Don't expect lasting stability

Our basic view remains unchanged; we remain positive on equity markets, credit spreads and most commodities because liquidity flows are still very positive and key indicators discussed below are supportive. However, we still are very concerned about for the worse.

Past issues have pointed to the widespread and huge disequilibria in the U.S. economy and financial system. That is also true globally. No one knows what's real and what is not when it comes to the economic recovery and market prices for assets and currencies. Market forecasts are always a big part of the game; in today's context, we can't attach much confidence to any of them. Rather, it makes more sense to think in terms of whether the environment is favorable for assets or not and to watch for
benchmarks to gauge when that might change and how it would affect the different markets.

One thing we do know: markets eventually correct disequilibria and it is usually painful. However, time lags are variable and frequently longer than most people can imagine. But when the adjustment comes it is usually swift and substantial. This makes for an uncertain environment because the risks are not easily quantifiable.

David Fuller's view I regard "lasting stability" as an oxymoron in most circumstances, especially where crowd psychology is a determining factor. However some market environments are more stable than others, producing lengthy cyclical trends and occasionally secular trends. Investors should expect instability - not in a paranoid sense, jumping at every rumour or wobble on the charts - but as an inevitability, creating both risks and opportunities.

Today, there is no shortage of "global disequilibria", as articulate Tony Boeckh points out. At Fullermoney we adapt to this different environment by shortening the time horizon of our forecasts from years to months. We remain suspicious of grand pronouncements. From market calls to climate change projections, those big number, multi-decade projections and extrapolations tell us more about the commentators than the future. Usually, they are either airing fantasies or selling tickets. For these reasons, we should subject any forecast to the reality check of market action, best studied and understood when viewed on price charts.

I think subscribers will be interested in Tony Boeckh's four options available to the Treasury and Federal Reserve in terms of financing government debt. They are informative and this issue provides a good overall summary for markets.

Tony Boeckh tells me that his new letter will be free for another month or two and you will see contact details on page 9. I will be posting it while it is free, but thereafter he has asked me to restrict coverage to excerpts following a reasonable time delay.

Meanwhile, major stock markets continue to push upwards from their 200-day moving averages, so this continues to look like a normal correction, which may have reached its nadir within a cyclical bull market against the background of largely benign liquidity conditions. (See also yesterday's more detailed stock market comments.)