Let's try and be insightful today, shall we?
Equities have been rallying; we'll call it the summer rally.
Major benchmarks are only a few percentage points off their highs. It's all good, right?
I don't think so.
We could use the old "can't see the forest for the trees" adage, which means, sure, you can look at all the trees around you and see they're still standing, because you're in the middle of the woods. But you can't see the whole forest, because you're too flat on the ground and too deep under the canopy.
Let's rise above the treetops and market highs and look down, to get the big picture.
Here's what I see. There are too many trees to measure the health and height of each one. But I see something much simpler on a path through the woods that we're going to look at and draw our insights from.
Yes, I see a team of horses, yoked together, pulling a huge wagon up a steep, meandering slope.
One of the horses embodies central banks, banks, bankers and market players. The other horse embodies the markets: stocks, bonds, commodities, and real (estate) assets.
The large and heavy wagon they're pulling is the economy. It doesn't matter which one. Think of the U.S. economy, or the European economy, or the global economy.
Some of the stuff in the economy wagon includes horse parts, things like equity, fixed income and real assets, stuff like real commodities, too, not just the paper stuff.
Did I mention that the horses are yoked together? Did you notice that the horses are pulling the economy wagon?
"Don't put the cart before the horse" is another adage.
Well, here's what happened, at least as far as I can see from up here.
The wagon got too heavy. Mostly from real estate and paper instruments that ended up getting soaked when the leverage bubble, which got blown up by overuse of the low-interest rate pump, popped and rained on everybody's parade.
So the guys who own one of the horses in the team (did I say they were yoked together?) decided they were struggling mightily and could end up being dog food (they were already horse-whipped to near total collapse and death) decided to unhitch them from the wagon.
Who owns that horse? There are a bunch of owners, breeders, really. They run the Central Bank Stables and breed race horses as well as draft horses.
The other horse in the team, yoked to the CB Stables stallion, isn't a horse they own. She's a filly that they train, on account of the fact that they're trainers and jockeys too.
Either way, that other horse, because she can be bred for huge fees on account of her foals being worth a lot in the future, has to be taken care of too. Kind of like breeding "futures" you might imagine. Futures of wealth for the silent partners who actually control the goings-on at the CB Stables; yeah, those guys.
As it turns out, the wagon is stuck, and the team of horses has gotten ahead of themselves.
No one would ever advocate cruelty to animals, so they were cheered on by most people, even though most people were cheering grudgingly.
But here's the rub. They're a team, you know. And you can't hope the breeder's horse drops dead and the filly gets to run wild. They're yoked together. (Did I say that?) So if you want the filly to have a life, you have to go along with keeping the other horse alive.
At some point, the wagon is going to have to get hitched back up to the pulling horses, or it ain't going nowhere.
From above the trees, I see that wagon, which was holding its ground on the slope it was abandoned on, starting to slip. Did I say it was one big, heavy wagon?
Oh, I forgot one thing. That's because I almost couldn't see clear to the ground because of all those trees. But there's a long, very long, set of reins that still connects the wagon and the horses.
As that wagon starts to slip backwards, it won't matter how healthy those horses look and how far they've gone ahead of their heavy load. They're going to get yanked back, reined-in, and maybe broken.
You don't think so?
Have you seen what's weighing down the wagon? Haven't you seen it starting to slip?
The economy here in the U.S. looks like an old nag is pulling our giant rickety wagon.
Unemployment is at 8.3%. Real estate prices have been up in some areas. Up? Up is relative. Like The Doors sang, "I've been down so goddamned long, it looks like up to me." Foreclosures this month are up 6%, according to RealtyTrac. Consumers aren't spending, and what they're buying, they're back to buying on credit. Savings rates are back to non-existent levels. And we're facing that fiscal cliff thing.
How bad is the fiscal cliff?
First of all, people, it is real and it is not going to be addressed on any long-term basis. We will go to the edge of the cliff, look over, lose our national footing, and be saved (hopefully) by a last-minute, temporary "fix," which will be too little too late.
Want to know what's going to happen to our wagon then? Just look across the pond at Europe. That's where we're heading.
The U.K.'s (great Olympics, you lads and lassies!) industrial production numbers are now the worst in 20 years. At 97.3, they are down 2.5% from May to June. Their economy continued to contract through July. That makes three consecutive quarterly declines. Two quarterly declines in a row constitute a recession.
Italian GDP was down 0.7% in the second quarter after falling 0.8% in the first quarter. Year over year growth is down 2.5%. Italy is experiencing its fourth consecutive quarter of negative GDP growth. And about those bond yields… they're going to sink the country.
Germany, you know, the biggest economy in Europe, saw industrial production dip 0.9% in June, erasing some of the 1.7% upside they saw in May. Year over year IP is down 0.3%, and German government officials are saying they're seeing "growing signs of decline."
Spain? Oh, things there are just peachy. Spain, the Continent's fourth-biggest economy (Germany is 1, France is 2, Italy is 3, Spain is 4, and the Netherlands is 5) just notched its tenth month in a row of declining industrial production.
The Netherlands just announced IP fell 0.6% in June, from a lackluster May.
Greece? We won't even go there.
China? Slipping into darkness.
So, how did those horses get so far ahead? Oh yeah, that would be by manipulation. The same kind of manipulation that China, the ECB, and the Fed are ratcheting up again.
Can those horses break free of the reins that bind them to reality (it's the economy, stupid) and run wild?
Just don't lose sight of the reality that it's the economy, stupid.
… Did I already say that?
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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