This note was originally published at 8am on March 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“We learn geology the morning after the earthquake.”
-Ralph Waldo Emerson
Emerson was an American Patriot who championed individualism during the mid-19th century. He was born in 1803 in Boston, Massachusetts and lived his life out loud during a time of great American leadership. I don’t think he’d care so much for today’s Big Government Interventions.
Today, not unlike any other day, we’ve woken up to the risk management reminder that the world is grounded in uncertainty. From Japan’s earthquake to the Saudi “Day of Rage”, not matter where you go, there it all is…
The morning after risk should have been proactively managed is as crystal clear as the mirror you have to look in every morning. Those who are Perma-Political obviously don’t like to do that so much on mornings like this. Sadly, the modern day Japanese, European, and American bureaucrat lives a life of finger pointing as opposed to introspection.
I’ll get to answering the Quake or Correction question about the US stock market by the end of this note, but I really think that there’s a much more critical long-term leadership question that we need to be asking ourselves of the government we should be governing this morning.
If we want to make this country Japanese in its fiscal and monetary union, that might be fine for the sake of a 2-year stock market trade – but not in preventing a long-term societal Quake.
The Ralph Waldo Emerson years were very formative in terms of how Americans thought about self-directedness and individual liberties. During Emerson’s adult years, Andrew Jackson was the President of the United States (1829-1837). Like all of us, Jackson had plenty of faults associated with living in the moment, but one of them wasn’t accepting the tyranny imposed by a socially elite Big Central Bank.
In fact, “after the First Bank of the United States was established by Hamilton, followed by a Second Bank put in by pro-bank Democratic-Republicans after the War of 1812, President Andrew Jackson managed to eliminated the Central Bank after a titanic struggle during the 1830s.” (Murray Rothbard, “The Case Against The Fed”, page 73)
On the banking front, Jackson’s battle against Big Central Planning was won against a young Princeton economist by the name of Thomas Biddle, who was serving in a quasi-Bernank seat as the president of the Second Bank of The United States. It gives me chills to think that Big Princeton Keynesians like Paul Krugman and Ben Bernanke have generated so much political power with the same academic dogma since.
Unfortunately, after the Jefferson-Jackson libertarian ideals of free markets were fortified via democratic vote, the Civil War came (where Jackson obviously had plenty of accountability issues to deal with on another topic - slavery) and bankers who hoped for Big Government Intervention capitalized on the crisis.
The phrase “Not Worth a Continental” is derived from the same strategy that the Japanese will look toward to solve for event risk in their economy today – issuing fiat paper. During the American Revolution, that’s exactly what the Continental Congress did (print money) – with the bigger problem being that those Continental dollars were non-redeemable in gold (neither are trillions of Yens).
“The common phrase, “Not Worth A Continental” became part of the American folklore as a result of this runaway depreciation and accelerated worthlessness of the Continental dollars.” (Rothbard, “The Case Against The Fed”, page 29)
Now getting back to living in the today, if we don’t want this country to be hostage to event risk like Japan is this morning (I mean economically), like any good American household or company, we need to get this American balance sheet problem fixed. There comes a tipping point where you can’t print money to internally finance a recovery from a natural disaster, or God forbid, a war.
I’m not being alarmist. This is a very serious matter that history certainly has taught us to respect. Ask the German bankers like Paul Warburg who constructed both the German Reichsbank (founded in 1876) and, to a degree, the US Federal Reserve (founded 1913), how being hostage to The Inflation associated with an addiction to printing money ends when calamity strikes…
Back to the risk management Question of The Day: Quake or Correction?
I’ll grind through the levels here and keep this answer as tight as it needs to be. After all, you should be asking a firm who called for this Asian and US stock market correction for the levels to manage your way out of it…
As a reminder, we’ve been calling for a 3-6% correction in both US and Japanese Equities since Valentine’s Day:
- JAPAN - This morning’s selloff in Japan makes the cycle-peak-to-drop correction in the Nikkei -5.6% since February 21, 2011
- USA - Yesterday’s pounding of US stocks (4th down day in the last 5) makes the cycle-peak-to-drop correction in the SP500 -3.6% since February 18th, 2011
My immediate-term TRADE and intermediate-term TREND targets for the SP500 are now:
- SP500 immediate-term downside support = 1283
- SP500 intermediate-term downside support = 1265
So, I say Correction. The Quake is already another historical event. Let the Perma-Bulls learn from that again, on the morning after.
Go Yale Hockey in The Haven tonight (Game 1 of the playoffs against St Lawrence), and best of luck out there today,
Keith R. McCullough
Chief Executive Officer