Here we go again. It’s all about Europe. And now we’re all in wait and see mode on Greece and whether they’ll default and defect and possibly trigger the Lehman 2.0 scenario that so many have been worried about for years now. In many ways this market has a 2008 feel to it. I wouldn’t say it’s quite the same because the global economy had been on a 5 year credit binge just waiting for a negative catalyst that came in the form of house price declines. Today’s environment is a little different. Back then we were Mike Tyson walking around sticking our chin out and taunting the idea of recession and a knock out punch. Today, we’re Mike Tyson fumbling around looking for his mouthpiece after the Buster Douglas knockout blow. We’re barely on one knee. So kick us over if you want – we won’t fall very far. In the case of some European nations we’re not even talking about being on one knee. Spain and Greece for instance, are flat on their backs, barely breathing. They didn’t get hit by Buster Douglas. They were hit by a Mack truck that kicked it in reverse and came back to run them over just for good measure. So my decoupling call for Europe is still on. I just don’t see how they pull out of this tailspin without some sort of unified action….The USA is recovering, but still weak.
I still don’t think the USA is on the verge of a renewed recession, but I know the risks are rising. My worst fear is that all this chatter of a “fiscal cliff” is paralyzing corporate America to the point where business investment is going to come to a halt from its current crawl. The one really positive sign in recent quarters has been the continued recovery in business investment paired with the government budget deficit. This is all part of the balance sheet recession healing process. But we’re at serious risk of this process coming to a stop. And recent rhetoric out of Congress regarding the debt ceiling isn’t helping matters. So I admit that the risks of recession are certainly rising, but the data isn’t there yet to convince me that my long-standing “no recession” call needs to be changed.
As for the markets – it’s a mess out there. Messier than I thought they’d be. And that’s coming from a guy who was building a short position all the way up to SP 1420. But I was a buyer in small bits on Thursday. My indicators aren’t raging bullish, but I do think we’re beginning to see some fear levels and market action that is generally consistent with a market that is a bit overdone on the downside. We’re seeing lots of extremes in different markets with the Euro tanking, Treasuries spiking and equities getting bludgeoned in a matter of weeks. The bears are betting on a worst case scenario and if Europe stays true to their actions of the last few years the bears will once again find themselves on the wrong side of the trade resulting in a rip your face off style move against them. I wouldn’t get wildly bullish here because the worst case scenario is certainly not off the table. But from a risk management perspective I certainly feel better about owning equities 8% cheaper than they were just a few weeks ago….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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