THE MARKET AND PANDORA’S BOXES
April 22nd, 2010 by Leonard
The Market and Pandora’s Boxes
Space mirrors deflecting the Asteroid and disintegrating its surface from New Scientist.com. Can the Feds deflect a downturn of US Bonds thru smoke and mirrors?
We know from the fable that opening the box (which was really a jar) unleashed many of the evils of the world. Pandora closed the lid with only hope left inside, but eventually opened the lid and let hope into the world.
Of course there are many versions and interpretations of this fable including hope as being one of the greatest evils of the world. Another version of the story is that hope is the last thing you lose.
In modern times opening Pandora’s Box refers to opening up a box of un-ending problems. Better to not touch that. This has been one of the benchmarks of complacency surrounding Congress until recently with the election of President Barack Obama who summarily shakes and moves things around. Most folks want change but as I have said in past blogs “Change is just a word until it comes to your backyard”.
Mover and Shaker
The president continues to stir up the pot and tackle sacred cows of money centers.
Like it or not, someone, at sometime, must dust off the cobwebs of complacency, slothfulness, stagnation, excessive greed, unethical behavior and mix up the salad bowl.
I am not worried. When the dust settles everyone will figure out how to do what they do in a slightly different way. If you have ever been to counseling then you know that change does not come easily. And when an entire nation is going thru counseling………..well that’s a lot of energy and turmoil, displacement and disorientation taking place at one time. It will take the fringe loonies a little longer to adjust because their fear meter is off the charts. But hope springs eternal.
The Greek Fable Hits the Greeks
Leave it to the Greeks to test all of these theories as the EU, and the IMF, tries to scare bond vigilantes into submission with the threat of a bailout for the sovereign nation of Greece.
In other words without actually spending any money, the EU, and IMF, continue to act out a charade hoping that the mere threat of billions of Euros in a bailout, will lower the cost of borrowing for the Greeks at their bond auctions. So far, no one is feeling the intimidation. Borrowing costs have gone up and insurance costs (credit default swaps) have gone up as well.
Event Markets and Loss of Control
The opening of Pandora’s Box in this case is that once Greece asks for the money, it may lead to un-ending chain of defaults with other sovereign nations that lead to an “event”.
Markets don’t like “events” because “events” imply loss of control. The only “events” that Yuppie Boomers like are ones where the loss of control is on the upside. They have no problem enjoying imbalances, graft, corruption, irrational exuberance, liar loans, and freakonomics, as long as the value of a house is priced for insanity, and the stock market is priced for lunacy.
But look how they act when the imbalances are corrected back to a “state of normal”. They take out their guns, they want to shoot people, they want to secede from the union, don’t want to share, closet racism comes out of the closet, and they throw fits and tantrums just like they did when they were six years old screaming at their moms in the shopping mall.
This is not to say that they are bad people, but their behavior invokes images of the “Ugly American” from the 1950s replete with a narcissistic right to entitlement. Tolerance for change goes down to zero as fear driven radical conservatism goes over the top and off the edge.
I view this as a “birth of consciousness” C.G Jung; the psychiatrist/philosopher has said that “There is no birth of consciousness without pain”. And we are seeing a lot of that.
The Short List of Pandora’s Boxes
Here is a short list of Pandora’s Boxes, anyone of which could lead to an “event” with un-ending repercussions, unpredictable outcomes and potential loss of control, creating a temporary state of “oh s**t what’s next?”. This list is in no special order.
- Record real estate foreclosures and personal bankruptcies….This lingering aftershock of the finance, insurance, and real estate crises may still be on the precipice of pushing another wave down in the economy
- Greece on the precipice of default possibly needing 80 billion Euros at a minimum in financial aid. The EU and the IMF are on the spot. No love lost between Greeks and Germans. An Army of French waiters are on standby alert as Jean-Claude Trichet, president of the European Central Bank referees.
- Israel warns Syria to stop shipping Scud missiles to Hezbollah in Lebanon. Is shipping Scuds supposed to be a deterrent to an Israeli-Iran military conflict or preparations for a military conflict?
- China bubbling over asking 50% cash deposits on second home purchases. Yes 50%. What’s next? Floating the Yuan and trade wars? I hope not. I was kind of looking forward to buying a Chinese made automobile in aisle 5 at Wal-Mart, imported by General Motors. It will probably look like a Buick. Of course stock market bulls are conditioned to believe that the wheels can never fall off the Chinese command economy. That belief has been reinforced by the results of our own command economy propping up asset prices through government intervention.
- US Treasury Bond asteroids look like they are heading towards planet Yuppie Boomer. Duck and cover. Interest rates may go up sooner than later on an over supply of domestic and global debt. Bernanke has been sending out S.O.S. messages about fiscal disciplines. Is he covering his butt because he’s cornered?
- Financial reform is hastening as the SEC charges Goldman Sachs with Fraud. Is this the beginning of indictments throughout the industry or only a warning shot? And if indictments of malfeasance and fraud are still coming, will Americans require seeing birth certificates of all the heads of these investment banking firms and too big to fail corporations since they really have been running the country?
Opening any of these Pandora’s Boxes could quickly lead to a radical shift in the mood rings within the financial community. I haven’t even addressed Unemployment and the North Korea, South Korea riff.
Every Dip is an Opportunity Just Before Diving off the Cliff
In the meantime Wall Street traders treat every dip as an opportunity. Over the last 2 months the pricing of equities has been pumped up into the anticipation of a good earnings season. Analysts have been focused on revenues over EPS. Steve Jobs is the market with i-everything. I love that he named everything with “i” before it as it is so fitting for the “me” generation.
None of this elevated asset pricing has changed my opinion which is that the market is lacking a litmus test. Yes I am watching and monitoring as best as anyone can the underlying signs of some random stability. But I am also monitoring lots of cities, counties and states on the verge of bankruptcy.
If the economy is on better footing, then a drop in price into the low 900s on the S&P, the low 1400s on the NASDAQ and the low 8500s on the Dow Jones will not cause a cardiac arrest but instead clean out the remaining dead leaves on the economic tree and reinforce trust in the markets as a better alignment of market and economy comes into balance. One has to be able to factor in the existing debt piled up over 4 decades that has been shelved for now.
Call me old fashion, but until some of the Pandora’s boxes above have been resolved, I am not a believer in the 2010 portion of this stock market rally.
My clock is not permanently set at 5 minutes to doom.
I in fact called the March lows in 2009 and projected very accurately where prices were likely to go on the upside. I also called the top in the market in November of 2007 drawing a picture of how the market would look and trade 7 months into the future. The drawing was very accurate. (See Freight Train Analytics )
It is always possible to be wrong. I don’t have an ego issue with that nor do I aggressively fight the tapes. But the automaton momentum traders have not touched my buttons yet. They know bubbles and they are conditioned to trade them having lots of practice over the last 15 years.
Let’s take a look at the 30 Year US Treasury Bonds
The potential Head and Shoulders top on this charts is almost 2 and 1/2 years old. The neckline of the pattern is at 112 or 113’00 dependent on how you draw necklines. In order for this pattern to be valid the Bond prices must reach the 112’00 to 113’00 level somewhere near the end of June. We can give or take a few weeks. But then prices need to break down thru those levels. I would expect that prices would later turn back up to test the 112’00 to 113’00 area as resistance and then begin falling again in earnest.
If on the other hand we see prices elevated to the120’00 in late June then the pattern could be subject to failure and this Pandora’s box could melt away.
If the pattern succeeds then we could expect to see rising interest rates in the fourth quarter of 2010 and into 2011. Yields on the 30 year bonds could move up to the 7.25% level while prices move down to the 82’00 level. Those are price levels not seen since 1994
My Mom Always Said “Live and Let Live”
So you choose which Pandora’s Box is acting up at the moment or the market will choose for you as we move through a very dynamic time in the history of America and the world. Everyday is a good day when you are able to get up in the morning and smell the coffee, laugh a little, and extend a little kindness to your neighbor.
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