Op-Ed: Will Troubles Abroad Stop a Countertrend Rally?
Coming crises in China, Europe, Latin America could bring markets to their knees.
I've been predicting that we'll see a consistent stream of releases showing a surprising upturn in second-derivative economic data over the next few weeks. This scenario seems to be gathering steam, and today's unexpected increase in housing starts (+22%) is just one small data point pointing in that direction. I expect a similar situation to manifest with data coming out of Japan (EWJ), Korea (EWY), and some of the Asian Tigers.
It's my position that improvements in the second derivative, together with frequent and increasingly coherent policy responses from governments and central banks around the world, could provide the basis for a countertrend rally that may be of greater magnitude than most currently believe. My own statistical work suggests that the window for a rally based on second derivative improvements is between now and June.
However, there's a major risk to the countertrend-rally scenario I've just described, and it has to do with developments outside of the United States. The effects of the global crisis are only now being fully felt in the rest of the world. My macro work suggests the effects of the crisis, which began in the US, will be felt in most foreign nations by April-May 2009. The full effects of the crisis on the domestic economies of most foreign nations will be felt by the fourth quarter of 2009.
Circumstances in Europe (EZU), Latin America (ILF) and China (FXI) are much worse than statistics are currently implying, and worse than the vast majority of US analysts and market participants realize. As the negative data from these countries start to hit the wires over the next few weeks and months, this will send global financial markets into the financial crisis's second phase, which will be accompanied by the realization that things are actually worse outside the US than in the US itself. International events will therefore become the primary driver of developments in financial markets.
First, with respect to Europe, the situation in the Mediterranean countries, particularly Spain and Greece, will be dire. Unemployment of 20%+ is a real possibility.
The inflection point in the European crisis will come in the summer, for 2 reasons: First, tourism is a huge driver of employment and general economic activity in southern Europe, and that will collapse. This will provoke widespread unemployment and bankruptcies in small and midsize businesses related to this employment intensive sector.
Second, the summertime is protest season, and I expect massive street disturbances to spread through Europe by virtue of the well known psychological phenomenon of the "copycat effect." The absolutely horrific situation in Eastern Europe (IEER) and the former USSR will add fuel to the fire and an element of geopolitical risk to the crisis vis-a-vis Russia.
EU mechanisms for dealing with a crisis of this nature are woefully inadequate. Tribalism is on the rise, and the centrifugal forces for EU dismemberment are increasing exponentially. This is only magnified by rising anger among ordinary EU citizens at the seeming indifference, rigidity and arrogance of the German position. Of course, this is reinforced by long-standing animosities.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter