What happens in Wyoming…..

Posted on 08/22/2011

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……..most definitely does NOT stay in Wyoming.

It’s the end of August which means different things to different people – the end of summer vacation, your last chance to wear white (god forbid you do so after Labor Day), or college football kickoff. Those interested in the markets know it marks elevated risk for hurricanes (keep your eye on Natural Gas) as well as the Fed’s Annual Symposium at Jackson Hole (WY).

The lead in to this year’s conference is eerily similar to last years. In both 2010 and 2011 we saw signs of economic exhaustion creep into data points in June, July, and August. The chorus of “double dippers” became increasingly vocal by late August in both years, and the broad market (as measured by the S&Ps) pulled back ~15% in 2010 (between April highs- 1220 and late Aug lows- 1040) and ~19% in 2011 (between July highs- 1350 and August lows- 1100).

This year’s incarnation is exacerbated by the mushrooming liquidity crunch for European banks (and thusly the ECB). In May of 2010 we watched explosive Greek clashes brought on by austerity efforts and a “flash crash” where at one point the S&Ps dropped 100 points intraday because of a fat fingered Waddell and Reed employee (YEAH RIGHT!). This year we were witness to more Greek clashes as well as street violence in and around London arguably gestated by government cutbacks. Add to the list a self immoliation in Tunisia that sparked “Days of Rage/Jasmine Revolution/Arab Spring” across N. Africa and the Middle East whereby Ben Ali and Hosni Mubarek were ousted -in a day or two you can add M. Quaddafi to that list- and there were/are varying degrees of instability in Algeria, Lebanon, Jordan, the Sudan, Saudi Arabia, Syria, Yemen, Bahrain, and Kuwait.

Domestically we continue to be burdened by structural unemployment,  intransigence in politics……and re-emerging expectations for another dose of Federal Reserve backed stimulus (methamphetamine). The zombie banks, with balance sheets loaded with opiate-like real estate “assets”, are crying out for JUST ONE MORE HIT!

I imagine Bernanke feeling much like LBJ must have in/around 1966-1967. Johnson firmly believed in  the “Domino Theory” which informed his unwaivering commitment to containment. Bernanke, as a student of the Great Depression, has made vocal his resolute effort to fight deflation. In my estimation, myopia becomes the greatest threat whether you’re considering a war of attrition in Southeast Asia or a war against deflation. Escalation (troops or money supply) in either case – could simply prolong and magnify the inevitable comedown.

All eyes and ears will be on Bernanke later this week. Perhaps he commits more troops (dollars) to the cause which should make the market happy (high) for a brief time period, but I fear that before long it will be like 1968 where a Tet Offensive-like moment will break the resolve of the public/market and support will collapse.

I continue to watch Gold and the price action (continues to move higher even on days when equities are up) leads me to believe the “panic” that began three weeks ago may not have run it’s course. To me it feels intent on testing $2,000 an ounce and if that happens will the VIX go to 50? Higher? Volume continues to be significantly higher on down days which is disconcerting for bulls. Treasuries are absolutely pricing in deflation. Gold is signalling pervasive currency concerns.

On Aug. 25th of 2010 Bernanke renewed his commitment to Quantitative Easing.

Gold was ~$1,250/ounce….. now it’s nearly $1,900 (up 52% in a year)

Silver was ~$18/ounce….. now it’s nearly $44 (up 145% in a year)

Gasoline was ~$1.95/gallon….. now it’s $2.65 and it was as high as $3.05 (up 36% in a year)

Corn was ~$4.50/bushel….. now it’s $7.15 (up 59% year over year)

The S&Ps were ~1,050….. now they are 1,125 (up 7% year over year).

In 1965 there were 1,863 American casualties in Vietnam.

In 1966 there were 6,143.

In 1967 there were 11,153.

In 1968 there were 16,592.

Nothing like the smell of Quantitative Easing in the morning.

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