We’ll get to the Eurozone circus in a moment. But first, we present the best technical description of this market we’ve seen in a while. It accurately represents the thought processes, if you could call them that, of the speculators.
That’s because there are few investors in this market and they’re certainly not the ones driving prices. Investors focus on fundamentals. But how can you assess the fundamentals when the system that produces them is in its death throes?
The current trading action really represents the hope that the can will once more be kicked down the road. Or maybe it won’t.
From Barry Ritholtz of The Big Picture:
…the S&P trading range has held, and markets are still in breakout mode. Until they fade, in which case they obviously were not in breakout mode, but rather breakdown mode. In which case they will go lower, until they find support (unless that breaks) and then they go lower and find support (that holds) in which case they can reverse.
Unless they don’t. If that happens, you might have been caught leaning the wrong way, which helps set the stage for the next turnaround. Unless it doesn’t. Which goes to show you how dangerous crowded trades can be. Unless they continue, cause after all we know the trend is your friend and you can’t fight the tape and it’s tough to be a contrarian and long and strong is the posture you want.
Until it all goes into reverse, and then the trend is not your friend and you should not have gone along to get along with a tape that was a bull trap and it looks like we are heading lower. Unless we don’t.
If so, check out Murray Dawes’ latest free YouTube update, which might clear things up a bit. Among other things, he points out the S&P500 is trading in the sell zone. We would concur.
Right, let’s get back to the bumblezone.
While on holiday earlier this year, we read a book that had nothing to do with the markets. It was John Julius Norwich’s The Middle Sea – A History of the Mediterranean. It was a fascinating and entertaining read, chronicling the history of all the nations that bordered or had anything to do with the waters of the Med.
Thinking about that book now, we can easily see why the Europeans just can’t get it together. It’s easy to ridicule them (as we do and will continue to do) but it’s not like getting a bunch of mates in the room and trying to agree on something. That would be hard enough.
Instead you have a negotiating table full of people who reflect thousands of years of conflict and animosity, trying to come to an agreement that best suits their own self-interests without blowing others – and by implication themselves – out of the water.
What a nightmare.
But European history has never really been any different. They’ve been having a go at each other for millennia.
To pick an arbitrary starting point, the crusades are a good example. In the 600s the Saracens, as the Arabs were known back then, conquered the Holy Land and North Africa. Then they took on the Persian Empire and Christian Europe. Within a hundred years they got a foothold in Southern Italy and Spain, but went no further.
The Christians, who for our discussion here really means the Europeans, were threatened by this invading force and the new religion of Islam. So they endeavoured to take the Saracens’ European gains – and the Holy Land – back.
The result was the First Crusade. By 1099, the Crusaders had taken Jerusalem. They celebrated by killing all the Muslims and burning all the Jews alive in the main synagogue.
Within 50 years, the Christians’ grip on the Holy Land was tenuous. Another crusade was organised. Like the first one, French and German armies, among others, gathered at Constantinople, the capital of the Roman Empire. Unlike the first one, the Greeks (the inhabitants of Constantinople were Greek) demanded payment to house the armies.
Things didn’t get off to a good start and the crusade was a debacle. By 1187, the Saracen leader Saladin, who later became the Sultan of Egypt, had taken Jerusalem. The Third Crusade fared better, but Jerusalem was still under Muslim rule
Not giving up, the Europeans launched the Fourth Crusade. It was a disaster. This time the army was to go by boat to Egypt in vessels built by the Venetian navy. Less than half the expected amount of soldiers turned out and Venice was left badly out of pocket.
In an attempt to recoup its funds, Venice and the Crusaders took part in some ‘intrigue’, a scheme, which eventually led to the sacking of fellow Christian city Constantinople (the Greeks have been copping it for years). They looted the city of all its treasures and didn’t even bother heading to the Holy Land.
A few hundred years later, when the Turks were besieging Constantinople, the Western Europeans refused to help their fellow Christians in any great numbers because it refused to convert to Catholicism. (The city was the head of Eastern Orthodox Christianity).
So as you can see, it’s complicated!
Italy, simply a ‘geographical expression’ according to Count Metternich of Austria, is another good example of the complexity of Europe. Following the disintegration of the Western Roman Empire, the Italian peninsula fragmented.
Ruled by the Holy Roman Empire (whose centre of power was Germany) in the north, the Papal States in the middle and the Spanish in the south for hundreds of years, Italy was indeed just a geographical expression. Then Napoleon upset this balance of power and the French occupied much of the peninsula until 1870 when it was unified as the Italian nation as we know it.
Greece itself is another story altogether. To give you a taste, after a long struggle to end the 400-year domination of Ottoman rule, Greece gained independence in 1832. But the Western Powers decided Greece should become a monarchy, not a republic. So they put a German on the throne, 17-year-old Prince Otto of Wittelsbach!
This is simply a very small tip of a very large iceberg of European affairs. Its history has been one of struggle and conflict, not of cooperation. Admirably, the Europeans designed the euro as a way to promote integration and avoid conflict.
But it was designed incorrectly.
Currency union without fiscal union will fail. Only the timing is uncertain. Instead of acknowledging this reality the Europeans are trying everything to avoid this inevitable fate, including financial leverage, which will be a disaster heaped on a disaster.
There is too much self-interest at play in Europe – backed by a deep history of national animosities – for this to work out well. The Day of Reckoning is knocking on Europe’s door.
It’s also knocking on China’s. More on that tomorrow.
for Markets and Money