The Face that Launched a Thousand Ships (QQQ)
There was a time when a woman taken captive was enough to start an international conflict, and come to think of it, there’s perhaps no better reason to don the chain mail and saddle up the clydesdales.
Back then it was Helen of Troy, who, some 3000 years ago triggered the youthful Greek testosterone after her abduction by that wicked Frenchman, Paris. If it wasn’t enough to suffer the indignity of a life without feta cheese, the poor woman also had to endure the man’s odious eau de toilette.
Today, we have more important reasons to shuffle off to battle, like, for instance, concerns over our adversaries’ commitment to proper nutrition or good sportsmanship, or their willingness to share their supply of fossil fuels.
But war is no laughing matter, as we all know. It’s just that our lighter side is regularly set off by things of a graver nature. Call it black humor, or a defense mechanism. Defense, after all, is the order of the day.
We’re going to return to the issue of war and all it means for us investment types in a moment. But first, a little background.
To begin, there’s something funny happening in equity markets, and it’s nothing that can be characterized in a concrete way. It’s more a ‘feeling’, to use a word that we really can’t stand.
It might best be defined as a ‘disconnect’, where nothing that happens price-wise is actually grounded in the numbers we’re seeing either on the corporate profit front or from government economic releases. Things just keep floating higher.
Since the year began, the Dow Jones Industrial Average has posted 31 new all-time highs, and we’ve yet to experience a 3% pullback over that period.
Take a look –
As for that meager 3% retracement, this is the second longest streak in market history that has come as a straight line higher.
See here –
Extending things somewhat, we’re also 275 days into a market rise that has yet to experience a 5% decline. During that time, the S&P 500 has tacked on 23%, marking the fourth longest period in U.S. history that the averages have failed to retreat by that measure.
And all the while, we’ve seen anything but robust earnings and economic reports. So what accounts for it?
It would be nice to be able to point to something in particular, but we can’t. Back in the winter of 2008/09, when the federal government stepped in to save American business and investors from a crash that would have resolved a great many issues that were then a’bubblin’, we stated very clearly that the market was about to take off on the back of a liquidity injection the likes of which were unprecedented.
And so it was.
The only thing we didn’t foresee was the size and duration of the intervention, which scaled larger and lasted longer than we ever could have imagined.
Investment Made, Payoff Awaiting
With the government now on the hook for trillions of dollars of bailout cash, a means of extricating itself from its current over indebtedness must be found.
Normally, inflation provides the ideal condition for paying off debt. That is, twenty year old indebtedness paid off today requires ‘cheaper’ dollars – dollars whose intrinsic worth is reduced because of wage and price inflation. To use a crude example: if your papa borrowed three thousand dollars back in 1955 to buy a house on the outskirts of Wichita, you’d be more than happy to take over that debt today and take ownership of the property.
The annual erosion of the dollar’s value in an inflationary economic environment works wonders for borrowers.
But the last decade hasn’t provided much in the way of inflation, and the Federal Reserve and Treasury are therefore in a jam as to how the whole thing finally gets worked out. Their efforts to stoke inflation by keeping interest rates at essentially zero, accomplished nothing. Other measures, including wholesale purchases of U.S. Treasuries and ‘Quantitative Easing’ (printing dollars) were equally ineffective.
So now they’re stuck looking for other means of repaying that cash.
In the meantime, however, the only ‘inflation’ evident in the system is in the price of assets, like real estate and stocks, both of which have seen a tremendous turnaround since prices bottomed back in the first months of 2009.
The current situation is untenable, and with a debt ceiling crisis facing us in less than 60 days, there’s a need
1) to divert the public’s attention away from a fiscal calamity,
2) point the blame for any fallout therefrom on a sufficiently hated scapegoat, and
3) launch an effort to leverage American power into outright economic benefits after a display of superior American might.
And that’s where North Korea comes in.
It’s our very strong opinion that a North Korean ‘attack’ on a U.S. interest or ally is forthcoming, perhaps as result of the upcoming U.S./South Korean war game simulation, scheduled for next week, or perhaps otherwise engineered by our security apparatus and tipped to the Chinese in advance.
The response to the North’s ‘provocation’ will be a consensus global rebuke and will lead to an immediate attempt to dismantle the regime and its military.
What to do…?
The trade that emerges from this scenario is counter-intuitive, but lucrative in the extreme.
As much as it sounds like Russian Roulette, you can count on one thing. On the morning after the battle – for it won’t last long – if the stock market is operating, the rise will be as unexpected as it will be intense. And that goes doubly for an eleventh hour diplomatic solution that puts a verifiable freeze on the North’s Nuclear program.
And it can only be played thus –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
As the troops on the DMZ well know: the best defense is a good offense.
Many happy returns,