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The world is certainly getting interesting!

Today:

Fitch downgrades Spain to AA+
China declares that they will investigate the South Korean sinking – this after having seen the ship first hand today.
US figures provides convincing evidence of a renewed slowdown.
Canadian dollar back at the 1.0561/.95 level & Oil is at $74…

David Brooks of the NYT is one of my favorite commentators, and he draws an analogy between the Tree Mile island disaster and the Deepwater Horizon accident.  His point is that in a complex world, people tend to underestimate the impact of small failures.  Because people don’t understand complex systems, and the cascading effect of many small failure can have on a total system.

Now imagine our world of complexity (just try to explain how a derivative works – or how it settles if there is a failure), and there are right now a number of small failure that don’t appear to be interconnected, but could all this lead to something bigger.  For a start many countries are otherwise engaged in solving “more critical” problems:

(1)                                         Europe is in a major “navel grazing mode” and will remain there for the foreseeable future, or at least until “Greece” gives up the ghost and sits down with its creditors and negotiate an acceptable outcome.  You can more or less count “out” Europe for anything outside their borders
(2)                                         The Korean peninsula seems to be going through a very difficult phase.  There are rumors of power struggles within various government factions in North Korea concerning the succession of Kim Jong ll.  It was rumored few weeks ago that this could be the cause of the rising tension with South Korea.
(3)                                         China’s economy appears to have slowed down dramatically.  Although China notoriously unreliable economic data (what do you want the growth rate to be!) can say anything.  But there is no doubt that Europe’s economic pain is transferring itself into China’s economy via a reduction in the growth rate of exports.  Government imposed “pinpricking” the residential real estate market bubble may have also slowed things down (although it feels “early” for any meaningful change to have occurred).  
(4)                                         China’s “tune” on North Korea changed dramatically today.  It is unclear what this change could presage in terms of the behavior of the hermit kingdom…
(5)                                         American data just ahead of the long weekend indicates that the economy is either slowing down or at least marking a pause.  

One of the crazier bloggers out there suggested that the May 6th crash was a system test, and that the main event will occur as soon as the right market conditions are in place.  However, imagine an escalation of tensions in the Korean peninsula, Europe getting into serious trouble (think of a small banking crisis based on a write-down of Greek and maybe Spanish exposure – European banks trading in NY are getting “bitch slapped” this afternoon).  Market begins to realize that U.S. growth rate for 2010 will not be 5% (yes that’s what the market is pricing right now!).  Loss of confidence in North America, and Europe, armed conflict in Korea (with the corollary effect on China, Japan and the U.S.).  You have an excellent reason for a market panic, this market lacks conviction (low volume).  Could this be the sign of a major correction in this bear market environment.  Ca you say S&P500 at 850…

As for Canada, well the Canadian dollar continues to behave as a Petrocurrency, when crude was trading at $68, the Canadian dollar traded near 1.0834/.92, but is now back around 1.04/.96 as oil price have rallied back to around $74.  The Canadian money market seems to have discounted a rise in s/t interest rates in Canada – the futures market has priced in about 1.3% in increase for the next 12 months.  Again, these are expectation, but at least real money is betting on this outcome!

 
And finally, a bit of chart porn at the request of Ms. FitN on house prices.  You see we have lots of Australian friends, and many live in an area of Sydney called Mosman (across from the Opera House and the Zoo) anyway I was telling Ms. FitN that house price in Australia had gone through the roof, and I had seen a chart.  So here it is


 


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