Change is Not What We are Witnessing
“All great changes are preceded by chaos.” -Deepak Chopra
We recently had a changing of the guard in the NBA with the Miami Heat taking the crown, Lebron James’ first ever title. Also, my Los Angeles Kings won the Stanley Cup for the first time in their 44 year history. Good to see changes happening in sports, it’s refreshing; but it seems markets are not seeing it these days.
Much of the news over the last couple of weeks really did not change much in the way of policy in Europe or in the US. Did we learn anything new from all the fear? Not really. What we did see was more kicking of the can down the road, and did we expect anything different? Part in parcel to kicking that can is stalling for more time to see if the situation can fix itself. The euro is still in jeopardy, there is still risk in the eurozone as the leader consider solutions for a delicate situation.
Offering up loans to Spanish banks is not the answer to fixing their debt problems but buys some time against a run on their banks. The Greek elections pretty much kept the status quo in place for a bit longer until they unify their government, and only then will there be some serious reforms discussed. The Greek can will be kicked at least 10 years out, will the rest of Europe (and the World for that matter) be able to handle it.
The Fed sent us a clear message this week – there is a limit to what they can do going forward. Oh, they gave us more twist and even expanded their effort to include more bonds across the curve. However, if banks are still being stingy and borrowers are cautious there is really no benefit to holding down rates indefinitely.
However, the bet for the Fed is to somehow stimulate growth by fostering an environment that is kind to lending. So far the effort has been strong but the results disappointing. Chairman Bernanke mentioned there are other ‘tools’ to use but clearly there is a line that won’t be crossed, and the forward data will determine the amount of flexibility they have left.
I would have thought some of this resolution would have brought about a change in sentiment, but according to some reliable indicators that may have not been the case. The AAII data didn’t move the needle much last week and while the VIX had a big ride this past month it is just back to where it was five weeks ago.
The rise in fear was natural due to the uncertainties surrounding Spain, Greece and the Fed. Once removed we saw the VIX fall sharply. Put/call ratios have also moved in waves, the SPX 500 index just back to where it was post Memorial Day. Perhaps with all that has passed the markets may now get back to normal.
“Fear, uncertainty and discomfort are your compasses toward growth.” Unknown