Since the start of October, the Aussie market is up over 6%. Year to date, the market is still down 10%.
But the underlying question is whether this is the early stages of a monster fourth quarter rally…or just another fake out. Remember, the third quarter was the worst quarter for stocks around the globe since the manic/panic days of 2009. There’s a fair bit of relief that the quarter is over. But has anything really changed?
The current rally is not to be trusted.
The underlying market conditions are, frankly, awful and getting worse. Take Europe, for example. Greece edges closer to default by the day. The 17 members of the Eurozone – the countries that use the Euro as a currency – are desperately trying to approve a plan that gives the European Financial Stability Facility (EFSF) the ability to borrow and lend an additional €2-3 trillion.
The EFSF needs that ability in order to fully recapitalise Europe’s banking system in the event of a Greek default. But that is just one worry. The bigger worries are in Spain and France, where the banking systems are too big to fail, but too big to be bailed out by the EFSF no matter how well it’s funded.
The stock market doesn’t seem to care about any of this. It’s behaving as if the fix is already in, in Europe. In other words, the market is pricing in an orderly Greek default and a “Grand Plan” that recapitalises Europe’s banks.
I’d say it’s 50-50 whether Europe can get it together politically to actually come up with and agree on such a “Grand Plan”. The conventional wisdom is that because they have no other choice, they have to.
That leaves us with three possible scenarios this year. One, the “Grand Plan” comes off, the disaster is averted, and stocks soar. Two, the “Grand Plan” is still born, the recriminations begin, Greece defaults, and the markets resume pricing in Italian and Spanish failure. Three, a “muddle through” solution that extends the status quo out in time is achieved, leaving everything unresolved.
You can never underestimate the ability of interventionists to further screw things up. But I would be surprised if we didn’t see another violent move down in stocks when Europe’s “Grand Plan” fails to materialise. In fact, I wouldn’t be surprised if we’re headed to the equivalent of hitting “Ctrl+Alt+Delete”.
Those are the keys you press at the same time when you have to reboot a computer that’s crashed. It means you’ve given up trying to fix the problem and you need to start over.
We’re going to have to start over too, with sound money and financial markets that have written off trillions in bad debt and extinguished it from the system.
by Dan Denning