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    MARKET EDGES

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“I will either find a way, or make one.”

-Hannibal

 

One of our most successful European clients recently sent me a book that I can’t put down: Tom Holland’s “Rubicon – The Last Years of The Roman Republic.” As a behavioral study, the parallels of power and politics between then and now are interesting to consider.

The Rubicon is the river in northern Italy that Julius Caesar infamously crossed in 49BC to officially declare what was considered the unthinkable – war against the Perceived Wisdoms of officialdom in Rome.

Holland captures the moment ominously: “Gaius Julius Caesar instead gazed into the turbid waters of the Rubicon, and said nothing. And his mind moved upon silence. The Romans had a word for such a moment. “Discrimen,” they called it – an instant of perilous and excruciating tension.”

Whether it was how you felt at 830AM Friday morning when you saw the US Government’s employment report or how you’ve been feeling for the last 3 years in trying to manage the market risks associated with US Government Sponsored Volatility, “The Discrimen” summarizes both, across durations – the turning point.

The Discrimen for the heavy hand of Big Keynesian Deficit Spending and Debt Financing has reached the proverbial Rubicon of economic debates. Not unlike the legendary Rome that Holland depicts in 140BC, the blood, sweat, and tears of the United States of America still stands on the principles of meritocracy, liberty, and competition. Whether the willfully blind realize it yet or not, Americans will find a way to make this economy American again.

When I talk to the grinders of this business – the people who aren’t professional politicians - the men and women who fight it out every day in this marketplace for their clients, firms, and families – I hear the same thing over and over and over again: “this isn’t working.”

Like the Romans back then, we reserve the right to change this country’s direction. As Holland writes in his chapter titled “The Paradoxical Republic”, “the Romans judged their political system by asking not whether it made sense but whether it worked. Only if an aspect of their government had proven to be inefficient, or unjust, would they abolish it.”

You tell me if you think making the “risk free” cost of capital in this country ZERO percent has done anything but amplify the cyclicality of both employment and market volatility. Bad actors in bad economic systems compound bad decisions. Either I will find a way to make this point clearer or I’ll make one.

The modern day Triad of Groupthink hasn’t changed a thing about how it analyzes market risk. Wall Street, Washington, and the Manic Media have once again completely missed the boat on delivering to Americans what they really want – a proactive risk management system that works. I don’t know if I run a media company or a research firm that competes with some of the aforementioned outlets of analytical incompetence. But I do know that we are evolving as markets do.

What would be my approach to fixing this mess?

  1. First, stop. Just stop what we are doing with this Bernanke-Geithner/Keynes/Japan experiment.
  2. Then, start over. Start empowering new/competing risk management strategies. Start by respecting the cost of capital and future liabilities.
  3. Finally, plan on changing this plan if it’s not working.

I have been promoting this Bull vs. Bear debate for the last few months because we need a Forum of Transparency & Accountability where we can settle this score once and for all. There will be winners. There will be losers. There will be no more finger pointing by losers who won’t accept change.

This isn’t about egos. This isn’t about me turning into some broken clock perpetual bear either. This is all about finding a better way – a way that works. The market isn’t lying; politicians and people are.

Into Friday’s market close, I covered our short position in the SP500 (SPY). This doesn’t mean I’m not bearish. It simply reflects our strategy of booking gains for the winning side of this current debate. Stanley Cup Playoff style: Backcheck. Forecheck. Paycheck. We remain short the Nasdaq (QQQQ).

At a price, the market will be Bearish Enough to come to grips with the reality that our debts and deficits are heading down a European style road to perdition. Markets like Spain are now down -27% for the YTD, so we need to play this game with a renewed sense of urgency. Unfortunately, we have not reached The Discrimen of change yet, but markets see something not so funny happening on the way to this Investment Forum – to the professional politicians of modern day Rome that is…

My immediate term support and resistance lines for the SP500 are now 1153 and 1182, respectively. What was the long term TAIL of support at 1078 is also now a critical line of resistance. My position in US Equities remains much like the return on American capital that Bernanke is promoting – ZERO percent.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

The Discrimen - Day