The Investor’s Great Divide;
Crossing the 200
December 11, 2015
Doug
Wakefield
“Reuters,
the British news agency, moved a story on its wire at 11:39 A.M. Tuesday, May 8,
saying that Continental had denied as “totally preposterous” rumors that the
bank was considering bankruptcy….
Ordinarily,
Continental would have refused to comment on the rumor by Reuters. Instead, it
reacted with a quick denial, perhaps in the hope of placating the foreign
depositors….
The
run took hold domestically when, a little more than twenty-four hours after
Continental had said bankruptcy was “totally preposterous,” the Board of Trade
Clearing Corporation (BTCC) just down the street from Continental withdrew $50
million. The BTCC, a clearinghouse for trading on the Chicago Commodity
Exchange, had been a long-standing customer. Word of its defection moved
promptly on the wire services, and the panic was on.” [An account of the 1984 collapse of Continental
Bank in Chicago from Bailout: An Insider’s Account of Bank Failures and
Rescues (1986) by former FDIC Chairman, Irvine Spraque, pg 152 & 153]
In
the summer of 2013, I released the article, The Nirvana
Trade, discussing how relentless the 200-day moving average had been
throughout 2012 and 2013. This was the line in the sand that “the crowd”
refused to cross without almost immediately getting its footing, and moving
right back above it.
This
past August, on the 21st, I released the article, The
Stock Nirvana Has Been Broken. Every investor tracking the S&P 500,
watched as this index fell 10% between August 20th and the close on
August 25th.
Yet,
by the end of October, “the crowd” had managed a rally back above this line,
and the talk of yet another “all time high” was everywhere.
So
while the S&P 500 is back under its 200 as we close out this week, the
larger picture and the American public’s understanding of risk is what is now
foremost on my mind as we head into next week’s Fed “will we raise rates or
will we stall again” release on December 16th.
Since
2012, the American people, looking at the world through our broad equity
markets, have been given the impression by the Federal Reserve that “We have
your back.” When they look at statements and look at the S&P 500,
especially since the 10% four day drop into August 25th, it really
has looked like someone has made sure that US equity investors would not go
below this “nirvana line”.
This
type of obsession to break above 2100 after last November’s
2100 target released by Goldman’s
equity strategist David Kostin took place multiple times this year. Yet
never was there a strong breakout to the upside.
So
as everyone will wait and see if the Federal Reserve will finally raise rates on
December 16th, or yet again kick the decision down the proverbial
road, markets around the globe have certainly produced an extremely volatile
picture far different from US equities.
Volatility, The New Venue
If
there ever was a warning to the American investment community, it is now, and
it has already come from watching the largest markets in the world this year.
Can
millions of investors watch massive swings in the two most traded currencies in
the world over the last 2 years, and not expect something to take place in US
equity markets?
How
can the price of oil drop this much over the last 18 months without having huge
ramifications to the finances of oil producing nations, as well as the oil
industry in the US, which has been a major factor in the growth of the American
economy since 2008?
Can
we watch global investors experience this level of volatility in China, a
nation that has quadrupled their debt load since 2008 (another first in history
event) and not wonder how this would impact American stocks and economy?
The
massive rally (plunge in yields) in German bunds and then sell off (yields
rise) with the turning point being the lowest yields in German history, should
tell us all that central bank planning has NOT made our financial world more
“stable”.
So
while we wait to find out what Chairman Yellen will tell us next week about
interest rates, the short end of the bond markets have already told us they are
certainly expecting her to raise rates for the first time since the Fed
Funds rate was lowered on December 16, 2008.
If
you are reading this article, you are thinking. Never has skeptical thinking been more important. Never stop
trying to influence the thinking of others who think that information like this
is only for those interested in finance.
The
dominant central banks of the world and the unending commentary by the financial
media and industry have lead the average investor to the conclusion that
constant intervention is now the new abnormal. Without them, how could what’s
left of the free markets survive?
“These
breakdowns come about not in spite of our efforts at improving market design,
but because of them….The steps that we have taken to make the markets more
attuned to our investment desires – the ability to trade quickly, the
integration of the financial markets into a global whole, ubiquitous and timely
market information, the array of options and other derivative instruments –
have exaggerated the pace of activity and the complexity of financial
instruments that makes crises inevitable. Complexity cloaks catastrophe.” [Comments by Richard Bookstaber, who served as
managing director of risk at Salomon Brothers during the 1987 crash, and as
Morgan Stanley’s first market risk manager during the meltdown of Long Term
Capital Management in 1998. Comments are from his book, A Demon of Our Own
Design: Markets, Hedge Funds, and the Perils of Financial Innovation (2007)
pg 5]
Be a Contrarian, Remember Your History
The
big shift from longs to shorts and shorts to longs continues pounding global
investors and traders. Calm markets are coming to an end. Whether raising rates
or using NIRP, volatility will be the word for 2016.
Click here to start the
next six months reading the newsletters, reports, and group emails as the
bust phase grows stronger, and thinking becomes more critical.
On a Personal Note
Check
out Living2024, my personal blog. I
wanted to have a place to write stories about how this entire drama is reshaping
our thinking on money. Check out my latest post,
A 4,000 Year Old Lesson: Joseph & the Costs Of A State Rescue.
Doug
Wakefield
President
Best Minds Inc. a Registered Investment
Advisor
1104
Indian Ridge
Denton,
Texas 76205
Phone
- (940) 591 - 3000
Best Minds, Inc is a registered investment advisor that looks to the best minds in the world of finance and economics to seek a direction for our clients. To be a true advocate to our clients, we have found it necessary to go well beyond the norms in financial planning today. We are avid readers. In our study of the markets, we research general history, financial and economic history, fundamental and technical analysis, and mass and individual psychology.