It ain't over til it's over

So, did you enjoy yesterday's calm, rational, and frankly boring markets? Spoos only managed an 8% daily range.....this stuff is child's play!

So the zillion dollar question is whether we are now on the long road to recovery. While it's true that short term sentiment always swings to extremes, it's also the case that we have the small matter of a global recession to navigate, with the concomitant hit to growth and earnings.

To get a perspective on recent history, Macro Man has recently been re-reading Barton Biggs' Hedgehogging. While the anecdotes and thoughts on portfolio construction are consistent with what you'll get from most books of this type, Macro Man is reading the book because it contains a snapshot of Biggs' and others' views on equities in late 2004 and 2005.

What is remarkable is the number of managers who are quoted as looking for an eventual relapse in US equities back towards 2002 lows. Obviously, such an out-turn is coming to pass before our very eyes.

Biggs also included a chart on previous financial market bubbles and how the price action played out in the year before and after the peak. Macro Man has updated the chart, using monthly data, and added a new bubble (oil) to the mix. The message, based on previous bubbles, is not to expect a massive rally over the next year.
On a more real-time basis, the fallout from the current crisis brings fresh pain to light seemingly every day. In Ireland, the government has hiked taxes across the board and even taken a pay cut (thereby downgrading an Irish ministerial post from a boondoggle to a sinecure.) Charlie Haughey must be rolling over in his grave!

We're also seeing the falloout from the crisis broaden in terms of markets. Most countries/markets/strategies that have depended on credit to fund growth in recent years have been decimated. An obvious exception has been Eastern Europe, which has weakened in recent weeks, but only back towards end-of-2007 levels.

Of the CEE-4, Hungary is clearly the most vulnerable. Its housing market has famously been financed via Swiss franc mortgages; the door to that particular liquidity tap is in the process of being slammed shut. Rumours have started to swirl that Hungary will approach that venerable dinosaur, the IMF, for assistance, as it lacks the domestic fiscal ability to fund a bail-out.
That today's cheap dollar funding in Europe (the 1 week "unlimited dollar" tender was offered at 2.277%) hasn't prevented European equities is another ominous sign that the correction may be over almost as soon as it's started.

That's the thing about a bear market: it ain't over til it's over.