Cheers! Drink a little more, just to make absolutely sure you forget 2011!
It was a particularly good year to be pessimistic. As they say, pessimists have it easy: either they get positively surprised, or they get proven right! Not necessarily true in financial markets unless you’re a long-only bond + equity person, but work with me here.
Also, a lot of things make this year easy to forget. The euro barely budged, as neither did US equities. However, the momentum will appear to have flipped overnight if you succeed in drinking yourself to the point where you erase an entire year. The euro is currently surfing its 52-week Bollinger Bands seemingly running sprint between important support levels, and US equities are still at the magical level where volatility reigns supreme given that the S&P 500 1260 region is where the stock market was just prior to the 2008 market mayhem.
Gold provided one of the wilder rides out there. It moved up about 10% overall, which is pretty much twice its daily moves when things were rough. Near the latter half, it broke nearly every triangle that was out there to the bottom, and things now look rather bearing from a long-term technical perspective. We still get some rebuffing from the yearly, or 250 day SMA/EMA combo but more recent price action suggests either down or consolidation for at least the start of 2012. My bet on when to reenter gold companies will be in early/late February as the Asia holiday effects (the HSI falls prior to 31/12 7 times for the last 10 years – 2 flat and 1 up, and Chinese New Years has the same effect – 8 down, 1 flat and 1 up) suck out liquidity and price, then leads a rebound somewhere between Chinese New Years and 7 weeks afterwards with returning – if not increasing – volumes. I know this is a little bit fuzzy, and it doesn’t really hold up to the standards I like to use, so check for yourself and see if you can get something better out of the tea-leaves. Chinese gold companies are some to watch!
Correlation check in currencies:
The yen broke below 77 to the US$! It’s now below the 100 to the euro level as well! Wow! Again, things do not necessarily look like they will return to yen weakness anytime soon, see my previous post for the reasoning from a technical perspective, which works well in tandem with a rather tame BOJ and a determination by the politiciants in charge to actually do something about it. Japan was virtually a flurry of yen-positive news over the holidays, with everything from planned tax increases to co-operations with China. I really cannot see how this will spell anything but upwards pressure on the yen as well, and unless there is severe monetary printing or an enormous flight out of the yen by Japanese national investors, I would expect a continuation of the current trend strengthening, with a target around 68-70 yen per US$ on this day in 2013, especially if there is more printing by Bernanke and not Shirakawa. Shirakawa has held his ground so far, what would cause him to print after he essentially held back after the earthquake?
Euro terms? Well, the baseline here would be roughly equivalent to an all-time-high of 90 yen to the euro, but if the Euro weakens to below 1.19 US$, given the band surf, well in yen terms that’s roughly 83, but then the question is whether the euro will manage to stave off dollar parity if it survives at all.
I’m not a believer in prophecies. period. Nostradamus didn’t predict anything; it was a bunch of insane and very likely drugged people that totally misinterpreted his vague gibberish and mixed and matched his predictions to the 20/20 of hindsight, to make people believe them and give them power.
The Mayan calendar just stops on the 21’st of December 2012. Kinda like the one on my wall does on December 31’st, 2012. I’m not running around claiming that the world will not see January 1’st 2013 because of that. What justification did the Mayans have for the end of their counting of time? Well, they said a great empire would fall, and that there was the fifth time something like this happened and that counting time in a new regime with old standards is kinda pointless. Fifth time’s the charm for the world to be destroyed?
We do, however, live in a time of great turmoil, and I will try to score a few of the things that could possibly be interpreted as falls of empires, and score them on a few basic metrics for your amusement. Likelihood is how likely I find something to be, the rationale is how well it fits the prophecy as I understand it. Also provided is a bit of levity on how these things will be considered come December 22’nd, 2012.
1: Euro falls apart
- Likelihood: 50% (totally disintegrates: 20%)
- Rationale: The euro represents the long-term striving for democracy, union and globalization of people, pennies and products that so many people in Europe fundamentally believe in. It was the solution provided after monarchy, imperialism, and dictatorship all blew up in their own faces following the World Wars. The fall of the euro could be interpreted as the fall of the empire of modern western world thought and very world view that professionalism is always trumped by ideology.
- Effects: Finance falls on its face if total disintegration occurs. Risk management is impossible as everyone tries to figure out just what is worth what. Institutions in the eurozone finally lose all credibility and people send capital to wherever it can be put to good use. In a cruel twist of fate, there is a recurrence of the Scramble for Africa, this time by investors trying to front run China to the resources. The milder scenario (Greece / Germany leaves) just sends the euro way below parity to the US$ and everyone runs around wondering what just happened.
22’nd of December 2012 reflections:
Well, this finally happened, and now maybe things can get mildly better, because Greece or Germany leaving was looong overdue. Euro at historic low as confidence remains low tat the politicians will do anything to prevent the same thing from happening 20 years down the road, but the banks are finally cleared out. Or….
AAAAHHHH! Run! Swim! Switzerland, Scandinavia, hell, swim across the canal and immigrate to Britain. Greece is annexed to Turkey for cash. Folly of having a bunch of ideologues shoehorning a handful of economies into an idealistic framework exposed.
2: US elections force economic policy errors and world investors utterly loses faith in US$. 10Y treasury yields hit 703 basis points on the closing of November 9th, and the US declares itself in formal default on the 21’st of December.
- Likelihood: < 2%
- Rationale: The principles of modern finance uses a risk-free asset; remove that and a whole slew of formulae-fed freshmen analysts sit with big question marks on their heads asking what to do. The very fabric of the modern finance world depends on the US$, and having to actually consider anything else would force at least the recoding of every larger financial institution algorithm by said question-mark-face analysts. Furthermore, not issuing the world’s reserve currency is a situation that doesn’t allow the US the privileges of financial global hegemony and cuts in half that massive 2% annual interest credit card issued by the rest of the world’s savers. This idea of a consumption driven economy will have to go out the window and the average American will have to go back to work which is remotely useful, hopefully to someone outside the US. The fall of an empire, albeit without an emperor, begins.
- Effects: Finance falls on its face. Chaos ensues. Printing like mad occurs. Gold, equities, and emerging market stocks soar while capital controls are introduced everywhere in Asia. Merry Christmas is crowned the global “Joke of the Year”. OWS is just a start to the rallies. On that note, funny how no one actually addresses opportunity to do something productive, they just attack consumption… Fun game: Tell an OWS’er how many sub-$2/day kids can be fed just with the OWS’ers tax cuts or subsidies, and then ask why said OWS’er doesn’t send half their income to poor children. Then ask between the relative difference of this and what OWS hopes for from the 1%. Tl;dr – Things are fucked up if this becomes an American political force.
22’nd of December 2012 reflections:
Too busy trying to move my money when Monday comes around. Do not disturb. It’s already hard with all the news media running huge “Breaking news!” stories and everyone and their monkey talking about how to prevent absurd losses and manage risk. Besides that, the pension savers next door staged a looting rally that brings back memories from UK’11, although the ages was upped by +60. Greece style protests spread around the world. But I guess we had it coming. The annoying thing is how all the gold bugs and Ron Paul are laughing at us. Go crash a Japanese export company funeral or something instead of bothering me…
3: China collapses
- Likelihood: Less than No. 2. Property bubble bursting with another 30% falls: 10%
- Rationale: What can only be described as the new world empire attempting to reclaim the crown jewels of its 101-year old imperial tradition falls on its face given explosive bubble-inducing growth, huge unaccounted liabilities in the mother of all property crashes, and leverage up over its ears. Dreams of once again becoming the most productive and most powerful nation on Earth gets a wake-up call that will keep even those squinting eyes wide open to some misery for a few decades.The fall of an empire in all but name begins despite signs that these people where more professional than their historic peers, and despite signs that this time was different.
- Effects: World sinks into recession. China shown to contribute positively to global growth after all. Merry cheers all around in the western world over Christmas as their cultural superiority is ensured for a few more years and Europe gets a break from bond vigilantes for a few weeks. US still can’t export anything, and on December 28th claims that the yuan is undervalued given its recent fall from 6.1 to the US$ to 7.05. If the milder scenario takes hold and leverage is found to not be sufficient to bring down the system, expect a few lean years but even more laughs for the Chinese around 2020. Still, they could very likely somehow repeat the Japan 1989 maneuver sometime in the 2030’s.
22’nd of December reflections:
China fell… I would have never thought. Personal savings wiped and I make preparations to move to Scandinavia to flip burgers in Norway. I hope to build enough capital to create a berry-picking firm and import some Chinese workers. Engineering friends in Hong Kong become moguls after having found an innovative new use of cement previously used for construction and buying up some Chinese cement company for HK$1. Another one starts a demolition company and also makes it big.
4: Tokyo Magnitude 8.0+ Earthquake
- Likelihood: Miniscule but impossible to estimate.
- Rationale: Brings Japan truly to its knees. The one region in this list that actually has an Emperor is demolished. The export wonder ceases to exist. Supply chain freeze 2011 was nothing in comparison. An empire, brought from its 20-year limp to the grave in one swift and impossible-to-predict sequence of shakes.
- Effects: China and Japan dump US$ bonds to help rebuild. China buys up most of all Tokyo electronics companies. All government debt cancelled and all savings in Japan to be restored by means of printing. Yen falls like a rock to 1000 per US$, making some people in Kyoto hope to export their way out of the mess given a few years. However, plan is short lived as the refocusing of assets to assist Japan plus the plans for Chinese hegemony over Asia allows acceleration of No. 2. Dollar repatriation accelerates No. 1. World is in ruins.
22’nd of December 2012 reflections:
Wow… well… they kinda did ok after the ’11 version… Ganbatte? Surely hope my new years chain-of-events prediction was wrong. With some luck, well, they could… rebuild and come back stronger? Anyhow, short yen, short tuna, long Chinese and Japanese technology companies!
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Closing: I don’t believe in prophecies, and I believe even points 1 and 2 could be handled. Germany restructured after Weimar, we’ve forced our way through Bretton Woods I and II, and we got through – stumbling, but still through – to revel in the mostly golden years following WWII. Looking at this, I do not think either of them is such a big shift from what has been done before, it’s just that the little shell of a system we have built is pretty new, and also made of glass. We’ll muddle through if this happens, but the system as it looks today most likely won’t. But that provides a lot of opportunities for those enterprising spirits who figure out and adapt to the new system quickly!