"Not everything that is faced can be changed. But nothing can be changed until it is faced."
~ James Baldwin
Clearly, after yesterday’s big intraday US stock market reversal, we are not out of the woods yet - and we effectively won’t be until we can put the US Financials rumor mill on the back burner. To do that, we need to let some of these financially geared companies go away. We’re socializing the losses of our financial system anyway, so rather than behaving completely like the Japanese government, let’s just get on with it and let some of these banks go to zero.
The media is picking up on a story that speaks to this very point. It turns out that the old battle axe of getting unpopular things done, Paul Volcker, is already butting heads with the bailout bureaucrat, Larry Summers. Anyone who has read the respective histories of these two gentlemen will not be surprised by this. Volcker is a doer and Summers is a Rubinite.
What’s a Rubinite? Someone who comes from the Robert Rubin school of Goldman Sachs gone public. Goldman, when it was a partnership, was one of the greatest success stories that this country will ever see. Goldman, as a public company, is a training ground for leverage traders and politicians.
I agree with Jeremy Grantham’s recent assessment that “Rubin is the guy who was last seen exhorting Citibank to take more leverage and keep swinging … he was part of the establishment that failed to express early, loud concerns over slipping financial standards, and in fact helped create an environment where prudence was a career risk and CEOs felt obliged to keep dancing.”
The reality is that Summers, much like Hank Paulson, is a Rubinite. Tim Geithner is a Summers man, and so is the new head of the CFTC (actually Gary Gensler was appointed into Treasury by Robert Rubin). Follow the bouncing ball folks… it has finally rolled up to the big cigar smoking Volcker’s feet – and he doesn’t like the smell of it.
Does our financial system have a Crisis in Credibility? You bet your Madoff it does – yesterday’s intraday 200 basis point selloff in the SP500 probably had as much to do with Harry Markopolos’ Madoff testimony as it did the rumor that Bank of America is going to be nationalized. Markets are functions of confidence. They don’t go up, sustainably, when there is no trust. Trust is earned, not appointed. Trust takes forever to build and a minute to lose.
Obama, unfortunately, has already appointed two politicians (Geithner and Daschle) who violated America’s trust. Whether it is not paying their taxes or hobnobbing with the Rubinites, this is American Idol season, and America has voted – she doesn’t like what she sees, and she shouldn’t. Obama’s promise was one of hope – hope that things will change. The New Reality is that “nothing can be changed until it is faced.” President Obama, “C’mon Man”, enough with the knucks and the hoops, you need to seriously get it together, and fast.
Insiders on Obama’s political team are already blowing with the political wind. The man’s big smile has lost him 9 full percentage points in approval ratings in the last few weeks. Not everything Democrat is Obama. But Obama now stands for the new Democrat majority. If accountability is what Obama wants, and that’s exactly what Americans are giving him.
Does this charged political environment matter to stocks? You tell me. Some “smart” people in this business used to tell me “there is no edge in macro” – now that’s all those people want to trade on… As this increasingly interconnected marketplace of global economic and geopolitical factors changes, we need to continuously ask ourselves why we aren’t changing our positioning alongside it.
Any objective global macro investment process will reveal at least as many negatives right now as there are positives. Importantly, that statement has an implied positive embedded within it. Six and twelve months ago, there were far many more negatives than there were positives, with the most glaring being a breakdown of the global credit mechanism. Now that’s changed.
Alongside the global rate cutting and stimulus party, we have seen the TED Spread (3mth LIBOR minus 3mth Treasuries) narrow by almost 400 basis points since the October Liquidity Crisis. This morning the TED Spread is only 95 basis points wide. Alongside this, we are seeing a continued steepening of the US Yield Curve. The spread between 10 and 2-year Treasury yields has widened to almost 200 basis points. If you are hostage to using leverage to run your business, this is very bad. If you are a liquid long capitalist looking to borrow short, and lend long, this is very good.
The SP500 is trading in a very tight range, and that, combined with a Volatility Index (VIX) that has been cut in half since October are also becoming positive macro factors. US market volume is beginning to accelerate on the market’s up moves (as opposed to the down ones), and the market’s breadth is recovering.
These positives are offset by a host of negatives that the guys trying to sell books (Roubini, Schiff, etc…) will remind you of – the bear case went prime time with the SP500 10% lower, so I won’t repeat consensus or my bearish call from last year. The most negative factor that remains as a headwind for the US stock market is the US Dollar. If we don’t break the buck, the stock market won’t be breaking out to the upside anytime soon.
My line in the sand for the US Dollar Index is 84.38. Breaking down below that line combined with an SP500 breakout and close through 864 is going to have every Depressionista in the league feel shame on the short side. In the meantime, you can buy/cover SP500 support of 811 understanding that "not everything that is faced can be changed. But nothing can be changed until it is faced.”
Best of luck out there today.