We’ve reached the moment of truth. Many moments of truth; something is going to happen this month. The only question is whether the stock market crowd is going to keep their heads in the sand. With everything swirling around I can’t imagine how that’s possible.
Here’s what I understand about the North Korean problem. The Trump administration is threatening severe sanctions by cutting off trade with any country that does business with North Korea. Isn’t that right? China calls this plan “unacceptable.”
The China/Russia plan calls on the United States and South Korea to “suspend their large-scale military exercises.” I could get into this entire Russia monster that has become completely out of control in the past 12 months, but all I’ll say is as one sows, that’s how they reap. Remember, this is not me talking, I’m just channeling Lord Rothschild. This is as close as we’ve come to a nuclear conflict since the Cuban missile crisis. I’ve studied it very carefully as have some of you. There was an out. We had older missiles sitting in Turkey at the time which through back channels we promised to pull out within six months.
Dow futures have gapped down as of Monday night, other markets are lower but not dangerously so at this point. The crowd probably still thinks there will be a peaceful solution or are completely complacent to the danger. What is the “out” here?
But as you read this, Congress is back in session with its hands full. The bill for Harvey is said to be $190 billion, or roughly 25% of what TARP turned out to be. Don’t look now but Florida issued a state of emergency for all 67 counties. At this point, as bad as the situation on the North Korean peninsula appears to be, I’m more concerned about Irma. From the moment I saw it, I had a bad feeling about it. Recall that Andrew hit south of Miami in the less populated town of Homestead and caused $24.5 billion in property damage. According to USA Today, Homestead has 3X the population and a comparable hit would cost $60 billion. If Andrew had hit just 20 miles to the north in the population center I can’t tell you what the cost would’ve been.
There is a historical precedent for this, in fact several of them, In the roaring 20’s Florida experienced its first real estate bubble. But for whatever reason, it slowed in 1926. But the hurricane that hit on Sept. 18, 1926 is known to the area as the blow that broke the boom. The U.S. Weather Bureau in Miami described this storm as “probably the most destructive hurricane ever to strike the United States,” per the Sun Sentinel. This was a storm that formed like so many killers, off Cape Verde Island near Africa. There were radios and certainly no satellite imagery. There was no sense of alarm as a complete population center had no clue what was about to hit. Property damage wasn’t as terrible as some thought it could be, only $1.26 billion in today’s dollars. But here’s where the lasting damage occurred. The Florida real estate boom was over, killing their economy as people were scared to rebuild on the coast due to the storm. It took decades for Florida to get a real reset.
With everything on our plate, who would’ve thought it would be a natural disaster that could be the straw that breaks the camel’s back? Someone I know last week commented I tend to look at the glass as being half empty. No, I look at reality. The crowd thinks the glass is half full. Let me put it to you this way. This is the 11th anniversary of this column. That’s right, I started this column the first week of September 2006. Long time readers will remember I was six months to a year ahead of most of my peers being bullish on the market after the 2009 bottom. There is a time to look at the cup differently.
As your resident stock market historian, I’m here to tell you it was a natural disaster that destroyed the world’s economy in the San Francisco earthquake of 1906. The panic came in 1907 as the contagion spread from the left coast all the way to financial capitals in Europe. My point is that after Harvey, in a month where they must raise the debt ceiling and get tax reform done, I don’t know that our financial system can withstand another ‘Harvey like’ shock right now. They haven’t even figured out how to pay for that disaster. I run a secular business but here’s my best advice to everyone. Pray Irma goes out to sea.
How we get out of this Korean mess, I have no idea. We are certainly in the deep end of the pool here and as I’ve told you, this has little to do with North Korea. For whatever reason, China refuses to stop its little client state. I don’t see either side blinking right now and I think most rational thinkers realize what will happen if we cut off trade with China to any degree. That could sink the stock market all by itself. So, we don’t even need a war to damage financial markets. Look at one company called Wal-Mart. Is there anything in that store that isn’t made in China? Like you and me, they are just a company trying to get by. If you didn’t catch the full revelation concerning Rothschild last time, you probably do right now.
Finally, we have long term cycles which are maturing and we are in the Gann red zone at 360 months for the top of the 87 market and risk remains elevated through at least the end of October. But we are also at a golden spiral 619 months from the top of the 1966 market. But I already told you that. None of us know what is going to happen but we can all agree I don’t we’ve ever had to deal with so many threats all at the same time as long as we’ve been trading.
For early trading on Monday, markets are lower but it could be worse. I believe we’ve entered a period where history is being created in real time which is why risk is off the charts. I’d tell you it’s also dominating the technicals but they are likely intertwined with these cycles and the news.
