Tuesday, February 9, 2010

A Return to 2008 Trading - Guess the Bailout

Much like 2008, and to a degree early 2009 where speculation about governmental, central bank interference into markets added a 4th dimension into what is an already difficult 3 dimensional puzzle, we're back at it again.  Futures are up smartly on "relief" that moral hazard reigns supreme and a new can will be kicked down the road.
  • Greek and Portuguese government bonds rose as European Central Bank President Jean-Claude Trichet’s early return from an Australian meeting stoked speculation that policy makers will announce assistance for Greece this week.   The advance pushed the Portuguese two-year bond yield down the most in 14 months. Trichet will leave a gathering of policy makers in Sydney a day early today to attend a summit of European Union leaders
  • The markets are smelling a deal for Greece, and for that reason, we’re seeing some stabilization,” said Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management, which oversees about $20 billion. “It’s hard to see there not being one, given the potential fallout and contagion effect.”
With the Euro so oversold, and a backdoor bailout of some sort almost certain (just a matter of timing) I might take some more US dollars (via calls) off the table this AM to lock in profits.  As I wrote last Friday:

But here is the risk to bears. The IMF (or Germany, but I believe it will be the IMF) is going to swoop in to save Greece ...... At which point, the "markets" which love moral hazard, will react much like when the US said you can no longer short US banks, and in fact we are not going to let any other major US bank fail - the taxpayer be damned. I expect when this event happens in Europe for speculators to rejoice and we could gap up 3%+ on any Monday. There is no way to game that as an investor - the type of things we have to adjust for have nothing to do with investing - it is just how it will go down one of these weekends in my opinion.
So under that thinking, the "risk trade" (moral hazard trade) would go back on - the dollar crushed, Euro surge - blah blah blah.

Does this have anything to do with investing? Fundamentals? Technicals?  Not one bit.  It's a whole new variable that is simply 50/50 coin flips in terms of timing.  It's truly a new world where we now take government / central bank intervention as a course of normalcy.  And as we did in 2008 & 2009 the speculator class will celebrate. Because their timeline is one where "long term" is next week, so whatever keeps the party going for another 24 hours, 24 days, or 24 weeks - whatever the cost - is all good.
Speaking to the currency movements, in the comments section of a post yesterday there was some good conversation going about how the bailout would affect the Euro.  As I wrote above, the knee jerk reaction would be a positive.  But one has to ask, these nonstop bailouts dilute the value of fiat money - along with now placing whomever is going to do the bailout on the hook for the future obligations of the region i.e. Portgual, and Spain as the next 2.  That is somehow good for the Euro?  Certainly not in the long run - but see preceding paragraph for what the 'long run' is, in the markets.
So for now, we backslap each other in glee as governments have "fixed" the problem yet again.  It's Groundhog Day.  Let us see how the markets react after the initial "happy happy! joy joy!" movements in the coming hours or days.  I just wonder when the day comes that people look around and think out more than the next 3 months, and realize we are simply continuing a pattern over and over.  Eventually there will be no more rugs left to sweep problems we don't want to face, under.  One of these times the bond vigilantes are simply going to say all you've done is moved the debt from under 1 shell to another, and done nothing to address the structural issues that brought us here in the first place.

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