Well, for those of you that believe that the stock market is totally driven by the monetary whims of central bankers and have absolutely nothing to do with the economy, Friday was a perfect example. It would be hard to imagine a worse news day with regards to fundamental macro event risk for stock valuations than last Thursday, regardless of what your current fear for the market you had news to encourage that fear. If your fear was European debt issues – the downgrade of Spain on top of the previous downgrades of Greece earlier in the week sure helped that worry, North Africa and Middle East unrest?, well the apparent developing stalemate in Libya helped you along coupled with reports of shots fired in Saudi Arabia, and lets not forget the China issue with the reported higher than expected inflation rate (if you even believe that number) and the trade deficit for the month and for the year to date did not calm your fears. And on top of this, we are greeted Friday morning with an unprecedented natural disaster in the third biggest economy and within hours the market digested it, confirmed that it was no big deal and we were off to the races again – why? because the Japanese Central Bank said they would make whatever liquidity that was necessary available – why that sounds like another blank check and of course everyone knows that this liquidity will go directly into risk assets. So the initial reaction, prior to that announcement, that equities, energy, industrial and precious metals would be negatively impacted by this due to lack of demand from a (partially?) crippled consumer the size of Japan all reversed – except for grains (?). All of this happened before any reasonably person could possibly have made a determination of the extent of this disaster. This is absolutely amazing, nothing else matters, except government force fed liquidity. The market is beginning to feel like the goose being prepared for next weeks Foie Gras.
All day Friday as the market followed the same pattern of a straight up movement on absolutely no volume in the afternoon, I could not stop thinking of a test question in an undergraduate economics class I had and how it applies to Fridays market action. The question was – if a child next door breaks your window playing ball, you would naturally go out and replace the window, and that replacement window would be good for the economy as it would employ the glass maker for the glass and the carpenter for the casement and the installer to put it in, thereby having a positive impact on the economy and raising the GDP (in those days it was the GNP but "THEY" say it is still counted the same but "THEY" are also telling me we are at an all time economic high but I see massive store fronts and industrial vacancies with still very high unemployment and huge amount of especially young people being underemployed – I cannot help but have my doubts). So the question on the test was – if breaking that window and replacing it was good for the economy – the next time we need an economic stimulus – Why do we not just go out and break everyone’s windows? Because that is, in essence, what happened to a major economy Friday. I know how the market answered that question Friday – but how would you have answered that question?
Daniel J. Haugh
PTI Securities & Futures LP