Gene Inger's Daily Briefing . . . for Monday March 21, 2011:
Good evening;
Balance of power changes . . . are having variations few suspected. In Asia, Japan is not so irrelevant to ‘global recovery’ as those minimizing it’s pre-disaster rates of growth suggest; because it’s largest trading partner is China, not the US. Recovery is of course a plus for some firms; but others will simply lose ‘market share’ while they’ll wait for the long process of recovery, reconstruction, and then retraining personnel to operate presumably even-newer equipment (which ironically gives Japan a leg-up in five-ten years or so). In the Persian Gulf, Saudi forces probably nipped an Iranian plot to use subterfuge and smuggled weaponry to the Shiite majority in Bahrain, by their rapid movement of troops into not only Bahrain, but controlling the operation from the heart of the Oil-rich Shiite dominated section of Saudi Arabia itself (clear implication).
What this does for Asia is create a slowing in a growth rate that was decelerating well before all these events, as we contended, but as pundits continued to deny (probably because it was an ‘inconvenient truth’ relative to how the US gets bailed-out of debt woes of its own). Japan, despite domestic entitlement issues, is (balance reserved).
What this does for the Persian Gulf is denote the difference between a proactive if by no means democratic kingdom, taking the initiative in repelling a different theocratic regime (Iran) from further infiltration of the other side of the Gulf, at least for now. It’s a muscular message that Washington disapproved of, but which appears effective.
In North Africa, the odds are you are seeing a more genuine effort to simply get rid of a miserable terrorist, not just a local or regional dictator. As I noted earlier last week; preparations were being made, because we had reports of a task force departing out of Norfolk then, not March 23rd as reported today. Of note: USS Bataan and the USS Kearsarge will be ‘on station’ together; and both are multipurpose amphibious ships.
Though we will have some degree of ‘engagement’ in the 3rd Arab country (officially; as unofficially we’re well involved in the Yemen battle; the Somali pirate operation; in Djibouti (special operations primarily); and in trying to combat in many cases Gaddafi trained terrorist rebels in a number of African countries, eliminating him is essential. It hit me the moment he threatened ‘Mediterranean and European air transport’, that he was toast. Everyone must immediately have thought of his bombing of Pan Am 103.
Clearing Gaddafi and his corrupt crooked cronies (and terrorist and mercenary gangs of course) will show that the EU, the Arab League, and the UN and USA are not in a mood to play around with threats to the underbelly of Europe, or invite new influxes (this slightly sensitive portion is reserved for ingerletter.com members only).
Given the complex mix of challenges with near-term favorable or unfavorable human and economic implications, I thought I’d segment it just a bit to put it in perspective. It is not so simple as (discussion expands and correlates implications for markets too).
Over the weekend we suspect the news from Japan will get worse before chances of it getting better, and even though President Obama did NOT demand Qaddafi depart Libya or even step down (odd; only called for ‘withdrawing forces’), we envision initial aerial action (probably British and French with US air controlling AWACS), and note a contingent of Canadian F18’s are flying to the Med now; to join the USAF, which we’d thought from the start would handle the brunt of this; not just the Navy. If we get (and we really must) a ‘no-drive’ in addition to ‘no-fly’ zone; then (balance is redacted).
The implications for markets are probably minimal on the latter; provided that we’re not getting involved in greater complexity (always easier to get in a fight than out of). If Oil sells-off more, do not expect (forecast redacted) irrespective of all these issues.
Daily action . . . views the market’s comebacks as we outlined in the videos; and on low volume to boot. Let’s summarize a few points only of the past week; then videos:
Dualities of market impacts
The market might sell-off based on Libya, and rally later as Gadaffi is removed from power as many thought he should have been since Ronald Regan was President. At the same time, IF (and that’s a big ‘if’) the now-strung power cable to Reactor #2 at the Japanese nuclear plant is effective before further devastation, then the market is likely to rally. If it is not, then another decline right away is more likely. Either way it’s going to be a (most redact in fairness to members) economics for Asia or the globe in the near-term. Therefore any such rally (reserved forecast).
The Thursday rebound that reversed Wednesday’s hit is not that abnormal when you have breakdowns. The question is whether it’s one that should be sold into or not. In this case there are so many variables, that we suspect trading remains the best way to address this, and in any case we lean towards this being a bit more than just dead-cat rebounds but not much more. And extensions (forward outlook must be withheld).
It’s a ‘shot in the dark’ . . . bet to invest based on further catastrophe versus a ‘save the day’ brave power restoration effort. However, the analysts saying this is ‘random’, as a disconnect from market reality, have got it all wrong. Market internals were very weak for weeks, preceding not only the tragic catastrophe in Japan, but Middle East unrest, and even the sharpest upward Oil surge. That’s important as it was already a very old extended uptrend sustained by an underlying Fed ‘bid’, that was faltering in a way that we thought would be an A-B-C decline, with the ‘B’ wave up convincing a lot of analysts and traders that all was still well in the world (they did bite that bait) or that the market was impregnable (as almost always suggests the precise opposite).
Clear and present danger
Bottom line: if this were the United States, the recommended evacuation would be a far larger radius. That is why we perceive even Tokyo as too close for comfort. The movement of financial institutional staffs to more distant cities or out of the country is something we heard of two days ago, when there was still time to easily depart. No more is that so simple. Air France and JAL have been asked to mobilize fleets so as to assist those wishing to fly to other countries. (Since then so is the US officially.)
The global economy was NOT recovering/expanding as contended but either slowing growth in Asia or having tepid recoveries in parts of Europe and America. And as we said in advance of all of this; exogenous events or natural decline, after the drop they will say the market would have gone up ‘if not for’ these unforeseeable events. If not this they’d focus on (balance reserved for members).
The S&P was never going to 1400 we said long ago; saying it would break (a noted level) over time. No change in that expectation, which criticized all thinking just 2-5% corrections as likely. In fact, it’s probable (not possible) that the cyclical bull within the secular bear (sorry must reserve; after all forward analysis is the heart of our work). Our view before, during, and after struggles that dot the Planet; was that ‘instability, fragility, and even chaos’ would be the big story of the year; not politics, and not merely issues about the debt, which are severe; and won’t vanish no matter what.
Reality trumps . . . all fantasies, and even anxieties, that are related to the ‘forecast chaos’ of 2011. The markets have fought valiantly; but even before Japan’s tragedies started (more discussed), or unrest in North Africa and the Middle East, we targeted February to see the first ‘shot across the market’s bow’, and then after a bounce, a (pattern continuation of which current action is an expected component).
The ‘crisis’ is not over . . . and that refers to all ‘4’ crises currently percolating. The Japanese catastrophe contains risks (as outlined).
By the way, this major earthquake that struck northeastern Japan on Friday had the hallmarks of an interplate quake, which occurs at the boundary between two tectonic plates; according to Japan’s Meteorological Agency (though ‘quakes aren’t weather). The actual rupture was also historic for Japan; in length about 150 miles; that’s huge.
At the area near the epicenter, the North American plate, on which part of the overall Japanese archipelago lie, slips under the Pacific plate. That causes the temblor that was likely triggered when the North American plate snapped upward, releasing the accumulated strain. What that portends (if anything) for North America, isn’t known.
Combine overdue movements of the plates; magnetic field shifts, and climate change (makes no difference if one ‘believes’ in global warming or not; the glaciers and major ice caps are melting; causing pressure inflections in the shape of our planet such that it wouldn’t seem to matter, but does to large buildups of stresses on Teutonic plates).
Overall my points remain the same; this is a year of ‘instability and chaos’ on top of a major problem of debt, which remains unresolved. Stocks were (many still almost are amazingly) priced for a perfect world, which this certainly is not. ‘Caveat Emptor’.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast increased risk given the unanimity of optimism absurdly prevailing after what had been a remarkable upside run. Remember back in early 2007 I denied 'liquidity' momentum as a canard; believing housing only the first asset bubble to deflate. The ‘global instability, fragility, and chaos’; forecast before this series of events; continue.
Daily Briefing Technical-Corner MarketCast Videos
Just over 4 years ago I reversed from 4 preceding years of bullishness, to projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now an extended cyclical bull within a secular bear is struggling with post-rebound ‘distributions’, in a restructuring economy, and in a world that has shown itself to have ‘fragility’; both figuratively and literally.
Enjoy the evening;
Gene
Gene Inger,
Publisher
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