Weekly Musings 50 12-23-11
You are receiving this email because you are one of the 432 subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights, and thank you for supporting the site.
Thank you for your support in 2011
I want to begin by thanking you for your readership and support of oftwominds.com. By overlooking the uneven quality and value presented here to the inner circle, you encourage me to keep doing my best, though the effort may not always be visible. Simply put, you are essential to the continuation of oftwominds.com.
Crisis Past, Or False Calm?
It's difficult to tell if the European credit crisis is actually past, as the media and stock market seems to be suggesting, or if this is merely the financial equivalent of the eye of a hurricane. I will present a few charts which you are free to ignore if that's not your cup of tea.
Even without any fancy charts, we see the stock market has risen sharply, and the S&P 500 and the Dow Jones Industrial Average are the Status Quo's favorite propaganda tools: if they're rising, then that means everything's going well in the economy.
The charts suggest meaningful divergences have widened as the markets have signaled "all clear, crisis over." This chart suggests the VIX volatility index has diverged to a point similar to July 2011, just before the stock market tanked.
The basic divergence is the same one I have been highlighting for months, the see-saw between the US dollar and stocks. Stocks are rising, but the dollar hasn't plummeted as it should. So either the euro must explode higher and the dollar must tank to restore the see-saw, or equities must tank. In this chart, the blue line is the euro, which has tracked equities closely until recently. If this correlation has any meaning, then either stocks must decline down to the blue line of the euro, or the euro must explode to near its highs to match the S&P 500.
Alternatively, the see-saw is broken.
Much of the blogosphere and financial media spend considerable time poring over the tea leaves of economic data: container traffic into harbors, rail traffic, housing starts, unemployment claims, etc. As with sports, there is a limitless trove of statistics to pore over. Everyone looks at this for evidence that the economy is "fixed" and thus "growing."
We can set aside all the confusing data and simply ask: has anything truly been fixed, or has it simply been papered over? There is scant evidence that anything has actually been fixed, and abundant evidence that papering over the dislocations with more debt/ cheaply borrowed money is the Status Quo's one and only game plan and "solution."
Many of us wonder how much longer this plan will continue "working," that is, nudging the statistics the "right way" to indicate "growth" and "stability." A lot of analysts are now persuaded that the economy is "healed" and on a sustainable, stable path to "slow growth" because "that's what the data are indicating."
Just as a gut feeling, it feels more like a false calm than "crisis past" stability. The divergences suggest fireworks and volatility in January--either rip-roaring new highs as markets breathe the intoxicating air of "crisis past" or collapse in the high winds just beyond the false calm.
From Left Field
"Metaphor is the currency of knowledge. I have spent my life learning incredible amounts of disparate, disconnected, obscure, useless pieces of knowledge, and they have turned out to be, almost all of them, extremely useful."
Chandler Burr, The Emperor of Scent: A True Story of Perfume and Obsession (via Kathy K.)
Thank you for reading, and best wishes for a safe and happy holiday season--
charles
