Still lots to worry about says the Badger of Broad Street

Whatever happened to the fear that was driving markets lower and lower just a few weeks ago? The Panic is over. Stock markets have largely reversed the losses and its move on up time. Markets possess such short memories.

The speed at which the markets recovered highlights the fact there were plenty of buyers clamoring for the opportunity to get involved whenever prices looked attractive. That’s a good sign of a bull market – buyers waiting for prices to weaken so they can get involved. Unfortunately, it doesn’t mean they are right – bull markets suck in the maximum numbers of participants just before they turn bearish.

Sadly, there are still lots of things to worry about…

If we think back to the mini-crisis in mid-October, one important turning point was a Fed member reversing from a hawkish tack to more dovish comments – going as far as to suggest maybe QE would have to be extended further. And that became the buy signal – investors got back into the stock markets, buyers being happy to think central banks will keep distorting markets for as long as it takes for global growth to recover.

That’s dangerous thinking.

A few years ago it was banks that were accused of distorting markets through their abuse of the “to-big-too-fail” mentality. Now its the central banks that face a mighty problem – damned if they don’t support markets, damned if they do! Whatever happened to capitalism?

Do they keep doing things like QE? Remember it officially ends this week in the US. They are telling us rates are unlikely to rise at any time in the foreseeable future. It’s unlikely the Fed will back away from its “considerable time” mantra of low low rates – they are terrified they may trigger another major wobble if they do. As a result markets are taking too much succor from the expectation that central banks will do anything to avoid a crash for fear of the damage it will do to still weak sentiment.

So the upside for stocks is low low interest rates for ever – which means bond markets also remain high. Or do we see the first signs of real and sustained growth in the global economy early next year? Strong US consumer confidence is very positive news for stocks – does it presage greater consumer demand?

If/when it happens that’s when its time to get worried about bond markets – they have tightened, tightened and tightened some more. I confidently expect many 2015 market outlooks to say bonds are now set to widen as growth becomes apparent. I’m not so sure, there is still plenty of distortion to come.

So what’s the trade of the week?

Well the US still looks the best supported stock market and we still love the dollar.

But another market to think about is Gold. For the past year the Swiss Central Bank has been fighting a rear-guard action against a group calling for it to put 20% of its reserves back into gold. These monetary fundamentalists have successfully accumulated the 100,000 signatures necessary to hold a referendum – which happens on Nov 30th. The signals just now are the “yes” vote is marginally ahead of the “no” vote.

The implications of a “yes” vote are for the Swiss to spend some CHF75 billion on gold over the next 5-years to get to the required 20% of assets – it amounts to about 70% of annual production. As the vote approaches, gold prices could get very interesting.

Badger