Election Cycle Analog

In the summer of 2007, stock markets showed early warning signs that something was going on in the credit markets. Led by the banks, we had a few big down days in July/Aug.

I happened to be in NYC at the time and recall that, while there was some palpable concern among traders, many viewed the bearish action as a minor, necessary correction to relieve overbought conditions in what had been a strong multi-year uptrend. A stroll thru Midtown certainly did not suggest that luxurious lifestyles had taken much of a hit yet. Excess was still visible everywhere.

One rationale offered by the bulls was that it was the year before an election year, and that the Bush/GOP political machine would pull out all stops to keep markets from falling. After the summer swoon, markets indeed reversed higher. In fact, the S&P 500 (SPX) notched a marginal all time high in early fall.

After that, however, things came unglued. For most of the following 18 months, stocks cratered alongside the credit markets, lopping more than 50% off the value of the SPX.

It is safe to say that maneuvers employed by politicians to keep things 'contained' (and they used that word alot) were not very effective.

So here we are four years later. Markets softened back in March and then ralled to marginal highs for the move off the early 2009 lows. Prices have given back more than 7%. From a macro standpoint, we have the end of QE2, data suggesting a softening domestic economy, a sovereign debt crisis in Europe, and stress cracks in the Chinese machine. As a whole, this constitutes a big stinking mass of bear fodder that could/should propel markets much lower.

Yet, similar to four years ago, many have been trotting out the year-before-the-election-year rationale once again. Obama can see his poll numbers sliding w/ the weaking economic picture, the thinking goes. He and his political machine will therefore pull out all stops to keep things afloat into next year's election.

I have no doubt that many political stops will be pulled--some perhaps more extreme than we've seen already (and that's saying something). Whether those stops will 'stop' the bleeding is another question entirely, as our analog four years ago suggests.

Can't shake the sense that all the king's horses and all the king's men will once again prove ineffective in parrying the corrective forces of markets seeking balance.

position in SPX

Jim Rogers Checking In

The alway interesting Jim Rogers has been making the rounds recently, here at WSJ and here w/ a raspy Maria. JR has little doubt that the US is headed for crisis much larger than the 2008 edition. His time window for arrival seems to be between 'this fall' and 'the next 5 years.'

He's offsetting his longs in commodities, Chinese stocks, and select currencies (including the USD for a trade) with shorts in emergining markets and US tech.

When speaking w/ Maria, JR also revealed that he's short 'one major American financial company.' When pressed for more details, he admitted that 'it's the bank that hasn't gone down as much as the others.'

Any guesses on which bank he's short? I have mine...

position in commodities, SPX

Red to Gold

Another remark on Grant. In his 5/20 letter, Grant reprints a speech he gave at the CFA annual meeting in early May in Scotland. In it, he builds the case for the Chinese 'red capitalism' being an exaggerated version of the hampered market model practiced in the US.

He suggests the situation in China as a 'description, writ large, of the salient error of all the world's monetary arrangements--namely the elevation of the technique of command and control over the free interplay of supply and demand.'

Grant then makes the case for the gold standard as a means for putting markets back in control.

position in gold