The Risk Trade is Alive and Well Until it Isn't

As the Nikkei approached 40,000, or the NASDAQ approached 5000, shouts rang out like the man eating plant in Little Shop of Horrors: “Feed me, feed me.” So it is today, as gold, the Dow, and oil, move aggressively and parabolically onward and upward. Excess liquidity and momentum have been the rocket fuel to transport prices ever higher. Borrowing to leverage the trade has been as American as apple pie. Central bankers have slashed interest rates and poured billions into their systems to prevent the inevitable collapse. However, in their efforts to save themselves, they have ignored the populous, as foreclosures run rampant, unemployment shoots higher, and bankruptcies are a matter of course. But, oh, how bonuses will be grandiose on Wall Street this Christmas.

The common denominator of all the market participants, from Shanghai to Luxembourg, Wall Street to Main Street, bankers, hedge funds, sovereigns, or just plain folk, it’s one foot out the door. You see, all know it will end, and could end badly, but each think that he or she can get out before the other. This strange situation of fully invested bears could create the real possibility that some negative event could precipitate a route like 1987, as everyone heads for the exit at the same time.

Dubai, Afghanistan, Iran, anyone?

Till next time,

Bill


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