Enzio's Clock

Global markets have all rebounded The MSCI Asia Pacific Index rallied  by   29 % in two months, European stocks market valuations reached the highest level in more than four years  - What's driving the gains, and are  they overdone? How much more upside to expect?

·         I have been 34.5% (or 225 points) wrong, which is by how much the markets have rebounded since their lows of 9^th March. But I have been 42% (or 646 points)  right since the market has slumped from its peak on 10/10/07.

·         So I guess that I am colour-blind: I just cannot detect the reality of the “green shoots” story. Oh yes, Prof. Bernanke says that things are on the up, and that is totally understandable: what would happen if he said the opposite?  And remember that the earnings that are driving markets are of historical, not of forward-looking nature!

·         My guess is that herd mentality is very much behind the gains. Within this have to be the key drivers: hedge funds and props desks, whose traders understandably want to make immediate money.

·         According to the Center for Public Integrity, the top 25 US originators of sub-prime mortgages spent nearly USD 370 million in Washington on lobbying and campaign donations. “…as they tried do ward off tighter regulation of their industry…”  In yesterday’s Financial Times, page 3, we read that “The CPI investigation shows that at least 21 of the 25 top sub-prime originators, most of which are now bankrupt, were either owned or heavily financed by the biggest recipients of Troubled Asset Relief Funds, including Citibank, Bank of America, Wells Fargo and JPMorgan – also the largest political donors in Washington.”

·         Then we read in Tuesday’s Asian Wall Street Journal about the tight, cozy nexus between Goldman Sachs, the Treasury and the Fed: one is left wondering whether it “just Asia” that is corrupt and opaque….  Sophistry has overruled honesty in what used to be the beacon of rugged capitalism, America.

The current environment of improving risk appetite - how will that drive market action the rest of Q2, what are the changes you would make to your investment strategy?

·         Punters keep seeing less and less risk; but people perceive less risk whenever the markets are going UP, not down!

·         So my concern is that fear goes down only when market risk goes up, or to put it more bluntly: greed rises when the market goes up. Fair enough.

·         But this suggests that conventional risk indicators reflect greed and fear, not risk and safety…

·         No, I’ll stick with my three months of wrong strategy: I have not met one person who really believes in this rally, and I am not currently sitting on trading desks where I can feel the market’s undulations (like swimming in the sea) and advise accordingly. Nor can I believe that the banks are "suddenly" healthy.

·         Again, going on that cozy nexus between Wall Street and Washington that we alluded to in the first topic, I don’t trust the results that will come out. If anything, it feels like a huge “fudge” that has everything to do with cheap funding and tax angles, and less about true “stress tests”

·         The condition for a clean bill of health is to do what China did: amputate the sick banks and quarantine them, as medical pros are doing with swine flu suspects. The second rule should be that bonuses are paid out only over a five to ten year period; that way, even if props traders do not risk losing the money of others, they won’t be paid off as fast as before. Finally, the impossible dream of honesty and virtue must return, but that is idealistic rubbish

·         Finally, having studied under von Hayek, more regulation is not the answer. Cleaner, simpler regulation is the answer. In Hong Kong, by way of example, people who want mortgages have to put down 30% of the money themselves; it is as simple as that. This rule forces people to live within their means….

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