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The Market is Speaking; Are You Listening?


Fitting together the puzzled pieces.


Editor's Note: The following column is an updated version of Is the Market Forecasting War?

The future is now. We must now decipher what it will be.

The stock market is a forward-looking discounting mechanism and throughout our slow-motion summer crash, Minyanville has diligently discussed what the market is trying to tell us. (See: Where Do We Go From Here?)

When I awoke yesterday, after checking the overseas price action and scrolling through the headline news -- but before my plain vanilla yoga -- I checked my inbox to find a handful of folks proclaiming, "There it is!"

Stratfor, the well-respected global intelligence service, reported that an Israeli-Arab conflict is approaching.

Old School Minyans know that geopolitical conflict has been a concern of mine for the last few years as unintended consequences of the current policy directive and the enormity of the global financial condition manifest.

At the beginning of 2010, when we foresaw a tricky tri-fecta that included societal acrimony, social unrest, and geopolitical strife, we offered the passage below: (See: Ten Themes)

In 2007, we previewed the deterioration of the middle class and the friction between the "haves" and "have nots." In 2008, we forecast percolating societal acrimony. Last year, we spoke of the migration towards social unrest and geopolitical conflict.

As this evolves, real risk remains across the spectrum of social strife. While this will assume many shapes and forms -- populous uprising, the rejection of wealth, and an emerging class war -- we must remember that global conflicts have been historically triggered by financial hardship.

An Israeli strike on Iran remains a top-line concern, as are uprisings in South America (Venezuela), protectionist policies in China (isolationism is the death knell of globalization), and saber rattling in Russia.

Last week, as we "looked through" the second side of the financial storm -- or, the sovereign sequel to the first phase of the financial crisis -- we further opined, as a matter of last resort:

If we don't shift policies and alter our national direction -- or at least work together in a bipartisan manner toward a viable solution -- an unfortunate needle points to war (although it may not require bullets).

I don't claim to be a geopolitical expert -- I leave that for the smart folks at Stratfor -- but I've been fingering the pulse of world psychology for over 20 years. (See: Handicapping the Global Economic Recovery)

When I see Germany squaring off against the Eurozone (with words more than actions, for now), Russian Prime Minister Vladimir Putin calling the United States a "parasite", and China blasting our leaders for their "debt addiction", you don't have to be an expert in foreign affairs to see the evolution -- you just have to be awake.

This is not something one "wishes" for; getting dinged in your P&L is one thing but strapping an M-16 to a kid and sending him to the other side of the world to fight is, well, different. I believe we're better than that -- as a society, as a country and as a world -- and I've never been accused of being a cockeyed optimist.

I'm not convinced that the recent market malaise portends an immediate geopolitical conflict, for if that were the case I believe crude would be trading closer to $120. Indeed, the best-case scenario is that the free-market is pricing in the forthcoming global deleveraging and acting as judge and jury through the lens of meritocracy (as free markets should).

A more tangible concern may be a terrorist attack given the spooky parallels in the stock market. Please don't shoot the messenger, but the percentage decline in the S&P for the three months prior to 9/11 is precisely the same as what we've witnessed the last three months (-13%). (See: Brokedown Palace)

Be that as it may -- and let's hope it's a nonsensical coincidence -- the specter of global conflict will continue to uptick until calmer heads prevail and the world unites to eradicate our cancerous financial condition. If we don't move in that direction and soon, it will consume us from the inside out.

Random Thoughts

  • Levels to watch through the lens of contextual risk include DAX 5500 and S&P 1100, which are the summer lows on both sides of the pond.

  • CDS spreads in the financial have widened of late, including JP Morgan (JPM), UBS (UBS), and Citigroup (C), Bank America (BAC), and Goldman Sachs (GS).

  • While I've been bearish on this complex for years on end, the "easy" trade on the short side is long gone. It is, in my view, time to start sifting the winners from the sinners and babies from the bathwater.

  • Check the chart below, which juxtaposes the S&P against the bank index, and you'll understand why they remain a focus. We've long said that "As go the piggies, so goes the poke" and that very much remains in play.

    Click to enlarge

  • Finally, I feel compelled to send some white light to the families of those who needlessly perished in Pam Am Flight 103 over Lockerbie, Scotland, including Alex Lowenstein and the 34 other Syracuse University students. You have not been forgotten.


Twitter: @todd_harrison

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