The news of the week involved the delays at the nation’s airports due to the furloughs of the air traffic controllers, which slowed down the entire system. Congress got its act together to give the FAA greater flexibility to manage its budget and the delays -- much to the public’s benefit. I have to tell you, flying into LaGuardia and Newark is always a challenge, and I’m sure the descent into JFK isn’t a walk in the park either. I haven’t flown into JFK for years, but for the most part a lot of the domestic travel coming into the New York area lands at Newark and LaGuardia while all of the international flights hit JFK. There are many times when one has to circle the city for about 45 minutes before cleared to land. Thank goodness for some relief.
Finally, GDP came in at 2.5% instead of an anticipated 3.1%, which is being blamed on politicians in Washington being out of touch. The uncertainty of the future is being blamed for the GDP not being higher. Austerity has failed everywhere it has been tried and the last time it failed this miserably was during the administration of Herbert Hoover. Here’s my social observation of where we are at this point in time.
Never mind which side of the political aisle you are on. American politics takes on different shapes to fit the specific situation. The 1980s were a period of tremendous growth under Reagan; we know that. But I couldn’t understand how the party of Reagan could also be the party of Herbert Hoover. Hoover was the guy who thought he could solve the 1929 stock market crash by balancing the budget. This is the same political party; in one case they represented optimism and growth, in the other case pessimism and austerity. Many of us grew up with Reagan, which is the only GOP we ever knew. Whoever dreamed the Republicans could turn the clock back to Hoover?
In the 1980s it was the Democrats whom the public deemed to be unfit to run the White House. Now it’s 180 degrees in the opposite direction. It’s the Republicans who look unworthy of running the country. Why? It’s their Hooverite views. From 1932, it was 20 years before they got the White House back. It could happen again unless they get together to support someone like Jeb Bush who does not support the Hooverite plank of the Republican Party. If Bush doesn’t get the nomination it's likely Hillary Clinton will be the next president.
What’s the takeaway of this discussion? Looking at where we are in the economic cycle, we see history repeating itself since the peak in 1929. But if for some reason the economy develops despite the problems in Washington (because of technology), then history from the 1930s and 1940s most likely repeats itself. If a major war develops, the Democrats likely win again in 2016.
Forget the rhetoric, Americans overall trust Obama. This was seen earlier in the week when someone hacked into the AP Twitter site and announced there was an attack at the White House. Of course there wasn’t, but we didn’t learn that before the market took a nose dive, giving us a little flash crash. It tells me people can say a lot of things, but at the end of the day there is still much respect for the Office of the President and the man who sits in that chair. Let us never forget that Obama was the guy who put his presidency at risk by authorizing the capture of Osama Bin Laden. If war ever comes, Obama will be just fine.
Now let’s take this one step further. I did some more digging and found the president during the Roaring 1920s to be a small government conservative. That’s right, it was Calvin Coolidge who I’d have to say is one of the more beloved presidents we’ve ever had but almost none of us was around to experience him. He might have been the closest thing to Reagan. He presided over the last great bubble.
This is where the problem kicks in. Coolidge espoused smaller government. Obviously, there was no banking or stock market regulation to speak of, which led to the '29 crash. The problem here is that Hoover came along, the same party, expecting to tweak the economics, which didn’t even amount to a Band-Aid on the problem. The real problem is the GOP kept a philosophy mostly of business as usual even after the market staged the biggest crash in history.
Here’s the punch line you’ve been waiting for: If Coolidge espoused smaller government, so did Hoover. The problem is that in a time of prosperity, you want smaller government. When the system fails, smaller government no longer works. Why? Because complacency (lack of banking or stock market margin controls) creates the storm. Capitalism goes to the brink of failure and the government must become the backstop. How do we know? Because without the FDIC, we’d all be on the street. It happened in the 1930s. The government must be the backstop when the 100-year storm comes. At the end of the day, Hoover couldn’t adapt nor relate to the crisis. In prosperity, smaller government gets out of the way. In times of crisis, it becomes austerity. The GOP has to figure out this isn’t the 1980s anymore.
This generation of the GOP is similar to that. Before any of you get upset let me remind you I’m not a democratic sympathizer, I’m an old Reagan guy who gave up on politics but still has a very keen understanding of where the Republicans are coming from. What I am telling you is that if they don’t adapt like Jeb Bush says they have to, they’ll end up being shut out of the White House for 20 years, just like their ancestors.
Next page: Where's the Greenback?
The Greenback started the premarket with a retest of the benign pullback from the middle of last week. This is critical support which needs to hold. Why it might can be found several thousand miles east in Europe. The most important chart of the week is the FTSE which is hitting a key attractor/trend line of resistance at the top end of the range. If it’s going to fail, this is the place for it. Then we have the butterfly effect. If Europe stays in the range and pulls back it should affect the sneaky bull. While Europe still holds the highs from March which was a very good time window, we’ve had a couple of aborted pullbacks which never developed because they don’t make bears the way they used to. US markets will follow along and might I add that China will also follow along. The SSE is very vulnerable right here as the people who covered early again for the second time are in trouble again. This bounce couldn’t even make it to the gap down. As you know I’ve been skeptical of every Chinese bounce because of the great Gann symmetry at the high.
I think the market is at risk for another drop this week if for no other reason it’s so complacent. Longer term I think we are going much higher but in the here and now the VIX is once again at a place where the probability of a sustained move is very low. I know it’s tough to trade because no sooner do we get a distribution day do bears go back into hibernation. Then the sneaky bear creeps up on us and a promising VIX turns to jelly and we end up near highs again. Then the VIX gets so low that risk is too high to sustain a big move. This is the market we have now that we are coming to the slower summer months I think this pattern will finally be broken.