The Waiting Game

"There is more to life than increasing its speed." - Mahatma Gandhi

A trader is inherently impatient.  Sitting on your thumbs (in order to prevent trading just for the sake of trading) is a skill that is hard to learn.  Once learnt I ahve found that there are very few able to implement the rule but it is these moments where overtrading can break your portfolio.  As Tiger Woods once said, "You can't win on Friday but you can lose."  This is a good summary of where the market is now.  There are a lot of major events about to happen and to trade now is to take unnecessary risk (unless you are an avid day trader and close out all positions before the end of each day).  Taking a gamble on the outcome of a Greek election and Europe's reaction to it are, in my view, pure folly.  You may as well take your money and head to Vegas.  For what it's worth I think you would win on red!

Seriously though the Federal Reserve Chairman yesterday essentially said he was waiting and watching, Europe is not giving much indication of what they would do if the Greek elections result in a vote against Euro participation (in fact as the Greeks have disallowed any polling it is complete speculation as to the outcome) and Spain is sure to need a bailout package but the terms and conditions of that are unknown and certainly will be influenced by what happens in Greece.

So all eyes are on the Greek election for June 17th and the resulting fallout and there is little that can be done in the interim other than close out and wait or spend loads of time and energy speculating on the future and then trying to protect your portfolio against any potential shocks.  As I have mentioned before, this is a costly exercise and not just in financial terms but also emotionally.

So what do I believe is the outcome?  To be sure I feel that regardless of what their decision is that a mess will result.  Stay in the Euro and their future looks bleak as the austerity needed will result in a severe contraction and leaving the Euro will result in a severe contraction.  Leaving the Euro could have catastrophic consequences for the rest of the Euro countries as the bandits will smell the prize and will surely hammer the other weakened economies by dumping the bonds into an already fragile market pushing the sovereign yields of Spain, Portugal, Italy and even France through the roof.  The result of this would certainly push Europe into a deep recession and could even move it to a depression.  If Greece stays in the Euro it may buy the Euro countries time but without some kind of a plan in place for the future of the Euro short work will be made of whatever stimulus plan comes out of Brussels.  The result will be just another kick of the battered can a little further down the road and this is becoming less and less of an option as (any 10 year old will tell you) a battered can does not go as far as a new one.

So if I were to place a trade I would be looking to short the bonds of Greece, Spain, Portugal and Italy and use those proceeds to buy into the US treasuries.  Now that may seem to be the craziest trade in the world (which is why I do not plan on taking it), but it makes sense.  There is no reason to believe that US interest rates will suddenly fall from here, in fact I believe that the 10-year note will move to below 1% in the near future.  The reason for the trade is not that I want to earn 1.5% on my money for 10 years but that if the Euro collapses or Europe enters a very severe recession the increased price in these bonds will give me a windfall plus I should make a ton more money of the increased strength in the dollar.

As more and more people around the world seek safety this will continue to drive the yield on the US 10-year note down and strengthen the dollar.  While this is certainly not consensus if it does play out it will enable the US to continue to strengthen its economy in an effort to weather the storm coming from across the Atlantic.