Markets and National Interests

I read the following in the Global Times this morning:

Analysts believe that the PBC engineered a decline of the yuan from late February to early March, in order to shake off speculators who bet on the currency’s appreciation to make profits. The purpose of that move, analysts said, was to leave a market with more rational traders and less risk of volatility when the band is widened.

I have lived in Taiwan on and off for 18 years; it was economically stable during that time. To this day, its currency is manipulated by governmental authorities. Without buying and selling New Taiwan Dollars to moderate the market, Taiwan’s economy would suffer regular shocks. As I as was told many times: “Every time the USA has a cough, Taiwan gets a cold.” Wild currency swings would crush the capacity of locals to produce any goods for export or local markets. Beijing’s People’s Bank of China knows this well, too.

Similarly, the USA stock market and its bond market are too precious to the collective prosperity of the United States as an economic totality for the government and its proxies, such as the Federal Reserve, to do anything less than protect them from violent swings. This does not mean that the stock market can’t correct 5-10% or even a little more. But I did take Chairman Bernanke seriously when he implicitly criticized the Congress for policies that have made the sustenance of the central status and health of the world’s greatest stock and derivatives markets more difficult.  In other words, the Bernanke put is in place and will remain so until there is “regime change.”

It has always been difficult for me to see through this; for even though I’ve known it since I began trading, many traders and investors complain ferociously about it. I’ve been influenced by their discourses as I tried to understand trading in the financial markets, and this has hurt my performance.  They love volatility and see reasons for it everywhere. Please note during which presidential cycles that markets–are allowed to– fall precipitously and substantially.

The Ukrainian challenge is real and so is the Malaysian jetliner saga to investors inasmuch as they reveal the limits of American power. The US can’t stop the Russians entirely; and they can’t locate an aircraft built by Boeing that may have been targeted by terrorists who the US has promised to stop with elaborate electronic surveillance and drone warfare.

I think both of these issues will be solved. First, a face-saving agreement may be reached that truly does have some benefits for Russia and US and the EU. I think traders are realistic enough to know that the US will surely walk back on this issue. It will become the new status quo. Americans know Russia shouldn’t intervene in the Crimea, but they also know that we’ve done the same previously, think Iraq and Libya.  Terrorists may be found behind the disappearance of the Malaysian airlines flight, but technological solutions will be proffered and people will go back to their routines without too much worry.

In the meantime, I would not be surprised to see the S and P 500 trade at 1750 during the next week or so.  But another, more seasoned self adds this: we could just as well bolt higher on Monday. Energy building up in the market place (as shown by the increasing volatility or value of options) will eventually need to exercise its force in one direction or another. The market has been trained to go up.  While the pot-odds are to the downside, to bet big against a national interest, protected by the United States government and affirmed by the world investing class, seems like near-term folly.


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