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Random Thoughts: A Top-Down View of the World


Weighing QE3, warships, and Europe.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

I was commuting home last night, looking forward to the laughter of little kids, when an alert buzzed across my phone: "US Sends Warships to Libyan Waters Following Attacks."

The news, in and of itself, wasn't a shocker, but it did provide another piece of a complex puzzle that we've been piecing together for a long time.

Old-school Minyans will remember the critical crossroads that we first painted in Our Wishbone World in February 2008. And I quote:

"What's clear is that the game itself has experienced a seismic shift. Central banks have been extremely proactive in what they do and how they do it. This has been going on for years but the efforts increased appreciably since last summer. We opined at the time that something was afoot and the pieces have seemingly fallen in place.

"We are approaching a critical crossroads; structural imbalances have cumulatively increased since the back of the tech bubble and risk has built to a crescendo. The credit contagion simply served as a catalyst to bring this conundrum to bear. All that remains to be seen is where the bear will domicile.

"Let's look at both sides of the great debate. To the left is the socialization of markets, nationalization by governments, and the potential for hyper-inflation. To the right, we have asset class deflation, risk aversion and the unwinding of the debt bubble.

"If the Northern Rock nationalization is the first in series of similar steps, we could conceivably see the stateside assumption of mortgage debt by the US government. This would hit the dollar and spike equities, at least until interest rates rose to levels deemed attractive as an alternative investment.

"That is the hyperinflation scenario, one that is presumably preferred by the powers that be as an alternative to watershed deflation. The 'haves' would fare better than 'have nots,' which would include the former middle class that suffers as a result of moral hazard, as the costs of goods and services skyrocket.

"The other scenario is the draining of liquidity from the system, which would ignite the fuse for a higher greenback as currency becomes scarcer. Asset classes across the board, from commodities to equities, would deflate and impact the top tier of our societal structure that is tied to the marketplace.

"That, quite obviously, would be problematic for policymakers and the constituencies that bankroll them. Deflation in a fractional reserve banking system means that they have, for all intents and purposes, lost control of the economy. It is an admission of defeat, albeit one that may be unavoidable."

Will It Matter? Does It Now?

On one side, there's the bitter pill of debt destruction, asset class deflation, and a stronger dollar. On the other, there's more of the synthetic sweetener-the quantitative easing on other government stimulus-that got us into this mess in the first place. (See The Main Event: Inflation vs. Deflation.)

But it's not that clean-for every action, there is an equal and opposite reaction, and when actions are cumulative, the reactions are equally severe. We saw it in 2008, and take me at my word: If we don't shift our current course, we'll see it again. (See: The Anatomy of a Recession and A Five-Step Guide to Contagion.)

The issue now is how and when this dynamic manifests, and that, my friends, is a question that I'm not smart enough to answer. What I can say is the lurking danger may not be on our screens as much as behind the scenes.

The ramifications of policy gone awry are ever-present in the social sphere, and where you are in the "tricky trifecta"-societal acrimony, social unrest, and geopolitical conflict-is perhaps a function of what part of the world you're reading this in.

An Inside-Out Approach to the Market

The price action in global markets is in stark contrast to the devolving socionomic landscape. Credit trades well, stocks act fabu, and performance anxiety is running rampant. The buyers are higher-and the sellers lower-as we approach quarter and year end; in the FUBAR world of money management, it's OK to lose money if others lose more, but anathema to make money and underperform a benchmark.

I've traded two-sided this year with a rapid-fire staccato methodology. When I stuck to that approach, I benefited; when I veered from my discipline, I paid a hefty price. While I'm currently light and tight-I have a midday board meeting, today of all days-I wanna fade (sell) rallies for a trade and will look to buy some Facebook (FB) and not get shaken out of the position (this is an interesting article for those involved).

All the while, I'm doing my best to run a small business in a tough environment, balance the important stuff against the stressful stuff, and be part of the solution instead of part of the problem. I will say this: I speak with a LOT of folks from around the world, business leaders throughout the city and friends who are trying to make ends meet. It's not easy out there, and no, it's not you; the mantra, as we've been offered for some time, is to survive and thrive.


Twitter: @todd_harrison

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