On A Taper "Relief-Rally", Moar "Boots On The Ground", And "European Instability"

An increasing cacophony of prognosticators are of the status-quo sustaining belief that stock and bond prices will rally next week when the Fed announces the taper. As Scotiabank’s Guy Haselmann notes, the thinking goes that alleviation of the uncertainty will cause a “relief rally.” However, as Haselmann notes, since the Fed has provided 5 years’ worth of massive stimulus that has launched asset prices to record highs, the commencement of the withdrawal process is significant… and any relief rally that ensues next Wednesday should be sold. His thoughts extend from Indonesian central bank’s dilemma to European political instability, and the next stage of the Syrian crisis…


Via Scotiabank’s Guy Haselmann,

I find it quite interesting that so many people I speak with believe that stocks and bonds prices will rally next week when the Fed tapers. Many believe that the alleviation of the uncertainty will cause a “relief rally”. Some mentioned that the Fed will still be buying $60 to 75 billion of assets which is aggressive given that the economy seems plodding along. Most mentioned how they believe the Fed’s message will emphasize the modest amount of the reduction and the fact that rates will not be raised “for a considerable period”. I believe that since the Fed has provided 5 years’ worth of massive stimulus that has launched asset prices to record highs, the commencement of the withdrawal process is significant. We are slowly headed toward a period where asset prices will have to trade at prices justified by their fundamentals and those prices are lower than current levels. I believe that any relief rally that ensues next Wednesday should be sold.

Random Thoughts

As many as 1/2 million Catalans participated in mass rallies in support of breaking with Spain to create an independent Catalan state. Polls now indicate that more than half the regional population supports such a move. There are renewed calls for a referendum on the matter. Obviously, Madrid is firmly opposed. Catalons seem so “fed up” that proposals centered-around keeping more tax revenues will likely be insufficient to halt the momentum.

France’s government admitted that it will overshoot its budget deficit target this year by a large margin. Finance Minister Moscovici lowered the government’s growth forecast from 1.2% to 0.9%. The government said it will increase spending cuts while easing the tax burden to try to ease finances back toward EU-mandated objectives.

In his annual State of the EU address, European Commission President Barroso, warned that political instability is the biggest threat to Europe’s recovery. He also said that governments were still at risk of punishment by the financial markets if they veered from economic reforms recommended by Brussels. With these comments in mind, it should be noted that both Portugal and Greece have had defections from government coalitions by Parliamentarians objecting to continued austerity measures.

The European Commission plans to question Ireland, the Netherlands, and Luxembourg about their tax relationship with individual companies (such as Apple). The move will add political pressure on countries already under pressure from international efforts to tackle tax avoidance. The schemes involve complex structures that exploit loopholes in tax laws. Basically, subsidiary companies are set up in tax friendly countries, but with parent companies that are tax-resident in havens such as Bermuda. The Netherlands for example has 23,000 “letterbox companies”, companies that have little or no real business activities in the country. These ‘companies’ are managed by 176 licensed trust firms. In 2011, these companies made €8 trillion worth of transactions – 13x Dutch GDP.

Brazilian President Rousseff has demanded an explanation directly from Obama on suspicions of spying by the NSA. She believes that the NSA spied not only on Brazilian telecoms and Petrobras, but also on her and her staff. She has threatened to cancel an October State visit if not addressed.

The Indonesian central bank raised rates for the second time in a fortnight and for the 4th time since June in an attempt to support the plummeting rupiah. The country is faced with additional problems such as decelerating growth, rising inflation, and nervousness surrounding next year’s presidential election which is the first transfer of power in a decade. Indonesia is one of many emerging market countries (with a current account deficit) impacted by capital flight flows when ‘taper-talk’ began.

The Syrian situation is a diplomatic mess with few if any good outcomes. Markets believe a US military strike will not happen, but the Russian plan to secure and destroy Syrian chemical weapons is – shall I be so emphatic and use the word – impossible. They possess 1000 tons in 50 locations. The Pentagon estimates that it would take 70,000 troops to secure them. What happened to “no boots on the ground”? Estimates range from 3 to 10 years to destroy them. Do we trust Assad to cooperate? Is this all possible in the midst of a raging civil war whose battles lines look like a patchwork of warring fiefdoms?

“I have come to the conclusion that politics are too serious a matter to be left to the politicians.” – Charles DeGaulle


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