DISPLACEMENT……..THE NEW 2010 GAMEBOARD
January 6th, 2010 by Leonard
Imagine millions of independent, yet inter-dependent financial systems all trying to survive the greatest and fastest credit contraction of the last 50 years.
When I say systems, I mean the simple as well as the complex. From the gardener and the nail salon, to the municipalities, and to Wall Street, every change in habit and action creates a reaction.
How Does it Work?
If you do that, then I have to do this. And if I have to do this, then some other entity dependent on me must do that. Everyone shifts their paradigm and regimen.
And so millions of reactionary shifts in the smallest of ways, create massive movements of unpredictable force.
While Mr. Bernanke and Mr. Geithner are fast at work attempting to patch up the easy to see holes in the macro world of finance, the micro world and it’s unseen, un-recordable and unpredictable financial complexities are constantly mutating in size and shape and disorder.
There are no computer programs at the Fed capable of capturing these changes, or determining likely outcomes into the future. It’s all an experiment.
The neoclassical economists will continue to look for the untold story as they sort thru the data, but their data will be missing what was missing in 2004 thru 2007, that being common sense.
When there are write offs of debt, someone or some entity loses money. Those losses cause a reactionary shift. When leveraging is limited after enjoying open season on leveraging, there is a reactionary shift. And when credit is tight there is no cushion to buffer the loss of money, a situation specific to this recession, and unlike all others.
Poor Bears
Bears have been beaten up since July of 2009 when bank stock took off to the upside as a result of the cumulative massive infusions of liquidity from mid 2007 thru 2009, by the Fed and the government.
By proxy, Ben Bernanke and the Fed have become the largest hedge fund bulls of the stock and commodity markets. They have also become the largest hedge fund bears of the US dollar.
The Fed buys Treasury debt, suppressing interest rates, depressing the dollar, while gold rallies on inflation fantasies. The Fed gets to redirect the focus of attention away from deflation and to stoke inflation concerns as the well connected investment houses borrow cheap money, and buy things like equities and commodities.
This keeps an artificial support system underneath the equity markets while the US replaces Japan as the carry trade vendor.
Dr. Bernanke the Psychologist
In keeping equities buoyed, the Fed hopes of course that somehow the consumer will believe that 2008 was just a bad dream, and that boomer bubbles are a better alternative to reality based deflation.
And just to make sure that the bubble is well constructed, over 90 percent of the professional bubble makers in the corporate world have been retained and rewarded handsome bonuses.
This of course is creating a seething angry populace undercurrent of “what about me?”
The year 2010 could become the year of revolt if the wheels fall off of the 401K recovery wagon.
Measuring Success One Dreamer at a Time
The measure of success for the Finance, Insurance, Real Estate economy (F.I.R.E.) had to do with the price of assets rather than the quality of the infra-structure. The bifurcation of wealth between the F.I.R.E. economy and the real economy widened as the infra structure was gutted.
Hello…..without a base just where did these corporate heads think they were going to go? They were so busy creating infra-structures in 3rd world countries to push their own stock prices up, that they forgot where they live.
And now we see that the unions are being once again made to look like ogres. Teachers, fire fighters, policeman and other city and state workers are fighting to keep their benefits. Why not?
I remember watching the CEOs of the Big 3 (GM, Ford, and Chrysler), up before a congressional panel and threatening congress that if any one of the Big 3 were to fail, then all of them would fail and bring down the entire economy. They were nodding their heads and looking at each other like children as to say, isn’t that right? Wow….that’s a corporate union of unprecedented size. And then there appears to be Wall Street unions made up of investment banks, and insurance company unions who hire lobbyists as representatives that have enough power to bring congress men and women to their knees.
What about the Current Market?
The chart below of the E-mini S&P shows a classic rotational “pump and dump” trading pattern as conducted by traders rather than investors.
You will see low volume rallies (the pump) followed by high volume breakouts over previous benchmark highs as shorts are knocked out of their positions. The “pumpers” then “dump” into the short covering buyers and the game begins anew in the following month.
This pattern surfaced in Sept and Oct but something changed in the Nov-Dec period. We saw the classic low volume rally (the pump) but we have not yet seen the high volume short covering rally when the Nov highs were exceeded (the dump into short covering).
Negative Divergences
Volume is diverging against the rally and the S&P is lagging greatly behind the Nasdaq in gains. Yes yes, I know, the Nasdaq leads the way but that is only in price increments. The S&P always leads the Nasdaq in total value going up and going down.
The exception was in the late 1990s when the Nasdaq went ballistic on the dot com IPO internet bubble. But the Nasdaq paid dearly for that imbalance after year 2000 losing 80% of its value.
The market is currently lacking broad based participation. The S&P is not cooperating.
This Friday we will see the unemployment numbers and next week the beginning of corporate earnings for the Q4 of 2009.
We have seen a pattern of weakness in the numbers whenever a government program comes to an end. To date there has been no proof that the market can sustain these lofty PE ratios on it’s own without the help of Uncle Ben.
Should that change then there should be high volume accompanying any up move. Otherwise, traders are still squeezing the last drops of juice out of the lemon.
Validation
I contend that the S&P market needs a break into the low 900s irrespective of where it goes on the upside. This would allow for a healthy test of the 50 bar moving average on the weekly chart. If the market held its ground at those levels or at the March lows then perhaps a base building attempt could emerge.
That’s as bearish as I want to get right now, although I am aware of projections a lot lower from reputable technicians. Only 15% of market technicians are bearish at the moment. Bullish complacency is rampant.
A break in the market would be a healthy process that would make a lot of sense to the millions of people who see this disconnect between where the market is, and where each of their own economic realities are residing.
If the economy is on the precipice of greatness, then there shouldn’t be any problem or worry at all with a healthy break in asset prices that can stand the test of time. A solid base in the market would bring about more confidence that things may actually be getting better.
In the meantime, watch the wonders of displacement, and the many ways in which people you know adjust to the new order of the economy. In doing that, you will be several light years ahead of Mr. Bernanke and crew.
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