As a volatility trader, I loved seeing stocks drop 2% last week after having risen 3%. But as a credit trader and student of market behavior, I know all too well that this type of volatility is a forecast of stormy seas ahead.
Markets were disturbed last week by more evidence that the economy is weak, in spite of the fact that a steady stream of lousy economic news this year has done little to prevent stocks from reaching new highs. With first quarter GDP increasingly likely to come in at well below 1% – a number that certainly can't be blamed on the weather alone – investors are now starting to sweat.
That's what happens when stocks are trading at high altitudes and the Fed is threatening to raise interest rates without revealing exactly when that will happen. But the real back breaker for the market last week may have been the growing chaos in the Middle East and the Ukraine.
Global Complexity means Political Fragility
A few weeks ago, the world mourned the passing of beloved actor Leonard Nimoy, who of course was best known for playing the iconic character, Mr. Spock, on the 1960s television series Star Trek. One of the most enduring images of Mr. Spock is of him playing three-dimensional chess, demonstrating both his superior intellect and his ability to see the complexities of the universe in ways far beyond the limited abilities of mere mortals.
Today, even Mr. Spock would have trouble keeping up with the changing, multi-dimensional chessboard in the Middle East – and unfortunately, President Barack Obama doesn't have a Spock among his diplomats.
At the moment, the U.S. is trying to work with Iran on a nuclear deal and fighting ISIS while simultaneously opposing Iran in Yemen and Syria. At the same time American ties with Israel and Egypt, both important allies, are dangerously strained.
The Obama administration may want to give more thought to the words of Israeli Prime Minister Benjamin Netanyahu when he told The United States Congress, "The enemy of my enemy is my enemy." The history of working with corrupt, anti-American regimes as matters of short-term expediency in the Middle East has proven to be one of consistent failure. The U.S. has the wherewithal to fight ISIS by itself; it merely lacks the will and could well pay a terrible price for lying down with Iran in that fight.
As for the nuclear deal itself, news reports suggest that, rather than bring the deal to Congress (which would block it), Mr. Obama plans to ask the United Nations Security Council, with veto holders like Vladimir Putin and Li Keqiang, for approval. One only has to ponder that scenario for a microsecond to be struck by the huge potential drawbacks and dangers of this approach.
As all of this was going on, Mr. Putin returned from a mysterious absence to call for massive military exercises and a redoubling of his invasion in the Ukraine. Not only has he shown the recent truce to be a farce but has also once again demonstrated that Western powers who take him at his word are fools. The Russian tsar continues to have his way with feckless Western leaders that make Chamberlain look like Churchill.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.