‘Ctrl + Alt + Delete’

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.

Dan Denning
Editor, Australian Wealth Gameplan

[Ed note: Although Dan believes the market is headed lower it doesn’t mean he’s out of the market. In fact Dan has pieced together his own version of what he calls a “Permanent Portfolio”. It’s a simple asset allocation technique investors can follow to protect (and potentially profit) from recession or depression. Click here for more…]

 

Related Articles

Why Chinese Monetary Planning Means More Volatility for You

Australia: The World’s Investing Casino

Why China’s Hidden Debt is Bad News for Aussie Stocks

The Great Indian Coal Rush

The Other Side of Short Selling

From the Archives…

If Demand is High, Why has the Price Dropped?
2011-10-21 – Kris Sayce

China’s Hard Landing is Certain
2011-10-20 – Kris Sayce

Money is Worth Nothing and Ships are Free
2011-10-19 – Kris Sayce

The Gold Bubble and China
2011-10-18 – Dr. Alex Cowie

Why You Wouldn’t be a Millionaire if Investing Was Easy
2011-10-17 – Kris Sayce

For editorial enquiries and feedback, email moneymorning@moneymorning.com.au

Dan Denning

Dan Denning is Editor in Chief at The Daily Reckoning and the Publisher of Port Phillip Publishing.

Dan is also the investment analyst and editor of The Denning Report. His high-level, macro-economic and stock market forecasts are read by more than 35,000 high-dollar investors and fund managers in over 70 countries.

If you’re already a subscriber to these publications, or want to follow Dan’s financial world view more closely, then we recommend you join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Daily Reckoning emails.

Leave a Reply