Wow, Alan Greenspan and David Stockman both came to my side of the debate in the same weekend and the market rockets – very interesting.
First, we had Alan Greenspan on Meet the Press, regurgitating my "Tale of Two Economies," which was our theme for 2010 investing and, of course, is something I have been carping about for many years as income disparity has become critical in this country. Somehow though, it sounds more official when a crotchety octogenarian says it – so we’ll give the Chairman his due:
Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the–and everyone’s pointing out, are in excellent shape.
The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.
Another conservative darling who turned on his masters this weekend is Reagan’s OMB Director, David Stockman, who eviscerated current Republican fiscal policies in a NY Times Op-Ed this weekend, summing it up neatly with the title: "How the GOP Destroyed the US Economy," which is a must read but here’s a few juicy tidbits:
IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase…
…This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.
…The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.
But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.
This is an interesting trend I am seeing coming into the November elections, old-guard Republicans are finally taking a stand and saying out loud what’s been obvious to the rest of the country for years – "THIS IS NOT OUR PARTY ANYMORE." Republicans used to stand for balanced budgets, sound monetary policy and fiscal discipline and, as Stockman points out, the Neocons have jammed our military budget up to $1Tn a year (1/2 of the entire planet’s military spending) while Republican Congressmen have never met an earmark they didn’t like – until Obama took office, of course.
I’m not pointing all this out to pick on the poor Republicans but this is all setting the stage for the push to QE2, even though that is not either Greenspan or Stockman’s intention (both would prefer to see more belt-tightening). The mood of the country is clearly shifting and old-guard Republicans are circling the wagons to attempt to salvage what they can of their legacy and that leaves the Bush Republican’ts out on an increasingly unpopular limb as they call for a completely unrealistic policy of tax cuts for the rich and austerity for everyone else.
We were having a policy debate over the weekend (and lots of new trade ideas and strategy discussions in that post) as I prepare for my own upcoming trip to DC, where I can agitate closer to the source and we got into a discussion about wealth and one of our members postulated that it doesn’t benefit society to tax the rich because: "Money is not a "physical" asset that can be hidden someplace. It is a "debit / credit" entry on a balance sheet that is in a constant state of dynamic eqililibrium." I made the following point as to why pooling weath at the top is massively damaging to society as a whole:
Art, Gold, oil and other speculative investments not only take money out of circulation but causes TRILLIONS of dollars of damage by inflating what the bottom 99% have to pay for what’s left after the hoarders get their fill. This is also true of land to some extent as it trades around from wealth to wealth and drags up the cost of land for the poor (same land for more money = NEGATIVE benefits). Cash is another place money is hoarded – when the top 0.01% skim their profits off the bottom 99.99% and pay their 17% taxes (the actual average paid by the top 0.01%) and then put the other 83% in a bank that refuses to lend money – that money is OUT OF CIRCULATION! It’s been taken from the American people after they slaved to create it and then the opportunity to re-use what they have created is taken away from them.
Money is only an asset to the top 1%, for the rest of the country, it’s a disposable item, more like a work chit that enables them to buy consumables but nothing more. Most of the top 1% can’t see it because they live near the top and only think of money as an asset – which it is when you have more than you need. Unfortunately, 99% of the people in this country have less than they need and even 99% of the top 1% are simply delusional in their belief that they are on an even playing field with the top 0.01%, who are 100x wealthier than the average person in the top 1% (and that INCLUDES their wealth, which brings the average way up).
What the Republicans are positioning as a tax hike but is really the end of a tax holiday that was put in place under Bush II is now looking more likely and the rest of the World is seeing this as a very positive sign that America is finally waking up and will begin putting it’s economic house in order the way all responsible governments do – by raising an appropriate amount of taxes to meet their financial obligations. It’s fine if we want to add more stimulus to the economy – as long as we are willing to pay for it. What has been objectionable to the rest of the World is our current policy of spending more and earning less – something that hasn’t worked out too well on our National balance sheet for the past decade.
Yes, Democrats are the "tax and spend" party but the choice has been between the tax and spend party and the "no tax and spend anyway" party and it’s only just now that that argument is coming into it’s proper focus. On the whole, this is a good thing for America – a possible sign that we are growing up.
We were already bullish last week and we were only worried that perhaps we had gotten too bullish. On Monday morning, in Member Chat, we were worried about the downtrending channel and we decided we would go neutral into the weekend (on our short-term positions, our longs are all bullish) if we got a nice stick save to break us over the line I drew in my morning chart:
It came down to the wire but we were confident enough at 3:16 to get back into the EWJ calls (the Aug $9s at .65) which was, as I said at the time "just in time for the Mr. Stick Show" which did, in fact jam us up from 10,395 at 2pm to 10,433 at 3pm and ran us all the way back to test 10,500 before settling at 10,465 at the day’s end, right at the lower end of my happy circle!
We actually added a lot of new bullish plays on Friday. As I mentioned in the weekend post, "Bargains Abound for the Bold." Our FAS Aug $22 calls ($1.25) trade idea should be off to the races today. We also had long ideas for Members on WFR (always!), PFE, ARNA, AAPL, GENZ, VLO (always!), IWM (huge payoff today on Aug 6th $65 weekly at $1.12) and DBC so, on the whole, another very bullish day of picks! For a hedge we went with SDS in a very clever Jan hedge that makes 900% at $37 (SDS now $32.50 so a 7% drop in the S&P should do it).
So far, so good as the Hang Seng jumped 1.8% (382 points) and the Shanghai was up 1.3%, back to 2,672. The Nikkei is still slow at 9,570 (up 33) but India retook 18,000 with a 212-point move (1.2%) to 18,081. The big news in Asia was a slowdown in Chinese Manufacturing growth that wasn’t so slow as to worry investors as the Purchasing Manager’s Index fell to 51.2 in July from 52.1, which is the third month of declines while the HSBC China Index actually came in at 49.4, which indicates slight contraction (below 50) for the first time in many years.
Why is this "good" news? Because it means that China’s tightening policies are working in the slow, gradual manner they intended. Economists said the decline in the widely watched purchasing managers’ index also makes Beijing unlikely to take on any new aggressive tightening measures later this year as inflation pressures are expected to ease further. "The Chinese economy is slowing down due mainly to the ongoing property-tightening measures, but the slowdown is clearly not as dire as some expected. We don’t think the current situation warrants an all-out fight to rescue growth."
Europe is flying this morning, up 2% ahead of our open and our own futures are up about 1%. EU Manufacturing expanded but it was all Germany if you break it down, HSBC doubled their net profits and BNP went up 31% so happy days are here again in the EU. The dollar is way down this morning as the Euro hits $1.31 and the Pound is $1.58 and the Yen (which is killing the mood in Japan) is just 86.5 to the dollar, down from 86.85 in our usual 3am to 8am trade! Oil popped to $80, which is where we want to short it, especially if the ISM is disappointing at 10am.
We remain skeptical, especially as we re-test our 10,700 and 1,013 marks – if you want to read my technical commentary on the markets, just go back to the "Charts From the Future" post of July 25th because that future is now!
Be careful out there.