Ad Hoc Commentary – calling the S&P500 bluff

Now that our favorite S&P500 had closed above 2000 for the first time ever, yours truly is calling it bluff. Yes, we had been saying all these while that long term it is very bullish because sovereign debt is going the way of the worthless toilet paper. Since the whole system is based on confidence, the toilet paper reality will come all of a sudden like a thief in the night. But don’t expect governments to stand idly by while their credit cards are getting cut. You will see a new global wealth tax before the sovereign debt market gets totally destroyed. Or if we are lucky, you will see a new infrastructure asset class replacing the sovereign debt markets thus averting financial pandemonium.

It is perhaps one of the most interesting times in the history of the markets. We have on our doorsteps war and pestilence. Ferguson, Syria and Ebola are going to be game changers even though most market participants are not well versed in conflict and disease. During the years of unprecedented peace since World War II, we were dominated by fundamental analysts and technical analysts. Those well versed in politics and disease were relegated to a life outside markets. Recently, political analysts made a comeback into the mainstream economic analysis. However, understanding among market participants on how conflicts affects market is murky at best. Who thinks war is good for the economy? Many do because of World War II. However, the truth is United States benefited while Europe destroyed herself on envy. So, it depends. War is good for the supplier of weapons, not to the warring nations. This is even more true today because, thanks to increasingly destructive weapons, war has the potential to end in mutual suicide. So, there is very little possibility of victor takes all. In all likelihood, spectator takes all.

The ride forward is one of volatility. There are so many reasons put forth by pundits on why the equity market keep going up. In yours truly opinion, the most convincing argument to date is stock buybacks. If you want to read more about it, especially with a twist on getting left behind, go to Harvard Business Review Sep 2014 edition:
“…Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity…”

We remember this is our sentiments exactly as we wrote just over a year ago:
“…If the stock market continues to rally after a summer correction, then 2014 will be the year of resentment. Chances are the unemployed, especially the young unemployed, will be resentful of the booming stock market. Nobody likes to be “left behind”…”

Yes, the stock market and the rise of the masses against the system is connected. The stock market can be thought of as humming to underemployed (and sometimes unemployed) average Joe the Black Eyed Peas’ song: “I gotta feeling that tonight’s gonnna be a good night. That tonight’s gonna be a good night. That tonight’s gonna be a good, good night!” Can you imagine the resentment that would echo in average Joe’s heart as he hears it while faced with the horrors of underemployment? Since the S&P500 train in motion is unlikely to be derailed anytime soon, except for a short term correction, you can only expect the resentment to grow larger in the coming years. Police should be worried for their lives and thus are likely arming themselves up to the teeth.

In the very short term, yours truly is calling the S&P500 bluff. We had a high this week, and we probably will see the resumption of the correction that started on the Jul 22 week. Some technical guy showed me this morning the gravestone doji – whatever. The correction, if it really comes to it, should last at most till the Oct/Nov time horizon. After that, the stock market should continue rising on fear of the sovereign debt starting with none other than Hollande’s France.

Given we are in the second machine age, many will fall into poverty as the S&P500 makes new highs after the correction. The horrors of underemployment and unemployment is very real today. And as we mentioned before, the commoditization of white collar jobs due to much smarter computers is going to affect both the educated and the school dropout.

Good luck in the markets.