Ad Hoc Commentary – Dow soared past 2007 highs

“…Shortly after the opening bell, the Dow rose above 14,198.10, the intraday all-time high reached in October 2007…”

This is capital flight. Capital everywhere are looking for a home, safe from the grasping hand of nations mired in the sovereign debt crisis. For now, the American stock markets still command the depths and liquidity that is required by capital to flight there. Traditionally, the place to flight was into the bond markets. However, since we are in a sovereign debt crisis, government debt is the epicenter of the problem. Thus we maintain that the 2012 lows in US 10y interest rates will likely be the multi-decade lows – just as the 1981 highs was the multi-decade highs.

Money is not safe in Europe and Japan. In Europe, the people are pushing back on austerity – Italians through elections, and Portuguese through protests. Long time readers knows that yours truly thinks that Portugal is the next in line among the PIGS. And Italy, though not part of the original PIGS, is now the too-big-to-fail part of the PIGS. However, the biggest concern for Europe is not today. It is Germany’s elections in September. If Merkel loses, we should see the rise of a German government who will insist on strict austerity over Europe. That will break core, and scatter the PIGS.

In Japan, the Abe-Kuroda venture had chased capital out of hoarding. The Japanese money most likely moved to the Dow. The Chinese might have moved money into real estate of offshore financial centers when fleeing leadership change in 2012. However, Japanese will likely not find love with real estate. Everybody fights the last war. In Japan’s case, the 1989 misadventures into property both within Japan and outside Japan (e.g. Rockefeller center) left a bitter taste for real estate. So, expect Japanese money to continue fueling the Dow, and as yours truly hope, the FDI market of Asian economies like Indonesia.

The biggest question in the coming year is: What happens when it is America’s turn? Druckenmiller says he sees a big storm coming:

We had said many times before, this is a sovereign debt crisis driven by demographics. When the social welfare promises were made, the politicians thought they will pay with cheaper dollars. However, they were wrong. Thanks to demographics (i.e. inverted aging pyramids), we are not going to pay with cheaper dollars. Those who are owed Medicare, Medicaid and Social Security are the ones with the largest number of votes. Politicians will raise taxes. So much for those touting gold on expectations that Bernanke will print into hyperinflation.

Good luck in the markets.