Musings Report #3 01-13-12 Special Stock Market Report
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Special Stock Market Report
I know many of you are allergic to stock market charts and chatter, but the following comments might be of interest anyway as the mainstream media and elected officials alike consider the market a primary indicator for the overall economy.
Frankly, the market is looking like it's ready for a "surprise" decline. Various sentiment indicators are suggesting massive, widespread complacency--not bullish euphoria, but bullish complacency that reflects the general belief that the European Central Bank and the Federal Reserve have "fixed" the European credit crisis, and they have the power and will to "backstop" any market decline.
The most telling evidence of this is the VIX volatility index has declined for months and reached a level that typically reflects strong bull markets and widespread confidence. Yet there is abundant evidence that the global economy has rapidly decelerated and is now contracting.
This is only one widening divergence that historic precedence suggests will be settled with violent increases in volatility and sharp "unexpected" declines.
As noted here many times in 2011, "the only trade that matters" is the DXY dollar index, as stocks have long been on a see-saw with the dollar: when the dollar rises, stocks decline, and vice versa. Yet for the past three weeks, stocks have risen along with the the dollar. This divergence has caused many traders to start looking at currency pairs such as the euro and Astralian dollar or the euro and the Japanese yen for guidance as to the next move.
Bulls would have us believe the inverse correlation between the dollar and the stock market has been broken by this 3-week long aberration. That is possible, but a 3-week move burdened by numerous massive divergences simply isn't enough to dissolve a correlation with years of history behind it.
There is also a bit of an inverse correlation between bonds and stocks, as stocks are seen as a "risk trade" while bonds are seen as lower-risk. As a result, money ebbs and flows as it seeks safety or higher risk/returns. Analyst Tony M. discusses this in this brief entry: "There have been three large divergences between equity and credit since the late 90′s and each time credit forced the hand of equity."
That doesn't exactly sound very warm and fuzzy. But Doubting Thomases are few and far between, and those betting against the melt-up are getting lonely and tired. This is ideal set-up for a sudden crash: low volatility, widespread complacency and faith that the market can't go down because Central Planners won't allow it, and so on.
Lastly, major downgrades of European nations caused a near-invisible decline in U.S. stocks on Friday. Bulls can interpret this to mean the market is resilient and easily shrugs off bad news. Analysts such as those listed above see this as divergences being pulled ever wider, and the point at which the rubber band snaps back might come as early as Tuesday.
Longer term, we will have to monitor the severity and length of the decline. Maybe it will trigger another "buy the dip" rally, or it may lead to something more protracted. Various cyclical analyses point to a May low, while others see a final low out in 2013.
In my view, all these gyrations reflect the battle between Central Planning Manipulation and reality, as "discovered" by transparent, unmanipulated markets. The basic dynamic playing out is akin to insulin resistance: every intervention by governments and central banks to keep the market from reflecting reality is like an overdose of insulin. The system's sensitivity to each dose of manipulation declines with every intervention, forcing the central banks and States to increase the "dose" of intervention next time to achieve the same result.
Once the "patient" (global markets) loses all sensitivity to Central Planning interventions, then the system implodes. We might be at that point, or we may be a year away. Only time and price will tell.
From Left Field
Winter Haze Blankets China: "Particles smaller than 10 micrometers (called PM 10) are small enough to enter the lungs, where they can cause respiratory problems. The density of PM10 reached 560 micrograms per cubic meter of air on January 10, said the Beijing Environment Protection Bureau. By contrast, U.S. cities exceed air quality standards when PM10 concentrations reach 150 micrograms per cubic meter."
"But most of the pollution that makes up haze isn’t PM10; it’s finer particles, smaller than 2.5 micrometers in diameter (PM2.5). These particles can embed themselves deep in the lungs and occasionally enter the blood stream. The fine particles are highly reflective, sending sunlight back into space. The Chinese government does not currently measure PM2.5, but the U.S. Embassy in Beijing reports their measurements hourly in a Twitter feed. On the morning of January 10, PM2.5 measurements were off the scale..."
Is it any wonder that top Chinese officials all have homes, green cards and assets in North America or Europe? No amount of money can save your lungs in Beijing....
"But two new publications this week have left me sick to the stomach. I just don't think it's defensible any more to turn a blind eye to the social and ecological crimes Big Food is committing, in other parts of the world, so that you and I can eat what we damn well feel like. It should not have been a surprise last week, then, to read a grim report entitled “The great milk robbery: How corporations are stealing livelihoods and a vital source of nutrition from the poor.” (via G.F.B.)
North Korea reportedly punishing insincere mourners: The source told the paper “authorities are handing down at least six months in a labor-training camp to anybody who didn’t participate in the organized gatherings during the mourning period, or who did participate but didn’t cry and didn’t seem genuine,” according to the Daily NK. (via Ishabaka)
By December, escalating talk of military strikes, promoted by respectable Western and Israeli politicians, analysts, and commentators -- in the pages of this journal, too -- raised anxieties in Tehran to a level not witnessed in many years. In years past, war over the nuclear program had always been the subject of chatter in Iran, but few took it very seriously. In fact, if war came up in ordinary conversation, it was mentioned jokingly. In December, however, my optician, an older Isfahani with a wry sense of humor who hosts a salon of sorts with locals every evening in his shop, captured the mood of the city when he said of the worry over a coming war, "You can smell it," he said. "This time, you can smell it."
Thank you for reading--
charles
