Policy green shoots

Who will ever forget Ben Bernanke’s “green shoots” in March 2009. It was Bernanke’s finest hour as a forecaster and was taken up and boosted in markets by discussion of the “second derivative” economic indicators that showed that the pace of economic slowing was slowing. The rest is history with the moment marking the start of one of the greatest bear market rallies in history.

Can we draw a lesson from that episode today? Yes and no.

The current bear market rally has undoubtedly got legs for now. Friday’s mass downgrades of European banks and countries was water off the duck’s back today. Instead undollar markets surged again, especially equities, less so commodities, presumably on China worries, and the $US got whacked for 1.5%.

As I discussed last week, the US economy has held up better than I expected after the policy debacles of August. But these are not green shoots. They are a continuation of a sluggish trend best typified by the weekend’s employment data, which showed ongoing job creation in the 75k per month range (averaged over a couple of months), not enough to prevent unemployment rising further but not disastrous either.

The better data holds out the hope that the US can muddle its way through the fiscal cuts that are scheduled (if not yet in detail) for next year. I hold no hope for the Obama jobs plan. Oil is on the charge again so I still see little scope for the FOMC to move, given its self-imposed bar of deflation first. So, to me it’s a thin hope.

With US third quarter earnings in the offing, there  has also been a reassuring lack of profit warnings. Such might support the rally but only if, and it’s a crucial “if”, forward earnings aren’t guided lower.

The US data is some support for the rally but not its source. The green shoots that the market sees this time around are all of the policy variety and it is in Europe where they are seen to be most obvious. The shoots take the form of magnificent promises by officials to get stuff sorted. And there are some hopeful signs. The promises of Germany and France have become meaningless, but they are now backdropped by considerable pressure being exerted from the Anglopshere. That pressure has been piling on since the IMF meeting in Washington several weeks ago but is ratcheting up. One wonders if this is genuine or a part of some coordinated effort to prepare the core European polities for the next round of bigger still bailouts to banks and sovereigns.

The IMF is also preparing a raft of new products aimed at making short term loans to countries with liquidity issues (read Spain and Italy).

But, it’s still an almighty punt. The green shoots of 2008 had an objective economic basis. Policies for recovery were already in place – TARP, TALF, PPIP, ZIRP, QE, stimulus. Today’s policy green shoots offer no such thing. Nor do they solve any of the underlying issues in the Eurozone. Competitiveness is still a problem. Sovereign debt is still a problem. There will still need to be debt write downs. And austerity deals will continue to kill growth.

In this context, I still don’t trust the equity market rally. So I’ve looked at credit markets for some confirmation. It’s a mixed picture. There’s not much hope still in Greece (the following are all two year bond yields):

Nor Portugal:

Spain looks better:

But Italy doesn’t:

And the core countries yields are threatening to bounce, which might be a genuine release of tension or be foreshadowing a shift of risk contagion to the core as the prospects of bigger bailout leveraged to the French and German Budgets moves closer:

A slowing of European officials slowness is a pretty dodgy second derivative. But that’s what we’ve got and so far it’s enough. But unless we get real action, The Prince’s targets for the ASX200 in the mid 4000’s look pretty good for a juicy short.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. Yes I do New to this…since the ‘policy debable’ of August 2011 (i.e. When the tea party mandated Republicans finally imposed some budget constraints) the US Dollar has looked a good punt to me.

    Only in the medium-term though…once Europe crumbles and then some order re-emerges, I expect investors to look at the US unfunded liabilities and the US $ will crumble too. All fiat currencies will crumble…that I am pretty sure of after seeing the way politicians always oppt for the inflationary path (cheered on by the ignorant public and MSM…and MB!)

    • I was thinking of buying USD in the face of the AUD rally. It seems a bit exuberant to me and if the world suddenly remembers that there is still heaps of risk in Europe and the RBA cuts rates next month then the AUD will probably get sold off again? But, I am new to this and would love everyone’s thoughts on that.

    • “that I am pretty sure of after seeing the way politicians always oppt for the inflationary path (cheered on by the ignorant public and MSM…and MB!)”

      yay Keynes! where scarcity and loss dont exist

  2. c’mon H&H just get long will you, you are missing out. think off all the extra christmas presents you could buy.:)

    bear market rally to rally on for a least weeks and hopefully months is my best guess. this is just the begining although do need to be a bit more selective compared to a few weeks ago when you could have bought anything and be sitting on 10,20,30% gains already.

      • becuase the very crowded and very wrong “end of the world” trade that everyone has piled into over the last few months has a long way to unwind yet. even after the bounce there is still great value in shares in my veiw. i wouldnt stop buying / start selling until something goes wrong. that could be months away

        • The trade was never “end of the world”. It’s 20% correction. You’ve been reading too much Gittins! It was an appropriate response to slowing growth and the risk that policy-makers were increasingly stuffing it up.

          The end of the world trade lies ahead.

          • i dont read gittins. it wasnt appropriiate at all it is was based on rumours and assuptions. those assumptions have proved to be wrong, for now anyway.

            i wouldnt call a 20% drop a correction either. many share prices had halved during this “correction”. if you want to call it a correction ill call it crash. the truth is somewhere in between

          • yeah, that gittins comment was a low blow.

            global gorwth definately slowing, no argument there. but the stuff i was reading a few weeks ago was about a new global recession or depression and we arnet seeing it yet, emphasis on the yet

    • maybe it’s better to lock in profits now and re-buy again cheaper. 4300 could be the upper range…. mmmmm … now there’s a lot of ‘good’ news priced in these values …

      • i woulndt be taking profits yet, continue to leverage up for me. short covering globally still has a long way to go, then the long only’s get forced to buy as the underperformance of their cash weightings start to hurt.

        markets can also suprise on the upside dont forget.

        • I didn’t say yet, I said another 200-300 points.

          But, this rally lives and dies on Europe delivering something of substance, perhaps not the answer but a big part of it must come…

          • “I didn’t say yet, I said another 200-300 points.”

            agreed, another few hundred points and thats when you want to tighten your stops right up.

          • Yes, 4300 – 4500 max

            I think this rally has more to do with the upcoming US earning season than Europe. Everybody knows the European situation will takes years to play out in full and nothing has concretely changed since last year. What’s still unclear is how that will impact company earnings.

            Anyway, I am perversely long USD too, to cover my ASX long.

          • Also, without further USD weakness, I think this rally does not really have legs… and I am not convinced about further USD weakness, especially vs Euro, without a big announcement from the feds.

  3. On Friday, US NFP was apparently more smoke & mirrors – Something to do with Verizon sacking 45,000 striking workers & reinstating them & it was then counted as ’employment’ (sorry I can’t find the source). Italy and Spain were Downgraded. Now markets are rallying strongly on the decision to make a decision……. by next month????

    It’s a shame it’s not based on anything but ‘hopium’. They’re buying the rumours – Will they sell the news when it comes out next month? There must be pressure building for these Eurocrats to pull a beautiful rabbit out of their hat this time…… Surely there can’t be too many false starts & fake outs left.

  4. Markets can rally all they like but I think at the end of the day, the issues that precipitated the GFC have not been sorted out so we’ll probably get another disaster of one magnitude or another sooner or later.
    It seems a little difficult so see where the next surge in strong growth is going to come from in the short term after the biggest global credit binge in history.
    Real growth rates to be weaker on average with higher levels of unemployment to remain entrenched in a majority of places for the foreseeable future I feel.

    • That’s a good perspective for long-term investors like myself to keep in mind. No doubt the rally is great fun for the traders though. 🙂

    • “the biggest global credit binge in history”.

      True, but for every dollar borrowed there is a dollar lent. Some people have been getting richer throughout this credit binge, increasing their capacity to spend. We can’t all be on the wrong side of the equation!

      • True, but when things go tits up in a major way many of those dollars lent evaporate and are never repaid.
        Of course it always helps if you’re on the right side of the government bail-out equation.

      • Not necessarily Alex – fractional-reserve banking means that few people are getting richer while most are piling on the debt making us all poorer.

    • Yep Lefty fair summary. However I’m sort of inclined to back stupidity as the most likely course of action. Thus we will (eventually) get very serious inflation so we may get outstanding ‘nominal’ gains in equities. Just a thought. Don’t ask me anything about timing!!!!
      I’m not married to this….I’m subject to violent mood swings!!!

      • “Yep Lefty fair summary. However I’m sort of inclined to back stupidity as the most likely course of action”
        I think you summed it up neatly there flawse.

  5. P.S. Along these lines, It has been recoomended to me to buy ‘out of the money’ put on the US market at maybe 40 to 50% above current indexes.

  6. Ben no…if I’ve got the thinking right…I find ‘buying puts’ selling longs’ a bit of a contradiction my mind struggles with.
    What we would be backing is high inflation (medium term 20 to 30%)driving assets upwards (nominally)
    Also if, by some method I cannot see, economies did recover without much damage and get on some sort of growth path the deal ought still work rather nicely.

    • Then you want to buy calls at higher market levels. If the market rallies, the probability of your strike increases significantly, so too the value of your call option.

      FWIW I don’t agree with your thesis.

      A bout of high inflation would (in the short term) see a large compression in multiples, meaning equities get hammered. From there (at single digit PE entry point) your strategy might have half a chance.

      And in the absence of inflation, I can’t see where the growth is going to come from.

      Just my opinion, and that’s what makes a market. I just can’t get bullish about a market that remains expensive by historical standards, is deleveraging and has too much capacity for the medium term. Notwithstanding sovereign default / China / other exogenous shock risks.

  7. “TARP, TALF, PPIP, ZIRP, QE, stimulus”

    These things are technically impossible in the Eurozone because of the legal/institutional structures.

    They have no way out other than debt cancellations, bank nationalizations, currency exit and re-construction.

  8. For mine, equities are expensive. We are looking at many years of that will average out very low single-digit returns, if that. Buy bonds or fixed interest.

  9. “Who will ever forget Ben Bernanke’s “green shoots” in March 2009.”

    It was mould.