May 21, 2010
What Goes Up

For the first time since the March 2009 rally began U.S. stocks have logged a traditional correction of -10%.  The sell-off in U.S. stocks arrives at a time when Chinese stocks are down by more than 20% and the Greece crisis/bailout has stoked sovereign debt fears. Suddenly, the Euro’s viability as currency – much less a reserve currency in competition with the dollar – and the sustainability of China’s growth miracle are both in doubt.  To say that these events have investors on edge would be an understatement. 

The damage has hardly been confined to the EU and China. Rather, and to get an idea just how quickly and broadly perceptions have changed, consider that yesterday two major Canadian banks lowered their 5-year mortgage rates (for the second time this month).  Only weeks ago it was a foregone conclusion that Canada’s central bank would start tightening no later than June, that the Canadian dollar would stay at par (vs. USD), and that the Canadian housing market would remain one of the hottest in the world. Now, with the Loonie and crude oil diving and the Canadian real estate market relaxing, expected rate hikes are in doubt for the country that up until now was the strongest in the G7…

The odds may still favor economic recovery in the U.S., and the ongoing EU crisis may simply be a scary sideshow that doesn’t necessitate the launch of the main attraction (which is the end of USD hegemony). Nevertheless, seldom has a traditional correction in U.S. equities brought with it so much uncertainty. Along with all the negative headlines, this uncertaintly is fed by the knowledge that U.S. policy makers have yet to reacquire the ammo spent during the financial crisis,  What if the current correction evolves into something more sinister - who will save the day, and how?


 

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