We started the year with a bang -- that spectacular on-the-open rally Tuesday -- but other than that overnight gain, the equity markets are treading water as investors start seriously pondering what the future holds. There is no change in my own negative stance on Europe, but I do concede that recent US economic data has been positive on the margin.
The question that all US-based investors need to answer is whether Europe will overwhelm everything else this year, sending the global economy back into a tailspin. Spain is already in a depression (with 25% unemployment what else can you call it?) and Italian sovereign yields would be in double digits if the ECB wasn't already monetizing like crazy. Greece will wipe out all private bondholders, with at best 50-50 odds of staying in the Euro. I don't see much good news over there.
Over here, some of the best investment minds are decidedly and unabashedly negative. The recent opinion flow from some very sharp minds should give us all pause.
- Bridgewater, one of the largest and most successful macro hedge funds of all time sees "at least a decade of slow growth and high unemployment for the big developed economies," It points out that "(w)e're in a secular deleveraging that will probably take 15 to 20 years to work through and we're just four years in." and that the European "debt crisis is (a) long ways from over." Bridgewater is positioned for "higher gold prices, stronger Asian emerging-market currencies and lower yields across high-quality government bond markets."
- Widely-followed strategist John Mauldin notes that "credit markets are telling us there is a crisis in the making, on the scale of Bear Stearns or Lehman in 2008, except that now governments have less ability to step in and salvage the banks... the European crisis will create serious problems for the rest of the world. Global growth is set to slow rapidly."
- Bond ace Jeff Gundlach of DoubleLine is highly negative, expecting "the sovereign debt crisis in Europe to reach a 'crescendo'" in 2012. He astutely notes that "the creation of the euro, surprisingly, was not the beginning of an era, it was the end of an era."
- Fred Hickey, who writes the High Tech Strategist newsletter but has morphed into a great economic analyst is dour and loaded up in gold, stating "despite the year-end sell off gold remains in a secular bull market and is the only safe haven against the quantitative easers."
- John Hussman, the PhD behind Hussman Funds, is very cautious, noting that the recent strength is in economic indicators that are coincident at best, so we could easily be subject to a "blind side" recession. He emphasizes "to anticipate a sustained economic upturn here would require us to place greater weight on weak, lagging data than we presently place on strong leading data." As one example, he notes "(examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began) ..."
Obviously contrarians will all point to the negativity as a positive sign, but the street is not negative across the board. This is a small sampling of informed opinion that should be taken seriously. Tuesday's one-day wonder rally may have been nothing more than the warm fuzzy feeling after a great week off. I am remaining very cautious and highly focused on income and inflation hedges in my equity positioning. I see no value in pushing out the risk curve at the moment, especially with disaster in Europe not yet having reached full fruition.