So far this year it’s clear that a weak USD is keeping the stock market afloat. Since the turn of the new year the dollar has fallen against key risk-on currencies such as the NZD and AUD – an indication of traders taking or expanding positions with the USD as the funding currency. The willingness of traders to add to risky positions at a time when European markets are still a mess is a bit of a gamble if you ask me. Here’s a couple of things I see in my trading forecast shaping the first quarter of 2012.
Greece Spain Italy Debt Issues a Weak Dollar Trap?
My biggest concern as we have watched the market melt up off its 2011 close is the continuing saga of the European debt crisis. Last year a couple of events in the US and Europe set off a USD squeeze which hammered markets. While it is true that the Fed has made easing a priority in the last quarter of 2011 and shows every sign of doing the same in 2012 – the political environment in the US remains unstable. Any shift in the policy of the Fed toward not propping up the European banks with USD liquidity would cause a market destabilizing short squeeze on Eurodollars and implode US markets again. I regard a policy shift by the Fed to be unlikely given the recent statements about economic concerns extended to 2014, but sometimes political boneheadedness trumps anything the Fed can do… and with that in mind…
US Debt Ceiling Debate Most Likely Cause of Market Destabilization in 2012
The single greatest threat to the markets in 2012 is the risk of yet another grandstanding event by John Boehner and Eric Cantor in Congress over the raising of the debt ceiling. It should be a non-issue. Unless and until the private sector returns to healthy expansion the Federal Government needs to continue to expand the budget deficit. It is my HOPE that the expanded debt ceiling would continue to be used to push funds as far down toward the bottom of the economic food chain as productively possible. If my friend boatman1 feels compelled to cut some spending elsewhere then I would strongly urge a wealth tax or millionaire’s tax – as it is clearly not in the best interests of the country to have unearned income be taxed at such low rates.
Early 2012 Stock Market Forecast: Likely Outcomes
I feel the most likely outcomes for the early part of 2012 is continued melt up leading to yet another debt ceiling Mexican standoff between John Boehner and President Obama. We’ll have to keep an eye on the approximate timing of when the debt ceiling will be threatened and count on Boehner and Cantor to roil markets by threatening government shutdown again. So the stock market forecast for 2012 is this: keep an eye on the date the debt ceiling limit could be reached and expect a market tanking leading up to that date. Seems like a safe bet to me – after all, neither Boehner nor Cantor ever saw a microphone or grandstanding opportunity they didn’t like.