I Didn't Know

I didn't know that so many people traded on consumer confidence numbers and am surprised by the reaction. What I am not surprised about is that it looks like the market will not give me the sell setup I was looking for. Mr. Market does not like to make things easy. Back to waiting.


PJ said...

The economy is going to be bad enough that it shouldn't take a good setup to sell. To buy, yes, but not to sell.

In a deleveraging, total asset values have to decrease. We don't know quite how this will play out across asset classes, but we can be sure that everything will tend to go down, and that leveraged entities will do poorly.

So, in this environment my neutral posture is net short.

Anyway, the current setup seems pretty good to me. People are buying the dips. There's not a lot of fear.

Chaos! said...

Didn't that happen in 2008?
With all the money being pumped into the system you probably do need a good setup, both long and short.

PJ said...

Chaos, yes of course it did happen in 2008 ... but this is a multi-year situation, like the Great Depression and Japan 1989-present. It's far from over. We had an initial deleveraging, which continues in the private sector -- look at bank credit -- but it's been offset since late 2008 by massive public sector leveraging.

But the public sector leveraging is declining in magnitude. The Fed's $1.5 trn asset purchases will end in March. The federal deficit remains large but is no longer growing. States will be shrinking their deficits soon. Europeans are having to shrink their deficits or face default. China can't continue bank credit expansion at its 2009 pace.

So, we are heading more toward neutrality in 2010 as public sector deficits offset private sector deleveraging. That won't prevent asset price declines in many sectors. And in the future, private sector deleveraging will dominate again. Within 3-4 years, there are going to be mass bankruptcies -- including sovereign defaults -- and the market will discount that at some point.

PJ said...

By the way, Tsachy, this is why the consumer confidence number hit the market hard.

So many people are waiting for an economic recovery to bail them out, or bail out their debtors. If they come to believe there won't be a recovery, there will be massive flight from risk assets.

Tsachy Mishal said...


I agree with your view on the economy. I just wouldnt trade based on consumer confidence numbers.

Anonymous said...

Am just paranoid in thinking this decline in the equity markets has something to do with the government's need to place $180 billion of debt this week? Last Thursday they made a potentially panic-inducing announcement (the rise in the discount rate). Over the past two years the Fed and Treasury have made many important announcements the day before options expirations--but always in an attempt to PUMP the markets, not deflate them.

PJ said...

Anon - As one conspiracy theorist to another, I would say that the goal has been to bail out the banks and avoid having to make good on the $9 trn or so of guarantees they handed out.

On the most recent op ex, there were a lot of calls outstanding that had gone in the money. Knocking the market back toward 1100 S&P would have saved banks a lot of money on the calls they were short. Not sure whether it worked.