Wednesday, January 20, 2010

What Happened to the Scott Brown Rally?

Many market participants were looking for a market rally today, following the election victory of Republican Scott Brown over Democrat Martha Coakley in the special election held to fill the Senate seat left vacant by the death of Ted Kennedy.

There are a few reasons it didn't happen. First and foremost, the old Wall Street saw that you "Buy on the rumor, sell on the news," certainly applied today, especially if you consider yesterday the "news day" when it became much clearer that Brown would be the likely victor.

Second, the election of Scott Brown is not an immediate game changer. He is a middle of the road Republican, who appears to hold the expensive neocon view that the U. S. must control the world and fight untold draining wars across the planet. In reality, his impact will be limited to throwing sand in the gears of the Democrats' attempt to pass Obamacare. That in itself is not a bad thing, though, the Democrats may still be able to drive home the plan, sand and all. His biggest asset may come in that he wipes out the Democrats super-majority control in the Senate. But this is like a lion chasing after you, who has stepped on a tack. It's better it happened than if it didn't, but you are probably still in a lot of trouble.

On a long term basis, his win will energize the Tea Party followers, who tend to be much more anti-government, and the Paulians, a good thing. As for his actual victory, it was a lot of fun and a great that he beat out super-interventionist Coakley, but the next time he is up for election, it will be time for him to go.

Despite Browns win healthcare stocks were down big today as part of the overall drop. I think largely because the buying of healthcare stocks yesterday was done by unsophisticated buyers. Corporate healthcare providers, although they may come to regret it, are actually in favor of Obamacare. Brown's victory, if anything, makes their future unclear.

Finally, the BIG reason the broad-based market was down today, was the news that I have been reporting on over the last few days, China appears to be tightening, though ever so slightly, its money supply. In other words, the Chinese are not filling up the punch bowl as quickly as they were, and they are not spiking the punch as strongly. With their joint being the only booze joint still open that is serving up liquidity, it is a clear signal that this tremendous drunken knee-jerk recovery from the bowels of the '08 panic is about over. That is, the second leg of the double dip may be here. And there isn't anything that Scott Brown is going to be able to do about that.


  1. Wenzel,

    Do you ever feel like, because of your theoretical background (Austrian econ) you have this prejudiced bias in terms of expecting the interventionist economies (US included) to crash, so much so that it blinds your ability to reason clearly through the issues?

    Or do you feel that your monitoring of technical signals (such as changes in money supply and money supply growth, for instance) allow you to overcome that bias and see things more "realistically"?

    Additionally, how do you explain these periods where, for instance, the money has been turned off in the US for nearly a year and yet the markets keep on rising? There are always delays but come ON this is getting ridiculous? Do you have a psychological theory or something else extraneous to economics/finance that you consider? Do you see any absolute bounds for something like this?

    I have been second-guessing myself a lot lately. I don't know if you saw Bob Higgs piece recently on employment but he was arguing that unemployment-wise this isn't even close to a depression or the Great Depression, anyway. Then I got to thinking, well, how many countries have literally just disappeared overnight? Even with an Argentina or a Zimbabwe, things just got worse and worse and worse but I don't think there was one big drop-off where it was all kaput in one swift move. Think about Venezuela... that economy and political scene is way more crackpoty than the US and yet life goes on (somehow).

    I am really feeling like I know nothing right now and that this could go on forever even though it doesn't seem like it should. Life, after all, is not a Hollywood action-drama...

  2. I think a lot of Austrians have a prejudice that the economy will crash, utterly collapse and that gold can only go up.

    I don't think I fall into that camp. I am bearish on gold right now and while I expect a second leg down in the economy, I don't think it will be the end of the world.

    Monitoring the money supply is not overcoming a "bias" anymore than knowing that a minimum wage law would cause me to have a "bias" that there will be huge unemployment if the minimum wage is set at $100.

    That said, the money supply is a complex factor with many other inputs involved. It's like saying for a weatherman this is winter so it could snow. It would be absurd to try and now forecast the exact day(s) that it will snow in the winter of 2011. BUT, you can be real certain that it won't snow in July.

    With a tight money supply, you don't know the exact day it will "snow" (i.e. drop), but the money isn't there to support the current structure. On the other hand during a period of easy money, it is not very likely to snow (i.e. crash). Exact details just include too many factors which we can't have complete knowledge of.

    Yes, there are other technical(psychological) indicators I watch and everything is still within the realm of a dead cat bounce. You have to remember there was sheer panic in the fall of 2008, that means anyone left holding stock from that point is a very strong
    holder. It doesn't mean there is a lot of new buying coming in.

    Your frustration is understandable, the nature of a stock market is to grind everyone psychologically to be on the wrong side of the market, especially at key turning points. Trust your mind not your emotions.

    The Great Depression was different FDR was trying to prop up prices. That's what caused the huge unemployment. This is a different period. Unemployment insurance is simply keeping people off the market.

    I had the opportunity to visit in East Berlin before the Wall came down, trust me the difference when a country is in collapse under totalitarian rule is incredible. You can just see the pain, agony and desperation on people's faces.

    I don't knoe Venezuela well enough but if it isn't as bad as Eastern Europe was, then they have a lot more freedom(or black markets) the we understand.

    Really tyranny kills, that's whi I think few understand how bad Obamacare will be. It is very totalitarian, it will cost many people there lives and force many others to live unecessarily in pain. (Despite Oama's promise to give everyone pain killers)

  3. Wenzel,

    Thank you for the response. I just typed up a couple paragraphs of other questions and realized I was thinking out loud. I'm just getting antsy.

    I'm trying to be more careful, going forward, with my market prognostications and opinion-generation. I feel I need to strike a more... "pragmatic"... balance between understanding the long run fundamentals are still doomed, while realizing that change is always gradual and there are opportunities in the short run. Even when change is sudden and happens all at once, it's simply reached a marginally important moment that was built upon a structure of gradually accumulating pressures before it.

    I think the thing I struggle with the most in adopting that stance is that it seems like to even do anything in the short run you've got to buy-in or at least play the greater fool game, and that's really risky. For example, a bank that is insolvent in the long run (like Citi) is also insolvent right now. You have to lie to yourself and pretend it isn't to even buy it in the short run and run it up from the lows like you could've last March. I don't know if I've got the stomach for it!

    Final comment-- a friend and I have been discussing "how to build an economy from the ground up" partly as a mental exercise and partly as a step in figuring out the possibility of success of, say, moving to a remote area in a foreign country, starting a farm and trying to integrate oneself into the local economy in a mutually reinforcing way. I keep cautioning my friend that part of what we're attempting to do is "plan" this particular economy and ultimately we can't do something like that. But aside from that, it got me thinking about the Crusoe economics model and how people who are dirt poor can ever produce enough of value to raise their economic circumstances (obviously, politics and property rights are usually more than half the answer). From there, I started thinking about just how much of the US economy is "real" and self-sustaining and how you'd ever be able to calculate or estimate that to get some kind of idea of where the bottom actually is. You know, the point where the "self-propelling deflationary death spiral" would have to come to an end because people would start buying/producing again.

    I think things are drastically complicated by the existence of a monetary, non-subsistence agricultural economy. There are literally just millions of people who are essentially productively "worthless" until enough time has passed (and enough freedom exists) for prices, supply and demand curves and consumer preferences to all completely readjust to brand new equilibriums, at which point people can start going back to work.