Tuesday, January 17, 2012

Gears Shifting

Europe is going thru a well-publicized transition from a welfare state to forced austerity.  At the same time, China is going thru a barely-publicized transition from an export-driven economy to a consumption-driven economy, like the U.S.

Despite the credit downgrade of nine European nations last Friday, the European markets are up nicely overnight.  In fact, sovereign bond rates actually dropped slightly this morning, and the Euro has firmed against both the dollar and the Yen.

Also overnight, China released its fourth quarter (Q4) GDP growth rate.  The bad news is that China is growing at the slowest rate in 2 1/2 years.  The good news is that the actual growth rate of 8.9% is better than the expected 8.7% growth rate.  The  risk of a "hard landing" has decreased.  Not surprisingly, Asian markets were up nicely overnight as well.

At 4AM, it looks like the Dow will open up about 120 points.  Absent bad news out of Europe, it should be a good day on Wall Street.

The risk to today's market is that we see a repeat of the bad earnings report we saw on Friday from JP Morgan, when Citigroup and Wells Fargo report today.  Readers know I have been negative on money-center banks for some time.  If we have another Lehman-style financial crisis, it will show up in the money-center banks first, which would be a propitious time to increase cash.

The risk to the long-term market is how does the world's first capitalistic engine adjust to a weakened Europe and a changing Asia?  To shift gears and become the primary exporter to China's consumers, we need the dollar to weaken.  QE3 (quantitative easing) would actually help that.  To compete against newly-lean European companies, we need the dollar to weaken.  QE3 would help that as well.  To "inflate-away" our own huge soverign debt, we need inflation, which weakens the dollar.  In other words, we need QE3