Tuesday, December 6, 2011

Bulls and Bears and Timeframes

So I read that the European head honchos are coming up with a new treaty, with a clause preventing bondholders from taking any haircuts on European sovereign debt.  The theory goes that the European leaders need to show how Europe is a safe place to invest as it was the haircuts on Greece's bonds that caused the current Euro crisis.  Can't get any more ass wardsback than this. 

But forget about that.  Smarter bloggers will point out the details on exactly why this plan is bananas.  All I will say is that any investment where there is not a significant chance of loss is an oxymoron and is a crime against nature.  

What I want to talk about is how the different timeframes are at work in the market when this news broke.  The first reaction was a violent upside, a +1% gap premarket.  The gap mostly held throughout the day and finished +1%.  So short term at least, this was deemed as bullish.  Indeed, every new plan/treaty/fiscal union rumor these days causes a lot of relief buying and short covering.  But I can't help but see this as a long term bear's wet dream (next 12 months).  What no European leader will ever come out and say (for obvious reasons) is that the losses has to be taken in one way or another before the world can move on.  By explicitly stating that it won't be the bondholders taking the loss, the only choice left is the average European Joes.  Granted, this is all just words and the ECB can just as quickly start monetizing left and right.  Sure no nominal losses were taken, but the outcome is the same.

So assuming ECB doesn't go the inflation route, by not allowing bondholder losses, the only person left to take the loss is the European taxpayer/recipient of government benefits.  Say goodbye to European socialism, say goodbye to GDP growth as austerity is just a nicer way to say bear market.  As our biggest trading partner, America will not be decoupled.  Alongside a rabid election year and a will they/won't they China economic implosion, 2012 may just be the perfect storm.  Nevertheless, I am still long and strong (no BBC) and like everyone else, I assume I will be getting out at the top.

Happy holidays.