Assume for a moment that the stock market is a giant confidence game. We are all looking for the Queen of Spades. Now assume you are a Hollywood casting director. You need someone to play the dealer (the Inside Man), the Roper (the Outside Man), and the Mark (the Investor).
Let’s back up a second though. The false premise in a confidence game is that you can actually win. In Three Card Monty, you wander past a guy playing the game who appears to be a moron. He’s losing money. Even a child could spot the Queen, you think. You know you could do better.
The Roper brings you aside and says he has a plan. He will play the game first and mark the Queen. He’ll lose. But once the Queen is marked, you can’t lose. You pile your money in together and, convinced of a sure thing, you bet big.
Of course the Roper isn’t really on your side at all. He’s in on the con with the dealer. And the Dealer replaces the creased Queen with another card. The key to a good con is getting the mark to believe the money is so easy he might as well bet big.
Since 2003, the stock market has been a Big Con. Getting back to our screenplay, who would you cast as the Inside Man, the Outside Man, and the Mark?
Here’s how we’d play it: Greenspan and Bernanke are the Inside men. They don’t deal in cards. They deal in credit. And lots of it. Bernanke said yesterday’s the Fed’s Primary Dealer Credit Facility-in which investment banks (not commercial banks) can exchange impaired collateral for liquid U.S. Treasury bonds-would last at least another six months.
The Fed hopes that the market value of the collateral (a lot of it thinly traded and hard-to-value mortgage backed bonds) will stabilize. It hopes the banks won’t be force to mark it to market, or liquidate it to recapitalize. So it’s dealing. Credit, drugs, cards, what’s the difference?
Who’s the Outside Man? That’s easy. Jim Cramer and CNBC.
Who’s the Mark?
The trick in a confidence game is not to fall for the misdirection. Keep your eye on what’s falling, not rising. Practically speaking, that means we wouldn’t be keen on financials in a rebound. We’d be gleeful that coal stocks are falling hard. They’ll be worth a look, as will energy.
The mail box was bursting to the seams with theories about what could make oil fall. We can’t share all of them with you. But due to the high volume of response, we’ve published some of the more thoughtful and provocative ones in today’s essay section.
By the way, thanks to you the DR Australia now has over 30,000 readers. It’s a diverse bunch, with readers from all over the planet, and a huge variety of practical experience and wisdom. We know that our own experience can only offer so much..
About that twenty percent fall in oil prices. First, since it’s been such a dismal few weeks in the market, we came up with our own David Letterman-style top twenty list.
Top Ten Reasons Oil Prices Could Fall Twenty Percent
10. Oprah raids fridge, turns leftovers into biodiesel
9. Turns out you can microwave oil shale from Colorado’s Pieceance Basin and put it directly into your gas tank
8. OPEC minister Chaqib Khelil says “Smile Fatsos! You’re on candid camera!”
7. Soaring oil prices actually due to Jim Kunstler’s futures trading in order to promote new Peak Oil book
6. U.S. Federal Reserve raises Fed Funds rate by 200 basis points (2%) to combat soaring commodity inflation (just kidding)
5. High oil prices fun at first, but now collapsing the global economy.
4. GM introduces new “Fred Flinstone” two-door sedan, internal combustion engine not included.
3. The Rapture
2. Margin requirements raised in futures markets
1. Because they’re too damn high already!
For the record, the top answers from readers were: Iran abandoning its nuclear program, an increase in interest rates by the Fed, an increase in margin requirements for futures traders, Bird Flu (seriously, someone also suggested the overnight death of 2 billion people), and a U.S. troop withdrawal from Iraq.
There were many other answers too…the opening of the U.S. Strategic Petroleum Reserve, the landing of aliens bearing wondrous technologies given to us freely, the pricing and trading of oil relative to a basket of goods and currencies, a cheap solar car and much, much more.
Last week, we believed the only realistic non-market event that would lead to much lower oil prices overnight is the announcement of a troop withdrawal from Iraq. That’s because the geopolitical component of the oil price causes the most anxiety while also being the least quantifiable. You wouldn’t even have to say when it started. But we think the mere announcement that troops would be leaving Iraq would take a huge sting out of the oil price.
A Fed rate cut would be the most effective in terms of defending the dollar. But since when has this Fed or this Administration or this Congress (in America) showed that they care about defending the dollar? There is one school of thought that suggests the dollar devaluation is a deliberate way to inflate away the value of foreign claims on U.S. assets.
Oil, by the way, fell by five bucks in New York trading. We are not celebrating anything yet, especially as it’s not a move we tried to trade. Still, the echo chamber of the markets is so loud these days that the bullish themes became obnoxiously over-amplified. The long-term case for oil is very strong. In the short term? Gabriel just got back from New Zealand this morning. We’ve put him on the case and will report back tomorrow.
More reader mail in the essays below. We won’t comment on every one. Our general comment is that the markets are a complex adaptive system. Things evolve. Neither the market nor the Earth is a closed system. That’s critically important.
In a closed system-in which the amount of resources are fixedthere are limits to geometric growth. But we’ve seen people in laboratories in Singapore rearranging organic compounds at the molecular level.
Science is just now exploring the possibilities of rearranging matter at the molecular level. Will it fundamentally change the problem of scarcity? We don’t know. And with energy, we need to figure out how to turn more sunlight into in to energy that does work. There are tremendous challenges to that, too. And eventually, we’ll have to get off this planet to survive as a species. But more on that another time…