In the last couple of weeks the sense of growing euphoria in markets and the media almost defies belief. While there has been some sobering coverage to commemorate the run-up to the collapse of Lehman Brothers, it seems the rest of the World has forgotten what caused this economic crisis in the first place.
Rampant borrowing, disreputable selling practices of financial institutions and too complex “financial innovation” all contributed to the root causes of the Credit Crisis. Unless I have missed something, the policy responses of Governments and Central Banks have almost exclusively focused on hosing the system with money to try and solve the problems. Of course the fundamental contradiction of solving a debt-driven crisis with more debt has been overlooked, but worse than this little to no effort or attention has been made to restructure our economy.
There has been an obsession with returning to the way things were. But the problem is that the way things were was clearly unsustainable and undesirable. A large proportion of “economic growth” was little more than a credit driven boom.
I just cannot believe that the underlying issues have been fixed. Our society is engulfed by debt. Economic data is not yet positive, but is in fact less bad. More importantly the stimuli packages are yet to end. We will only be able to get a true view of the health of our economy once this latter support is pulled.
One thought struck me this morning. I cannot recall seeing or hearing a senior politician declare that the worst is over. Now it is perfectly possible I missed this over the summer, but I think the absence of such a declaration has to be an indicator that the establishment does not yet believe the bottom has been reached.
So how can I apply this view?
My Sterling trade worked very nicely a couple of weeks ago. I actually went long again versus the Dollar, when the price hit the 100 day moving average. This is only a short-term trade and I have not risked very much at all.
However it is in equities that I am most interested.
Equity indices have continued to stagger forward. However volume has been very light, apart from on the odd occasion in the last 6 weeks. This is not too surprising, given that it is the summer.
I am now looking to short the market. I would not be at all surprised to hear in the next month that more fiscal stimulus measures are required here and in the US. Remember that the US stimulus measures are due to end in September and the Bank of England has already used an additional £25billion of Quantitative Easing than originally budgeted for.
I am going to sell the FTSE100 and DJI this evening. Prices are at levels that should either see a reversal or provide support to the next stage of the rally. With this in mind I am going to apply quite tight stops.