For about two years now I've been rather bullish about stocks, but I'm starting to get a bit nervous. While I still believe the long trade is where it's at, I am beginning to think we're about to get derailed by a train wreck in the bond market that could come from two places, Europe or USA State Budgets & Pensions.
Europe, and more specifically the Euro is a can that keeps getting kicked down the road, but eventually the Euro is going to run out of road. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain), let's add the UK, have serious debt problems and so far the ECB and IMF have done more to postpone or mask dealing with the insolvency that exists. The structure and future of the Euro is called into question and so far there's no good answers. If the Euro currency unravels, and it could, it would be catastrophic for the world economy. But I'm growing more skeptical that neither the mechanisms or the political will exists to address the situation.
Back home in the good ole USA, many States are in awful fiscal shape. Rather than bailing out the States as they have done the last couple years, the Fed is likely to contribute to their problems. State financial woes will of course trickle down to counties, cities & towns, and schools. On the positive side, this could be the impetus for more spending cuts at all levels of government which is a good thing. Unfortunately, since so many obligations are structural, even contractual, the crisis is also likely to result in some nasty tax increases. The risk is that the situation could become disorganized (read panic) and dramatic (read crisis) rapidly.
So far markets seem willing to give the parties time to work these issues out. But I'm growing more concerned that one day this year, maybe sooner than later, that markets will turn on the problem in a big way. If this happens it's easy to see how the situation could get very big & ugly very fast!
Debt in Europe and the States is a tinder box waiting for a spark that could send bond markets and investors into a panic, which in term calls into question the solvency of governments, their currencies, and inter-related pensions and retirement obligations. And if there is a reckoning of this magnitude all bets are off for the stock market.
With so much fiat currency floating around gold, which has lost a bit of its glitter the last couple weeks, will be the asset Du Jour for sure. The question that matters for me is whether to move to cash and risk missing a rally, or stay invested and risk a large correction. Hmmm, greed or fear, which will it be? I took 5% off the table yesterday, only to miss gains on those stocks by the day's end. Greed or fear, greed or fear????
Check out the following CBS Video on the pension/debt problems that states have:
Jan. 2011