While the market was caught in tehe euphoria of Bin-Laden's demise and commodities lost some of their shine, it is easy to get confused and forget the main driver in this market and the tell-tale signs of change.
To review:
- The equity market is not based on fundamentals, but on financing. Borrowing at close to zero forces increases risk appetites due to lack of options.
- The fixed income market costs too much to short (in carry) and rates will not rise substantially until the employment picture improves which is unlikely for at least 1-2 years. Why that long? Recent decreases in the unemployment rate without increases in actual jobs indicates an exodus from the workforce. Those who have left will surely return at the first signs of job availability, thereby increasing the slack in wages.
- China is where the action is. When China stops tightening, indicating an economy which is in cooling mode, then commodities are done and deflation will become a fashionable word for the second time in 3 years.
