KRUGER INSIGHTS WEDNESDAY, OCTOBER 16, 2013

By: Joel Kruger 

KICKING THE CAN – Ian Bremmer had it right on Tuesday when he tweeted “if there’s still hours before a default, I’m not worrying about it. Call me when we’re down to seconds.” The whole melodrama is nothing more than a pathetic and embarrassing charade, and undoubtedly, there will be a resolution before time expires, so that the US government can once again swoop down and save us all from yet another unnecessary short-term crisis. The government gave us Syria and saved us from Syria, gave us a taper and saved us from taper, gave us Larry Summers and saved us from Larry Summers, and has now given us the threat of default and will save us from default. In Jay Carney’s most recent press conference, a reporter asked “when does the clock run out, just so I can be ready? Is it at the stroke of midnight on Wednesday or the stroke of midnight Thursday?” All of this has turned into a big joke, but has done the good job of diverting attention away from some legitimately threatening medium and longer term structural imbalances. Clearly, this has been yet another example of once again kicking some of the real issues down the road, so that we can avoid dealing with necessary realities and deceive ourselves into being satisfied with a short-term fix.

LET’S CALL A SPADE A SPADE – There are actually some very good reasons to question current strategies, and the Republicans that have been holding out should not be vilified as they have been (though they are not entirely innocent either). Both sides are responsible for what is going on. There are some legitimate uncertainties associated with the impact of Obamacare and another raising of the debt ceiling that should not be so easily dismissed. When the President says to the Republicans in the House “don’t hold the government hostage, do your job, re-open the government and raise the debt ceiling so that we can pay our bills, and then we can talk” his appeals should not be mistaken as someone without an agenda, acting purely on behalf of the best interests of the American people. While I am not saying he doesn’t have sincere motivation, it also is quite obvious that he is a superb tactician. In other words, let me get done what I need to get done, and then once you have zero leverage, we will sit down and talk. That doesn’t sound entirely fair either. So both sides are not innocent in this game, and we need to call a spade a spade.

WHAT KEEPS JANET YELLEN UP AT NIGHT? – The facts are that the US and global economy are facing a major debt crisis that has only been exacerbated through extraordinary monetary easing measures and government stimulus efforts over the past 5 years. And now that the debt ceiling is about to be raised yet again, and monetary policy and government stimulus efforts are fully extended, who will be there to keep us propped up this time around? The combination of excessively burdening debt and overextended Fed policy should not make for a pretty outcome, and the strategies employed to rescue the economy back in 2008 are now quickly losing influence. The thought of rising inflation and a still elevated unemployment rate is something that should be keeping Janet Yellen up at night, and I fear that she will be in for one of the toughest terms a Fed Chair has ever endured.

THE UNSOPHISTICATED OUTLIER – All of this tension has been presenting in various asset classes, with currency, fixed income  and commodity markets reacting in some way or another to these very real threats. Yet, the US equity market has been the one major outlier. It wouldn’t be a stretch to say that of all the asset classes mentioned, US equities are probably the least sophisticated. And so, we have seen this market on a one way track to heaven over the past five years, with all of the price action driven by a government and Fed policy response that has forced market participants into this asset class on incentive rather than actual underlying value. In an effort to save the economy from a massive bubble back in 2008, the government and Fed have only delayed the crisis and have perpetuated yet another crisis in the form of an asset bubble.  

A WHOLE LOTTA BULL - As sure as I was that the Yen would collapse back in 2012, is as sure as I am right now that the stock market is on the verge of a serious corrective adjustment. There is simply nothing left in the tank in the way of artificial support and without this support, I believe “a hard rain is a gonna fall.” Now I know there are many of you out there who would say betting for the end of the world has been a failed bet since the beginning of time. But let’s be very clear. I am not betting for the end of the world, and simply believe that the type of price action we have seen in US equity markets is well overdone, and that we need to see some healthy liquidation so that the market can normalize. If anything, I am bearish stocks so that I can be optimistic and bullish with the prospects for the global economy. I would go even further to say that encouraging the stock market at current levels is a reckless and irresponsible strategy that will only get us into deeper trouble going forward. Again I remind, we are living in a world where we are talking about a potential US default, unemployment at highly elevated levels, the housing market still far from recovered, interest rates are at zero, and the central bank fully extended. In the face of all of that I ask….Does it really make sense that US equities should sit by record highs?