A Major Inflection Point is Upon Us

Great things are done when men and mountains meet.  This is not done by jostling in the street.

Always be ready to speak your mind, and a base man will avoid you.

As a man is, so he sees. As the eye is formed, such are its powers.

Excessive sorrow laughs. Excessive joy weeps.

I must create a system or be enslaved by another mans. I will not reason and compare: my business is to create.

If the doors of perception were cleansed everything would appear to man as it is, infinite.

The weak in courage is strong in cunning.

What is grand is necessarily obscure to weak men. That which can be made explicit to the idiot is not worth my care.

You never know what is enough unless you know what is more than enough.
– All Quotes by William Blake

A Major Inflection Point is Upon Us
I have not commented on the financial markets in a detailed way for quite some time now.  This is not because I do not have strong opinions on them, rather it is because I see the current ongoing crisis as just as much a political and social crisis as an economic one and so I am compelled to address those concerns as I think it is in that arena that the greatest dangers exist.  Additionally, the major macro investment themes that I outlined well over a year ago remain the same.  Namely I think long investments in the United States stock market should be focused on precious metals miners, oil related energy shares and the agriculture theme.  Anything related to the ponzi economy like financials, real estate (commercial and residential) and traditional retail with little international presence should be avoided.  The final reason why I have not been more market focused is that with liquidity so bad and countless players seemingly exiting positions and taking risk down, sometimes I wonder who is really driving these markets.  Are the moves expressions of investors and their views on the future or is most of the trading actually related to sovereign interests engaged in financial warfare?  If it is indeed the later influence that is most profound then you can forget any possibility of rational moves on a day to day or even week to week basis.  Nevertheless, the market always wins in the end and this happens at major inflection points.  I think we are at one of those moments right now.

When Oil Breaches $80/b Watch Out
I have mentioned time and time again that the broad stock market has never been able to rally sustainably once oil moves above $80/b.  We first saw this back in 2007 when the market top occurred just as oil was about to embark on its surge through the $80/b level on its way to $150/b.  Oil has since topped $80/b on several occasions, in October 2009, January 2010, and then the March/April 2010 period.  In every case the oil price correlated very positively to the market and in my view was a key factor preventing further gains.  Well here we are again with the S&P500 on a nice bounce to the 50 dma and oil at $79/b.  If what we have seen in the past occurs once again the market is about to run out of steam.  So the question everyone needs to ask themselves is what are the likely scenarios from here.  There are two in my view.  The first one would play out as many of the previous ones have.  Namely, oil and the stock market pull back meaningfully as the “risk on” trade evaporates.  This is what I think most people anticipate.  The other likely outcome would be the decoupling trade we saw between fall 2007 and mid-2008 where the dollar lost serious purchasing power and commodities and ROW stocks surged in value relative to all other asset classes.

Is a Decoupling Trade on the Horizon?
I think there is a much greater probability of the second scenario playing out than many anticipate and here is why.  First, very few are set up for such a trade.  It first started almost three years ago now and as we all remember it ended in tears for those that had it on with leverage and couldn’t get out.  Investors are now sufficiently conditioned to the idea that oil and the S&P500 are both part of a “risk on” or “risk off” trade.  This is likely what the computers are trading on and so it would actually be a huge surprise if that correlation was to break down.  That said, just because it would be a surprise to see oil rise and the market decline concurrently isn’t a reason for it to happen.  I think one of the reasons relates to the dollar.  The U.S. dollar should have completely collapsed versus many of the better managed and fundamentally sound currencies in the last year or so.  By these I refer to the Australian dollar, the Chinese yuan (and most emerging Asia currencies), the Swiss Franc and the Brazilian real.  While the dollar has certainly lost a lot of value to many of these currencies in the past year or so it would have been considerably worse if not for active intervention by central banks in other countries.  Effectively, when the crisis hit the U.S. still had a lot of credibility and so the leaders of all nations decided to support the U.S. and its currency in an attempt to get things “back to normal.”  This is why I have mentioned repeatedly that the dollar index is so useless as an indicator (also because the main components are the euro and yen and I do not believe these to be sound currencies either).  There is investing in the dollar versus the euro or versus the yen.  I think all three will end up in the currency graveyard.

The U.S. has Lost All Credibility
The United States political and monetary authorities have lost ALL credibility in the eyes of the world ever since the crisis hit and for very good reason.  The main reason we are still held on life support is so that China can go out and buy up all of the world’s resources while the dollar still has value (and they allow us to bury ourselves) and we have a strong military.  We can see the loss of credibility in the fact that we went to the G20 talking about more stimulus and were rebuffed.  So when the crisis first hit all other nations defended our system and currency but now I think all nations are going to focus on what is best for them and believe me it will NOT be what is best for us.  China has already slowed itself down materially to deal with its irresponsible housing bubble but based on comments recently from authorities it is clear that they are committed to stimulating domestic consumption.  Furthermore, while the yuan has only strengthened slightly since they changed policy let’s not forget that it HAS strengthened.  While they are proceeding cautiously, this was a change of policy.  So to summarize I see a world emerging over the next few months where other nations publicly talk a nice game about the U.S. and its importance but in reality talks will go on behind our back as to how to gracefully cut the cord.  Any cutting of the cord would reflect itself in a decoupling trade in my view.  Unfortunately, politicians in the U.S. will never admit that they are the reason we are in this mess so they will likely start a war or create some other event (cyber attack to shutdown the internet?).  This is precisely why I call on all Americans right now to refuse to get involved in a war.  This would be a war to defend our empire plain and simple.  We do not need an empire.  China needs an empire to feed itself and to provide energy.  We are the most blessed large nation on earth as far as land, agriculture and water resources.  Plus we have a brilliant social document called the Constitution that the vast majority of Americans would die to defend if necessary against whoever would threaten it.  Let’s just get our acts together here and not fall for the trap that I see being set.  Also, remember that if the authorities are about to lose control of the precious metals and oil market the best thing for them to do would be to start a conflict so the rise can be blamed on that.  If you haven’t learned that Washington D.C is not to be trusted by now I do not know what it will take.

Mike

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