Tagged: geopolitics

Eyes Wide Open

Here’s my grand unified theory on the world. We stopped following the rules.

Not that humans don’t color outside the lines routinely. But in the last two years we jettisoned restraint. That gave rise to chaos in the stock market, imperialism in Ukraine.

Here’s what I mean. The Pandemic prompted a reversal of the relationship between people and governments. Governments derive their purpose and support from the people.

Even in tyrannies.  French Nobel-Prize-winning writer Albert Camus who coincidentally wrote a book called The Plague said, “The welfare of humanity is always the alibi of tyrants.”

We did it for the people.

During the Pandemic, governments uniformly, whether free or autocratic, assumed supreme authority and bullied everybody into submission. Rules be damned.

That’s a bullhorn to brigands, cretins and miscreants.  If the rules don’t apply, then what’s to stop me?

Everybody started taking other people’s stuff.

Here in the USA, the country’s system of production and distribution through free-market capitalism was crushed by a tsunami of manufactured money. Businesses were unevenly and forcibly shuttered (some essential, others not, for no reason save an opinion) when the cornerstone of the rule of law is uniform justice.

And the money whooshed away from commerce into financial assets and real estate. There was a geyser drenching everything.

Waves come in, waves go out. 

I told users of our trading decision-support platform Market Structure EDGE last May that the long Pandemic Money momentum arc might have ended. The data signaled it (see image).

Market Structure EDGE data. Sentiment (Demand) changed in May 2021. Price has returned there, and Demand is ever more volatile.

The market doesn’t suddenly recede.  The tsunami comes in.  Reaches a zenith. Goes back out. You can see it in the sea but the ebb and flow is deceitful in asset markets.

Plus, human attention spans are short. We think that whatever is happening at this moment is reflected in the mirror of capital markets, forgetting the most basic economic principle besides Supply and Demand: Cause and Effect.

The tripwires might be immediate. Somebody coughs in a quiet theater. Russia invades Ukraine. Jay Powell says, “We’ll raise rates…” and everybody stampedes. And then he adds, “By and by.”

The stock market is now trading where it was in May 2021 when Pandemic Momentum died. Sure, there was a carryover. (We wrote about the changes here and here.)

But the wave that advanced for more than a year is receding. We’re experiencing the consequences of monetary actions that smashed every concept of good behavior.

We shouldn’t have thrown the rules out.

The roiling waters now may calm and settle and return to a regular tidal cadence. The data suggest a surge in Tech stocks in particular is possible and maybe in the whole market.

But we’ve done damage that may be far longer-lasting ultimately.

There are bigger reasons why Russia invaded Ukraine and no excuses for thuggery (though thuggery is a timeless imperialist trait).  But what greenlights bad behavior is evidence the rules don’t apply anymore.

And so here we are at the crossroads of geopolitics and markets in a world where anything goes. Russia ETFs are cratering. Nickel was halted. Wheat doubled in a day. Oil is at 2008 weak-dollar pre-Financial-Crisis prices as the dollar hits Pandemic highs.

Half the S&P 500 is down 20% or more. Half the Nasdaq stocks are down by half, and the Nasdaq Composite is now down 2% for the trailing year!


Now, throw in market mechanics. Market Structure. The reason the trouble from Ukraine is so cataclysmic for asset markets isn’t rational but structural.  I wrote about volatility last week in a post called Rise and Fall. I think it’s worth reading.

By the way, did you see John Stewart is the new Market Structure expert?

The stock market is volatile because 53% of trading volume derives from participants with better data and faster prices and shorter horizons than the investors and companies who depend on the market.

They magnify markets up and down.

Once we thought markets should be free, fair and open, and rules should level the playing field for all. We’ve thrown those rules out.  Now rules promote specific outcomes.

How do we get back to good? Stop doing all that stuff. And in case that’s awhile coming, our best defense is understanding what’s happening.

The great international relations classicist Hans Morgenthau said all politics are the pursuit of power defined by self-interest, and human nature doesn’t change.

That’s a good lens for seeing the world.

And in the stock market, understand that 10% of volume is rational. The rest is reactive, leveraged, constantly evolving, changing prices, hedging. It’s all measurable, though.

Eyes wide open is always the best strategy. 

It begins with understanding what’s going on. In the stock market, we can help you.  In life, my advice is biblical: The prudent foresee evil and hide themselves.

Light Brigade

Not though the soldier knew someone had blundered.

Alfred Tennyson’s 1854 poem, “The Charge of the Light Brigade,” offers lines more recognized than this one above including “into the valley of death rode the six hundred,” and “theirs not to reason why, theirs but to do and die.”

One wonders about a marketplace that seems today to blunder after arbitrage opportunity despite risk.

Lord Tennyson memorialized an ill-fated British cavalry unit at the Battle of Balaclava in October 1854 during the Crimean War. A side note that history often overlooks is the Crimean War’s impact on clothing: Lord Cardigan commanded the British troops, and many Russian soldiers now occupying Crimea sport balaclavas, the ubiquitous choice in headgear for contemporary fighters wanting to make noise while avoiding recognition.

In the equity market, the mild Putin swale Monday in major measures speedily dissolved in festive cheer yesterday as “Ukrainian tensions eased.” I’m not sure what eased since there were more Russian troops in Ukraine yesterday than the day before, some 130,000 Russian soldiers were engaged in “scheduled” maneuvers, and the Russians just test-fired an intercontinental ballistic missile in Kazakhstan. Coincidences, I’m sure.

In market data Monday, we saw selling by bottom-up investors, sidelined indexes/ETFs, fast money trading at about the same pace as those investors exiting defensively, and lots of hedging.

Some of this makes sense. We’d expect rational people to be disturbed, thus selling some and hedging some. Vladimir Putin has a buffet spread before him. If he wants to walk his balaclava-clad comrades into Ukraine, or for that matter Poland, Slovakia (where Russian pipelines connect to Europe), Slovenia, the Czech Republic and other parts of eastern Europe, who’s going to stop him? Germany has about 60,000 troops, Russia, 600,000. Nobody’s got an army there except Russia.

But asset-allocation systems saw no risk. They weren’t sellers. Risk-analytics tools like Blackrock’s Aladdin built around macro data and fund flows and currencies and so on for $15 trillion of institutional assets have no fields labeled Crimea or Putin. Action in global currencies and commodities point green arrows at risk assets.

I realize this is a different sort of Market Structure Map than we generally pen. Our job is to inform and entertain on market-structure topics. Admit it, balaclava, while sinister-sounding, is sort of funny. (more…)