skip to main |
skip to sidebar
New highs on thin volumes, low volatility readings, frothy PE projections, and everyone is a bull.
End of year tape painting notwithstanding, this is going to end badly, and January 2011 could be interesting.
See my Handwave Forecast for 2011 for a look ahead.
When I was attending classes at an engineering school in Cambridge Mass my professor used to say that a weak estimate without rigorous analytical underpinning was a 'Harvard handwave.' What they taught up the street was how to recognize that you had a problem, and then to run around waving your hands while you found someone who actually knows how to fix it. If you were in the Law School they taught you to wave with both hands, but with gravitas. Such is the bias of the engineering class towards modern professional management. As my Statistics and Probabilities prof Pandu The Formidable pithily observed, "It's all bullshit."
(By the way, a reader has been unkind enough to point out that Ben Bernanke received his Ph.D. in economics from MIT. I should like to rebut that he did his undergraduate economics degree at Harvard, and that economics as such is certainly not an engineering discipline, and probably not even a proper science. 'Financial engineering' is like 'nuclear sociology.' In addition, MIT also has a football team. Ben played the saxophone. Would you hold that against Charley Parker?)
So here is my own handwave forecast for 2011. After all, how can one apply analytical rigor when the data is largely hidden or even worse, fictional?
The general theme for 2011 is "I can't believe this. What are they thinking? Don't they know people are watching? Are they mad? Do they think we are idiots? How far do they think they can go?"
The US equity market has reached the target of 1251 futures basis, and has clearly priced in a recovery based on the most optimistic of forecasts for 2011. It is hard not to assume that this is a cynical exercise in painting the tape for year end bonuses and political spin.
I am having difficulty forecasting 2011 credibly for myself, because the normal metrics and fundamentals seem to have been left at the shore as we have set sail on the uncertain seas of quantitative easing and cargo cult economics promoted by highly mercenary think tanks and their demimonde in the mainstream media.
The great unalterable fact is that the system that delivered the financial crisis is still largely in place and insolvent, merely papered over with dollars in an unsustainable equilibrium. Frauds and fees are the major US domestic products.
For my thinking the great pivot is to what extent Ben and the US will attempt to maintain a pretense of virtue in the dollar while using it like a whore, fudging the economic results and by attacking all its competitors such as the Euro with short sales and downgrades. "They are all pigs, but ours is a little prettier" is the advertising jingle for a continuing dollar dominance. And they will attempt to continue to inflate what is going to be seen in retrospect as a new asset bubble in dollar denominated financial instruments.
As I have said in the past, the primary limiting factor on the Fed and the Treasury is the acceptability of the US bonds (and the dollar is a bond of zero maturity). They know this and are stretching it now as far as I thought they would, although the coordinated assault on the euro, gold and silver are starting to raise a few eyebrows.
Since Obama reminds one of a modern American CEO I suspect that they will take it to the limit if they can. With Larry Summers leaving though, one wonders if Timmy and Larry's replacement will be up to the task of actually pulling the right levers, or will they just keep dishing out the cash to their cronies on Wall Street and hope for the best.
As an aside, someone from the dark side of management philosophy once told me that honesty, loyalty, and enlightened self-interest in a subordinate is good, but blackmail is more reliable. This was why I did not obtain a position for which I quickly lost interest. It might not hurt to keep this principle in mind. After all it was the basis for Timmy, Ben, and Hank's presentation of TARP.
This could imply a higher SP 500 in 2011 than most people realize, and an earlier taste of hyperinflation lite. Gold and the euro will continue to be attacked, and the dichotomy between reality and the managed mainstream perception will continue to widen. Consider this the extension of current trends until something breaks.
Remember the shock people felt when, riding the tide of global good will and just cause, the US diverted from its mission in Afghanistan to suddenly start making the case for an invasion of Iraq which up to that point seemed to have no connection with events, and in retrospect, did not? Expect something like that to happen once again. Not the same, but similarly out of 'left field' as they say in the states.
And if and when the bough breaks it will be noticeable. There will be a panic liquidation and then a very interesting period of time. The limiting factor there is the Constitution, and how much people will mind it. I have not read many who really understand all that this implies.
The other primary course is to allow things to correct back to some sustainable trend, with the thought of actually rebuilding the system rather than just taking it up for another run at the stratosphere to see what happens. This will imply a weaker dollar, higher gold and commodities, and a grinding stagflation as the financial arsonists call for austerity for those on whom they have off laden their bad debts.
There are outliers naturally. The government could just 'take off the gloves' early on some pretext and declare price and currency controls and a type of martial law. I do not see Obama doing this, because I doubt the military would support him without a very solid pretext indeed, probably marked by smoking ruins. At that point December 2012 starts to play more prominently in my thinking.
I keep thinking that we will have features of both primary outcomes, a deflation and a further bubble, but the timing is difficult because it depends on the will of powerful men, and also exogenous events from other powerful men and the many who, at least for now, are sleepwalking into cattle cars. This is why I hold tight to the concept of portfolio diversity and keeping certain options open.
So what I am doing for myself is setting up pivots and trigger points to help determine which way the course of events will break, waiting for events to unfold in their own good time, preparing for the worst but hoping for the best. Things that are 'real' and 'lasting' offer the greatest safety now as they have done for the last ten years. Most of the time the future is just an extension of the past, the continuation of the obvious, until something happens.
The month of January will likely provide us a better window into the rest of the year, in which case the charts and forecasts will become more reliable.
If this seems gloomy it is. This is a tough fix, and the many, most people, are in denial, reaching for all the wrong solutions, rationalizing the irrational, holding on to the past, and grasping at straws. When they are betrayed by reality most will fall into despair, but some will be angry like the gangs of true believers that went around Berlin lynching draft dodgers while the Russians rolled their tanks across the Oder. I am hoping that this is a metaphorical example and not literal. How many lamposts are there in lower Manhattan anyway?
And yet I cannot say that I see one person in power, a great leader, in whom I would place any confident hope. So perhaps this is when one is most likely to rise up. And this is perhaps the most potentially frightening prospect of all. Great leaders are a very dicey affair.
Since people always want to trade some roadmap or system I have included some markers on the SP 500 Daily chart that show a likely path if we follow the second course of a correction and a serious attempt to fix things now rather than just take it to the limit and kick the can down the road for some other tomorrow. As Woody Allen might say, Our best hope is that things will be frightening and dangerous rather than desperate and horrific.
Dark humour aside, my primary forecast of a grinding stagflation remains intact. More of the same, with a twist. After all, the system has not changed with the exception of a few empty seats like Bernie Madoff and Lehman Brothers, relative bit players and outsiders. It is still highly geared towards wealth transference and fraud, merely searching for something to replace the housing bubble, and a new crop of suckers.
As I have said previously, I lost money in 2005-6 underestimating the reckless disregard for decency and the public good by the Fed and the US government in creating a massive housing bubble. I shall not make that mistake again, trying to get ahead of the market, and suggest you do not as well.
"First is the danger of futility; the belief there is nothing one man or one woman can do against the enormous array of the world's ills -- against misery, against ignorance, or injustice and violence. Yet many of the world's great movements, of thought and action, have flowed from the work of a single man. A young monk began the Protestant reformation, a young general extended an empire from Macedonia to the borders of the earth, and a young woman reclaimed the territory of France. It was a young Italian explorer who discovered the New /world, and 32 year old Thomas Jefferson who proclaimed that all men are created equal. "Give me a place to stand," said Archimedes, "and I will move the world."
These men moved the world, and so can we all. Few will have the greatness to bend history; but each of us can work to change a small portion of the events, and in the total of all these acts will be written the history of this generation. Thousands of Peace Corps volunteers are making a difference in the isolated villages and the city slums of dozens of countries. Thousands of unknown men and women in Europe resisted the occupation of the Nazis and many died, but all added to the ultimate strength and freedom of their countries. It is from numberless diverse acts of courage such as these that the belief that human history is thus shaped.
Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centers of energy and daring those ripples build a current which can sweep down the mightiest walls of oppression and resistance...
The second danger is that of expediency; of those who say that hopes and beliefs must bend before immediate necessities. Of course if we must act effectively we must deal with the world as it is. We must get things done.
But if there was one thing that President Kennedy stood for that touched the most profound feeling of young people across the world, it was the belief that idealism, high aspiration and deep convictions are not incompatible with the most practical and efficient of programs -- that there is no basic inconsistency between ideals and realistic possibilities -- no separation between the deepest desires of heart and of mind and the rational application of human effort to human problems.
It is not realistic to solve problems and take action unguided by ultimate moral aims and values, although we all know some who claim that it is so. In my judgement, it is thoughtless folly. For it ignores the realities of human faith and of passion and of belief; forces ultimately more powerful than all the calculations of our economists or of our generals. Of course to adhere to standards, to idealism, to vision in the face of immediate dangers takes great courage and takes self-confidence. But we also know that only those who dare to fail greatly, can ever achieve greatly.
It is this new idealism which is also, I believe, the common heritage of a generation which has learned that while efficiency can lead to the camps at Auschwitz, or the streets of Budapest; only the ideals of humanity and love can climb the hills of the Acropolis.
A third danger is timidity. Few men are willing to brave the disapproval of their fellows, the censure of their colleagues, the wrath of their society. Moral courage is a rarer commodity than bravery in battle or great intelligence. Yet it is the one essential, vital quality for those who seek to change the world which yields most painfully to change. Aristotle tells us "At the Olympic games it is not the finest or the strongest men who are crowned, but those who enter the lists. . .so too in the life of the honorable and the good it is they who act rightly who win the prize." I believe that in this generation those with the courage to enter the conflict will find themselves with companions in every corner of the world.
For the fortunate amongst us, the fourth danger is comfort; the temptation to follow the easy and familiar path of personal ambition and financial success so grandly spread before those who have the privilege of an education. But that is not the road history has marked out for us. There is a Chinese curse which says 'May he live in interesting times.' Like it or not, we live in interesting times. They are times of danger and uncertainty; but they are also the most creative of any time in the history of mankind. And everyone here will ultimately be judged -- will ultimately judge himself -- on the effort he has contributed to building a new world society and the extent to which his ideals and goals have shaped that effort."
Robert F. Kennedy, Cape Town, South Africa, 6 June 1966
