“When the only tool you have is a hammer, every problem begins to resemble a nail.”
– Maslow’s Maxim

The market is gearing up for the announcement of another round of Quantitative Easing to be dubbed QE3, although one could argue that QE3 has already started with the opening of practically unlimited swap lines between the US and European Central Banks.

The signs that the Risk Markets need a kick to keep the party rolling are popping up around the globe:

US

GDP was a bit soggy in 4Q. There are plenty of reasons for disappointment:

  1. a bit too much inventory build,
  2. a worrying drop in the savings rate,
  3. lower 4Q earnings surprises and growth than 3Q numbers, and
  4. 1.5 – 2% GDP growth rate which means that US voters will go to the polls in November with around 8.5% unemployment.

To confirm the slow growth trend, the FED has made the unprecedented announcement that it will keep rates at current near-zero levels for the next three years. Team Obama may hope that the Republicans tear themselves apart in the primary season but that is no reason not to try a few more Keynesian and Monetarist kicks to the system to spruce up the economic backdrop for the autumn.

China/Asia

Asia typically greets the first day of trading after Chinese New Year with a rally, especially for a “Dragon Year”. However this year, only Taiwan managed to pull out a positive day on delayed reaction to strong Apple numbers. Hong Kong and Chinese investors parsed poor real estate sales results over the Chinese New Year Holiday and took the Hang Seng Index down towards the so recently breached 20k mark.

Europe

And not to be left out, Europe is preparing for another cycle of summits to solve the “Euro Crisis”.
Whatever solution bubbles up from the cauldron this time, it seems to be too late to save Greece from exiting the Eurozone. The real question now is whether the Eurozone can draw a line at Spain and Italy (Portugal appears to be the other acceptable casualty of the Euro Crisis). No matter what the politicians decide, recession (and worse) will haunt the Eurozone for most of 2012.

What is the System Saying?

The system can be described as somewhat lukewarm about risk assets with a definite preference for US listed equities. Top ratings for funds and ETFs are in the teens and for S&P 500, there are a few rating in the 30s and 40s. Given the extremely high likelihood of another round of government stimulus and Central Bank pump priming, one should wait for the next burst of bullish enthusiasm before taking profits.


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Filed under: Investment IdeasMarket Psychology

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