Every morning I've said that the rally in Europe is the equivalent of those markets drinking and celebrating at their own funeral.
I just could not understand how European equity markets could rally so hard in the face of the imminent default by Greece. How could the systemic default risk that Greece represents be in any way shape or form good for European equities?
By now you must have read that S&P has down graded Greece's debt to junk status. This has far reaching implications within the European banking system. Any loans that were secured by Greek bonds will immediately be open to collateral calls. Greek banks could be starved of cash just when they need it the most.
Now you would hope that the bankers at risk have been hedging their bond exposure via the Credit Default Swap market. But that may be too big an assumption to make.
As I've gone through this process as an investor, watching first the accounting scandals of the dot com era, the book cooking of the financial sector, and now the book cooking of entire sovereign nations, it impresses upon me once more just how dishonest many big businesses and governments really are.
We truly cannot rely on published financial statements to drive our investment decisions. We must have a series of empirical rules that at the very least take a measure of price analysis into consideration. In plain speak that means that we must have a working knowledge of technical analysis.
From 1982 until 1999 it was easy for Wall Street to manage your money, because we were in a bull market. But when the rubber met the road in 2000 and then again in 2008 we saw exactly what Wall Street's strategy was: Buy and hope!
You've got to become a more tactically oriented investor if you want to survive the next 7-10 years. It's going to be at least that long before we have another 1982-1999 type of brainless bull market.
The fact is that things are going to become more volatile, not less volatile. You can either profit from that volatility or get consumed by it.
The events in Europe are just a taste of what's to come. If the broad global economy does not start roaring back soon, what's happening in Greece will seem like a walk in the park compared to what could happen over here.
We are making many of the same mistakes that Greece is. Our economy is large, diverse and complex, but no matter how strong we think our economy is, no economy can last long when its deficit spending outstrips its ability to repay.
Without a sharp and sudden swelling of national tax receipts, we are headed for many of the austerity measures that are now sweeping through Greece.
Ben Bernanke spoke yesterday to the National Commission on Fiscal Responsibility and Reform. The commission's mandate is to come up with strategies to cut our annual budget deficit by about $250bn. This is a commission created for the express purpose of giving both sides political cover. Some tough decisions are going to have to be made, and no one party wants to take the rap for it, which is why they've been told to hold off on any ideas until after the November mid-term elections.
The one line from Chairman Bernanke's speech that caught my attention was "No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies."
Think about that!
He is telling us in plain English (eat your heart out Mr. Greenspan!) that we are going to see either service cuts, massive tax hikes, or a combination of the two. This is an unavoidable future for all Americans who pay taxes and use government services.
You will have less money in your pay check this year, next year, and for many more years ahead.
The cumulative effect of these policy shifts have not yet been reflected in stock and bond prices.
I urge you to start thinking about these issues, and to start game planning your responses.
The last thing you want to do is be left standing there like a sheep waiting to be slaughtered.
Chief Investment Officer
ETF Master Trader