I believe that the price action of the past two days suggests that the answer is the latter....something(s) far worse!!
One of our investors just asked if I was planning on putting the unusually high levels of cash that we've had on hand to work into this sell off. The response, both cryptic and to the point, was:
As you can imagine, having been defensive for some time, and sitting on unusually high levels of cash, there is a part of me that is ok w/what has happened here. But the bigger sentiment is still chock full of "scaredyfraid" issues.....if it were just Bernanke's speech and the rush out of fixed income in the US that was behind this multi-asset class sell off, I might say, yes...let's start buying.
But there's more to it....the May 22 Bernanke 'tapering' talk unleashed a massive paradigm shift from a "gee this is an easy, low-to-no-interest rate environment in which carry trades are no-brainers"....to one in which all those folks now are rushing to the exit doors trying to be among the first to unload EM local bonds and currencies..then to buy USD and unwind the carry trades.
The problem is that the unwind has crushed many EM currencies, which in turn has led EM Central Banks to have to implement policy responses that are defensive of their currencies instead of being supportive of promoting growth...witness Brazil and Indonesia's hike in rates recently (both should have lowered rates for growth reasons) and Bk of India that left rates unched when they too should have cut.
I think these kind of 'crisis era' type of policy responses are likely to throw more of a dislocation into global markets as flows of funds continue to challenge EM central banks. And EM growth prospects will be hurt, which in turn, should hurt corporate earnings outlooks especially for globally active companies.
Finally, add to the mix, some familiar issues, such as Italy and Spain...two hotbeds of potential trouble w/recession economies, massive unemployment, and now rising yields on suffocatingly large amounts of debt.
For now, while many of our holdings are global companies, and in some cases heavily dependent on their businesses in EM countries for meeting sales and earnings goals, when the time comes to get the cash off the bench and onto the field, the leaning is likely to be towards companies with more US-centric businesses, somewhat less exposed to EM countries. This, of course, will depend largely on just how robust the 'dislocations' that we've seen in recent days turn out to be.Bottom line? I'd like to see some dust settle before I put cash to work.
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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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