Market Update

US stock markets making good rally off the lows of last week. Barring any unknown unknowns, the NDX should push up to 4000 by mid-summer, maybe by Memorial Day. SPX should get past 1940, that's only up 100 for the year, or about 5.4%. Small compared to last year's 30% climb. Even if the SPX were to get to 2140 this year, the percentage gain would be about half of last year's. The headwinds from last year were 1) June China credit selloff, which was hard to follow because, as far as I can tell, it was the first time it affected US markets. But tracking the SHIBOR (shibor.org) should give a good indication on that known unknown. The possibility that China growth will slow comes up from time to time, and could be a problem in the future. The next obstacle from last year was 2) the US budget / debt ceiling politics in October. As of right now, it appears that the Republicans have learned that it may be best to keep the government open for business, at least until the 2016 elections. Several FOMC presidents have noted that it's a bit silly to agree on a budget, and then require a separate agreement to raise the debt ceiling in order to pay for everything that was in the agreed upon budget. When the markets look good and calm and nothing seems like it could possibly go wrong, that is a good time to look for things that could rattle the calm. There are typically a few already-developed macro stories that could re-present themselves to the market short-term consciousness. The mini currency crisis we had in January comes to mind. More than likely that was a reaction to the continued tapering by the FOMC, and it could worry people again. The basic idea there is that having super low rates as well as QE1,2,3 allows financial institutions in emerging markets to borrow cheaply in US dollars, buy their own currency, and put the capital to productive uses in those countries. This brings in speculators who also just borrow the low rate currency, and buy the higher rate currency, which pushes the higher rate currency higher. Once it became clear that the FOMC was tapering, fear entered the market, and that trade began to unwind. If there is any institution that is excessively leveraged in that strategy, then it can push the markets the other way quickly, and in an extreme scenario, cause severe problems in global markets. That's what happened in 1997-98. Crisis was averted when Greenspan found a way to rescue LTCM. That very easily could have turned into a US recession, but did not. With Y2K bugs everywhere, there was lots of productive work to be done, and that helped us bounce quickly. As for unknown unknowns, well, those are by definition very difficult to predict. But it may pay off to put in more effort there. As far as types of crisis, there are emerging market currencies, european sovereign debt, russia vs ukraine, rating agency issues (are they still using a 5-yr lookback period in their models?), middle east stuff (iran, syria, israel, egypt), commodity-related moves, china banking / credit, china vs japan squabbles, earthquakes, tsunamis, hurricanes, tech bubbles, biotech bubbles, financial innovation / reaching for yield, income inequality, terrorist attacks, climate change, and that's about all I can think of. A good risk analyst will think of the worst all the time, and attach the right probabilities to each scenario.