What a difference a month makes….we thought that complacency was getting dangerous in March and took some protection in the form of cash and volatility hedges, but did not expect quite such an abrupt turn in sentiment. The talking heads on CNBC who were waxing lyrical about strong US corporate profits and the ‘strong fundamentals of the global economy’ (I kid you not) in March are now staring into the abyss and recommending cash. Yet we fail to see what is dramatically different in the current environment versus that of two months ago. The ECB bailout of Greece has weakened the Euro and this is a minor positive for global growth (if not US multinational profits) due to the asymmetry of sensitivity to the level of the currency between the US and the Eurozone. The bankruptcy of a Spanish Caja (savings bank) can be no surprise to anyone who has had access to any form of media over the last eighteen months, and the revelation that the South Korean frigate that sank earlier in the year was torpedoed by the North dates back to March. The reality is that the economic ‘recovery’ in the West will remain anaemic. Central banks are moving explicitly to counter the deflationary threat of fiscal tightening with aggressive money printing. Asia will suffer much less, though the exporters will face some headwinds. The Chinese will not send their economy into a sharp slowdown by regulation. They will also continue to buy resource assets round the world, and if they are cheaper so much the better (thank you Mr. Rudd). Volatility is likely to remain a feature of the markets for the foreseeable future, but one should take advantage of this in a contrarian fashion. Remember the Chinese characters for ‘crisis’ incorporates those for both danger and opportunity……

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