Whenever the world comes to an end, it makes for an interesting movie. This one was particularly wrenching, as it involved not only the usual cast of characters - the U.S. economic, banking and political system - but also the whole wide world. This was the scary part.
We kind of knew how to deal with our own, but we barely knew Trichet, Merkel, Sarkozy, Berlusconi, Zapatero, Coelho, Papandreaou or Enda Kenny, Ireland’s Taoiseach (figure that one out). And who had heard of Venizelos (Greece), Noonan (Ireland), Tremonti (Italy), Salgado (Spain), Gaspar (Portugal), et al. We called them the PIIGS for some, the Old Continent for others, but we could not really tell the difference between the ECB
, the ESCB, the NCBs, the MFIs, the EFSF, the eurozone (17 countries), the European Union (27 countries). Yet, everybody became an overnight expert. Germany will exit. Greece will exit. Italy and Spain will default. Standard & Poor's, Nassim Taleb, gold and the Bildebergers were ruling the world, and the U.S. was doomed. Marx and Jeremiah Wright were right. Bernanke was to be pilloried, so was the Tea Party.
But the Invisible Hand
was watching. If we could not count our headless chicken coming home to roost, she could. I was watching her writing on three walls: the S&P around 1190 with a stop at 1175 and 1215, the euro/dollar September Futures, and the High Yield index (NYSEARCA:HYG
). While the news unfolded, she shook the tree and we went to 1120, briefly touching 1100. We had just experienced an 11.5% decline, this last 6% had grown men crying. Our leaders were on vacation, European leaders were on vacation. What were they thinking? Even Mother Nature got upset. She sent us an earthquake, then a flood. When would the locusts come?
In parallel, several things were happening. Italy quickly voted an austerity package. Kudos to them, they taught us a lesson, but in the grand scheme of things, it was immaterial. The folks not in vacation at the ECB bought Spanish and Italian bonds, immaterial too. Merkel and Sarkozy, in “grande pompe,” announced nothing, and that was immaterial too. The FOMC announced that rates would stay at zero until 2013, and no QE3, all immaterial (sort of). Jackson Hole was held in Wyoming, immaterial. Ghadaffi fled Lybia, immaterial. Consumer Confidence dropped, immaterial. Italy issued $7Bn in 10-year bonds at 5.22%, immaterial. And the euro/dollar was stable to up, HYG crept up, and the S&P went through 1190 like a knife through hot butter. Go figure. Something must have been material to abruptly stem the panic on August 23, when the S&P hit an intraday low of 1123 to close at 1162.
One explanation could be the 1297 page-views my August 19 article got (click here
) but I doubt it. Another explanation may be that the Invisible Hand now had all the information it needed to assess the overall situation, and decided to look over the valley. I know this is difficult to fathom. So much hinges on politics that September has all the elements to be a disappointing month, to include earnings which are likely to be way blah, if that much.
Unless, and this would be the White Swan, we call it a status quo. Here is how it would work. We are in an economic contraction. Deficits are bulging at every country’s seams. This is typical Keynes. Let’s do nothing, no tax increases, no spending cuts, short term. Irene’s $10Bn could stimulate construction. While only at the margin, this is the only employment moving needle. In Europe, the ECB should continue to monetize the deficits. To quote the first link above:
“Remember, if we are revisiting history here, it was not that long ago that they all went the fascist route. And it was not until the late 60s that Portugal was under Salazar’s rule, and it was not until the mid-70s that Franco ruled Spain, same for the regime of the colonels in Greece ... When you take the Panem away, you are left with the Circenses. That’s called fiscal restraint in tough economic times. Ask Marie Antoinette and the guys burning Porsches in Germany.”
Countries have become socialists, but you don’t want to take the Panem right away. In the meantime, depending on each country’s political agenda, the pendulum is swinging back toward fiscal balance, but as Ben Bernanke and Christine Lagarde say “Chaque chose en son temps." If this turns out to be the White Swan, please tell the world you have heard it here first. Nassim, eat your heart out!
For those of you who like charts, here are a couple. First, the Invisible Hand. If you don’t believe in technicals, you will at some point. This is August 31 at 13:20. Notice how we consolidate at S&P 1224, the intraday 50% retracement between 1346 and 1102.
Click to enlarge
Click to enlarge
The next one is my favorite analogy with the 1930, from my friend Tony Kolton who has since sold his firm to Morningstar. It shows the almost perfect correlation between the Dow in the Great Bubble and the Nasdaq in the last one. Why compare these two indices? Because they both reflected Kondratieff's type of structural innovation, each leading to speculative bubbles, and because today’s Dow has nothing to do with the Dow of back then. Note that the correlation stopped working in late 2009, with the Nasdaq now back at the 2007 level. This, to me, is the end of the Great Depression analogy.
Click to enlarge
Click to enlarge
For more actionable stuff, look at my Instablog
of August 30 but bear in mind the easy money has been made off the bottom. You now need more of a longer term view. The bottom line is this: There is some resistance in the 50-day and 200-day moving average area around 1245, but we are going higher, with 1270 as my first objective. This should carry us until the European vote on the EFSF mess at the end of September. On that score, it is interesting to note that the eurodollar is taking a drubbing this morning (September 1), down to 1.424 on the September futures. In "normal" times, this should have taken the S&P down some 20 points. Instead, it is flat and again, testing the 1124 area. And while some European banks are taken out of the Stoxx index, Barclays (NYSE:BCS
) is up 5% on an upgrade. It fels like the markets are starting to sort the wheat from the chaff, which is encouraging in front of the long weekend. I would expect 1195 to hold, so continue to nibble. Last week you needed to be fast. We now have more time to be selective.
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Disclosure: I am long ODP, TOL, MYE, PPG, WSBC, ADSK, JCI, BCS, SLM, HYG, URI, VECO, SANM, WCC, WWD.