March 18, 2008

Exchange with a bearish banker

Email exchange this morning - I'll leave in the jargon for flavour:

Me: I've shorted Euro/$ here ahead of the Fed for the possibility of a gap down if very aggressive rate cut expectations aren't met. Also I feel the Goldman Sachs' results are somewhat calming and may encourage the Fed to stay calm.

He: This is just the financial scare as a result of initial writedowns, real problem will be when the data turns bad. If you get payrolls print at -200k then you'll get some panic, more defaults, more writedowns, lowerequities etc etc. I don't see how this could end here.

Me: Well, calling the bottom is foolish, but there are plenty of positive signs:

-Bear Stearns handled swiftly without caving in to moral hazard.
-GS and others bouncing off long-term technical supports.
-McCain looking stronger in the polls - this factor is too little weighed in the conscious market. A big government left-winger is the last thing the markets need.
-Euro way overvalued for PPP* (tho I accept other reasons why Euro has/may appreciate).
-Gold at $1,000 / Oil at $110 / Euro at $1.58 /Yen < 100 / CHF and loonie reached $ parity.

In other words there's tremendous amount of $ and market bearishness priced in.

Dangerous to extend the trend at this point. If the Fed cuts a mere 75bp today the Euro might drop and the market might leap on the basis that the Fed's confident and the credit crisis is getting fixed. Once the credit market starts moving there'll be a buying frenzy.

Stay nimble. A banker can get bamboozled by knowing too much.

*PPP = purchasing power parity

He: Give them job losses and recession, which is surely where the numbers will say we are next month, then you'll see the real panic.

The problem is if the fed does 75, then next week there's a lack of confidence and the market sells off, the fed's run out of ammo. Then you get panic..

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