Musings Report #7 02-11-12 Fiefdoms and a daring/foolish call
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Has the stock market topped? One fool claims yes
I know few (if any) of you subscribe to receive my occasional (and completely amateur) stock market calls, but since there is an absolute dearth of fools willing to call a top in this meltup market, I will go ahead and be that fool, just to keep my hand in daring/dumb calls.
My basis is less than scientific: of all the technical analysts I follow, only one is publicly confident S&P 500 1,350 is the top; another who prefers to remain anonymous also called this a top based on some charting systems. Everyone else is at least publicly very circumspect--"of course this could go higher," etc.--because everyone of a bearish bent has been wrong about how long this meltup could go and how high it could reach.
I myself though the divergences looked stretched in mid-January (Musings Report #3 01-13-12) but a month later the relentless meltup has only just paused, and few are willing to stand in front of this particular train. As we all know, "markets can stay irrational longer than you can stay solvent" and divergences can reach extremes and stay there.
The very fact that Bears are almost universally hedging their public comments ("nobody knows how much longer this rally could go," etc.) tells me the top is in. That, and the usual suspects: extremes in bullish sentiment, low levels of mutual fund cash, a low VIX that has now broken out of a 6-month downtrend, the US dollar has found a bottom and reversed, and the fact that tax receipts, gasoline and electricity consumption are all trending down means the economy is weakening quickly and significantly.
Last but not least, this feel like mid-2008, when the wheels were visibly falling off but the market managed one last-gasp rally to blow away all the shorts and Bears. Now that short interest is back to historic lows, there will be few shorts to drive the market up by covering their bets (i.e. buying stocks they'd sold short).
Some very canny, experienced traders suspect the market will drop here but manage one more rally into March before starting a steep decline. This reflects a general belief that the momentum in this market will carry it forward a while longer before finally rolling over. It's good to keep this possibility in mind.
Nobody knows what will happen Monday, much less next week, next month or next year. But historically, divergences snap back, usually sooner than later, and sometimes the snapback is sudden and fierce.
Protected Fiefdoms and Castles of the Status Quo
Readers who have braved my 141,000 word opus "Survival+" know that I use the analogy "protected fiefdom" to describe any Central State agency, proxy or State-enabled cartel that is protected from risk via moral hazard, i.e. the Central State (i.e. the Savior State) has transferred the risk to the public coffers/taxpayers.
Examples include public unions that have won pension contracts that are disconnected from reality, healthcare cartels, military contractor cartels, the National Security agencies, and literally hundreds of politically protected departments, agencies and private cartels. The Mainstream Media lumps all these into the catch-all of "special interests," i.e. any group with sufficiently large donations and high-powered lobbying to buy political protection of its interests.
What is really happening is those who are unprotected (taxpayers and citizens) are forced to sublimate their self-interests to those of concentrations of wealth and power.
I think "special interests" is a typically bland and misleading MSM phrase in that it grossly understates the real concentrations of power. What would be lost if we called the landed nobility of the feudal era "special interests?" Virtually everything important about the feudal economy and political structure.
I think this mechanism of politically protected privilege is universally applicable to all cultures, economies and nations. In China, it is the Communist Party Elites and the financial Elites who have accumulated vast wealth and thus political protection--for example, the SEOs, stat-owned organizations that can borrow unlimited sums fro the central government-controlled banks and then never pay any of the loans back.
Mish Shedlock recently quoted a Chinese academic (via Michael Pettis' blog):
"Power is becoming too formidable and cruel. It is out of control, and without limits. It has kidnapped society and strangled reform. Facing this, finding a solution is a matterof vital importance. In a situation where special interest groups have choked off the possibility of various types of progress, building a just society and enacting reform is difficult. Moreover, there is not a ready-made civil society waiting to settle into the void."
In other words, the void that will be left should protected fiefdoms be dissolved is in effect a power vaccuum that will be filled by something. In "Survival+", I identify the solution as diffusion of power and wealth, and identify the Central State as key force which enables concentrations of wealth and power.
For example, without Central State intervention and protection, banks would not have become "too big to fail" and Medicare would not be 40%-50% waste, fraud, embezzlement and needless meds/procedures. Only the coercive Central State can aggregate such concentrations of wealth and power.
If we understand this forced sublimation of citizens' self-interests to those of self-serving Elites, then this mechanism illuminates all tyrannies, theocracies, kleptocracies, oligarchies and plutocracies.
Building on the fiefdom analogy, I have recently realized that these "special interests" are the equivalent of feudal lords' castles: not only is their power so much more concentrated than the diffused power held by the serfs holding pitchforks, their interests are also more focused: maintaining the Status Quo is their sole agenda.
In this analogy, the castle's moat is the political protection from competition and risk, and the drawbridge (usually up, denying access to the castle) is "upward mobility": as the resources and productive surplus of the entire economy shrinks, then the Elites and fiefdoms can no longer expand much; rather, they can only maintain their perquisites by limiting their membership.
Not only are they protected by the political clout purchased by concentrated wealth/lobbying, they also have raised the drawbridge so few can join their privileged numbers.
No wonder global unrest is building; the debt-serfs may be powerless compared to the nobles' castles and weapons, but at some point rage can no longer be controlled with Napoleon's infamous "whiff of grapeshot" and the castle's walls are torn down stone by stone. That day may be close at hand in Greece.
From Left Field
"The really interesting bit is about the bronze age economy in Europe, its excesses that lead to a collapse and regression of progress for 200 years (800 to 600bc) and the final emergence of the iron age. The parallels with today's economic issues are amazing ... proving humans really are creatures of 'habit'. There is also a very interesting narrative built into the economic and societal story that involves climate change effecting Europe at the same time as bronze age economic bubbles burst, hoarding of bronze items as 'wealth' peaks and crashes, and the emergence of strong 'regionalism' resulting in strengthening of local customs (and, I infer, interregional warfare). Neil Oliver is a great narrator ... the Attenborough of archaeology.
The excellent economic part starts at 20 minutes in. by 25 minutes ... you see a startling parallel with how 'axes' (cf Fiat currency) that could be productive (cf Invested in real things) were being commandeered by the elite (cf Bankers) to 'demonstrate their status' ... putting a massive drag on productivity in the real economy'. The unproductive economy then gets smashed by inability to cope with climate change ... society then dramatically re-models and re-structures."
"On the one hand, the Church advocates a world authority that manages globalization in the interests of economic justice. Yet it is equally committed to open markets, also as a matter of economic justice. Reconciling these two commitments will be a major test for Catholic social doctrine."
The 50 best cities in America: There are lots of these lists around, few cite public transit or bikeability as key features; perhaps fuel rationing will shuffle the criteria used in these lists.
"The Taiping Rebellion exploded out of southern China during the early 1850s in a period marked, as now, by economic dislocation, corruption and a moral vacuum. Rural poverty abounded; local officials were wildly corrupt; the Beijing government was so distant as to barely seem to exist. What was so remarkable, and so troubling, about the Taiping Rebellion was that it spread with such swiftness and spontaneity. It did not depend on years of preliminary “revolutionary” groundwork (as did the revolution that toppled the monarchy in 1912 or the 1949 revolution that brought the Communists to power)."
And just in case you had any doubts about the real situation in China, please consider this:
"Mr Wang’s startling disappearance, apparently into the hands of central corruption investigators, offers a rare insight into the brittleness, fear and winner-takes-all nature of Chinese politics ahead of a wholesale leadership transition later this year."
Job Hunting: When Parents Run the Show: "As 20-somethings struggle in a tough economy, their moms and dads are writing their resumes, tracking them on LinkedIn, and even going along for the job interview."
Thanks for reading--
charles
