Last night on Wall Street we saw a clear demonstration of the enormous latent equity buying power that is held back by fears of a nasty drop over the 'fiscal cliff'.
It reminds me of the buying power that built up when it was feared that Europe was about to crash. When that crash was avoided we saw a significant rise in global shares as the buying was released.
Last night in early US trade the Dow index was down more than 100 points. Then the top Republican in Congress, Speaker John Boehner, said he was optimistic that a deal on the fiscal cliff could be reached to avert large tax hikes and spending cuts. It was announced that President Obama and the defeated Republican Presidential candidate Mitt Romney would lunch this week. And finally President Obama said he hoped said to get a deal done before Christmas.
The combination of all three events gave Wall Street an indication that the fiscal cliff is not going to be as steep as was feared. Whether that conclusion was right or wrong is a matter of speculation. What is not speculative is the weight of latent buying power.
It is multiplied by the substantial short positions, which are set in the market backing a severe fiscal cliff-driven market decline. One of the reasons why the Dow index reversed more than 200 points from the low point to the high was that many of these shorters were covering.
The problem with Europe was that once a disaster was averted and shares rose as the buying power was released, markets looked forward and found a tough decade ahead.
In the case of the US, if the fiscal cliff is not steep, when markets look forward they will see a potential strong economy boosted by one of the biggest re-engineering projects in US history – the conversion of energy sourcing from Middle Eastern oil and local coal to American shale gas.
And with that comes a dramatic rise in manufacturing as the US combines low cost labour, relatively cheap energy and abundant capital plus a will to create jobs in the US rather than in China.
That’s the stuff which makes long-term strong markets – lots of blue sky.
Of course in Australia we are on the wrong side of all this. Global energy will fall in price, particularly coal, and the swing to US manufacturing will stunt China’s growth because there is a limit to how far it can go building infrastructure.
But that’s ahead. What was significant last night was the clear display of the latent buying power.