Sometimes, a simple but great title can capture the imagination and draw in potential readers. Such was the case when the Pulitzer-prize winning American author, Herman Wouk, penned a historical novel about World War II with the words: “The Winds of War.” To me, this title conjures up sweeping, epic images and distant sounds of bombs and missiles on the horizon growing louder with every breath of wind– and it foretells of a morphing anxiety amongst the people as they pack their bags and crowd the highways, train stations and airports to try and get out before the enemy arrives and all hell breaks loose.
For those movie buffs who have seen the classic movie, Casablanca, there is the image of Humphrey Bogart being pushed up on to the steps of the last train out of Paris in a pouring rain by his best friend, Sam– just before the Nazis marched in to take over that cosmopolitan city in the second World War. Bogie is left jilted by his lover (Ingrid Bergman) who was to meet him at the train station after receiving an inexplicable sour note from her as the train leaves the station. As the train chugs anxiously out of the station, the viewer sees that Bogie’s idyllic world of romance and fun are dashed against the hard reality of an impending war that he must escape as he will be a top target of the Nazis.
In both stories, the backdrop (of the Winds of War and Casablanca) was World War II, a great and bloody conflict fought on three continents and across two oceans and a great sea. It was the greatest and bloodiest war of the 20th Century and of any century of mankind’s existence on this planet. The war had its roots from the last days of the First World War when the victorious Allied powers imposed onerous reparations and penalties on Germany. It was the great hyper-inflation period following World War I and the reparations that sowed the seeds of a madman’s rise to power in 1933 over Germany. Once Hitler was in control of Germany, he took control of the social order and he commanded military maneuvers to take over ever greater territory and control of Europe.
So, it is with trepidation that I use those words (i.e., the winds of war), to title one of my blogs. After all, this blog is mainly about stock and options trading and about technical analysis, which is a fancy term for stock charting. The lexicon of war has rarely ever been used in this blog; I usually use terminology such as “trades” or “stochastics” or “buy signals” on this site. Oh, sure, from time to time, I will harp about the great imbalances between nations over such matters as debt, balance of trade, over-spending and money printing, which in and of themselves, can be actions that help to plant the seeds of war. But this blog has rarely ever focused on the issues of war, though often times, local conflicts and civil wars always seem to creep into the headlines from time to time on the financial news channels and websites.
Conflicts around the globe are nothing new–they are always going on, but mostly in remote parts of the world and are of little interest to most investors or traders. For instance, the civil war in Somalia during the Clinton Administration drew attention from humanitarians, but it had little effect on stock, bond or currency markets. There was the war in Sudan which was in an area of little consequence to the markets, and again, was ignored by investors and traders. There were, of course, the US led invasions of Iraq and Afghanistan which were meant to weed out enemy combatants and their terrorist organizations. Though there was some market fear before those conflicts began, it turns out that American military superiority ensured victories for the West in both countries and this is one reason why US stock markets and energy markets remained buoyant (except of course for the Financial Crisis episode of 2008).
All of which brings us to year 2014– for the first time in my memory, which dates back to most of my many years on this planet, I cannot recall a time where there were so many growing conflicts at once in places that could matter to the markets. If not in all cases, they at least matter to many of us because they are occurring in places much closer to our comfort zones as citizens of the post-modern world of the 21st century.
In a matter of weeks, military conflicts have arisen between Russia and the Ukraine on the heels of a Winter Olympics that was a showcase for Russia. The Olympics showed a unified Russia with a revived pride among its citizens and in the wake of the accusations against the United States of spying on not only other governments and their people, but also spying on its own citizens in America, supposedly a land of people free from government oppression and tyranny. Within weeks, Russia had annexed the Crimea region of Ukraine and was engaged in a game of military deception by controlling “separatists” with loyalty to Russia in the eastern provinces of Ukraine.
To the south in the Middle East, Israel and its neighbors in the Gaza Strip and Lebanon have resorted to a new conflict of missiles and bombs launched into civilian areas. Meanwhile, once secure Iraq has fallen into splintered regional conflicts amidst a new civil war in that oil-rich country and there is now word of a possible civil war simmering in Afghanistan. The number of episodes in the Middle East has increased greatly in recent weeks, and it leaves an observer such as myself to wonder if these conflicts might all coalesce into one greater conflict as regional and global wars have been known to do if not contained by the super-powers.
Meanwhile, as these regional conflicts with real bullets, bombs and missiles grow more intense, we have an American president who seeks to keep the US out of these conflicts except in a peripheral sense, with possible controlled air strikes by fighter jets and drones. The approach of this president offers a pacifist message to the enemies of the developed western world. The reactions of the renegades are not surprising in the wake of a pacifist approach. From 1945 to the end of the George W. Bush presidency, the US was basically the police officer and mediator of the world’s conflicts. As examples, whether it was a hot war such as in Korea in the early 1950s or the Iraqi-Kuwait conflict of the 1990s, the US military intervened to control the spread of destabilizing influences.
However, in the wake of two costly wars in Iraq and Afghanistan and a financial crisis in the early years of the 21st century that has created contempt for aggressive government spending on foreign excursions, America has taken on a greater non-interventionist approach to world affairs. The current US president, Barack Obama, symbolizes this non-interventionist approach.
At the same time, the US stock markets trade as if these events are simply a distraction as in the so-called “wall of worry,” which is a trading philosophy that says that stocks perform best when fear is rising and traders short stocks. In this scenario, the shorts gang up on stocks because they foresee bad news, only to discover that a bit of good news (or not-so-bad-news) leads to a short squeeze. A short squeeze is where a heavily shorted stock causes traders to rush all at the same time to buy back stock that is in short supply so that they can cover their shorts–it is this massive rush at once to find limited stock that drives prices higher.
However, not only do markets tend to rise during the wall of worry, but in year 2014, I have also noticed a curious phenomenon amongst the news media outlets. The growing conflicts and local wars seem to be receiving only cursory attention from many news outlets and the stories seem to be pushed to the so-called “back pages” (a reference to the old newspaper days when editors would bury stories they deemed not-so-important to pages less visited by readers). These days, the news media seems more focused on domestic stories such as the illegal immigrant children border crossings (an important story in its own right, but not the only important story in my opinion), and the latest trending stories of TV and movie stars on the social media channels. In essence, the news media itself reflects the non-interventionist mood of the American public.
Even a few short months ago, there was one television show on the CNBC financial network that came on in the evening and which gave some good insights into these global conflicts–the show was called “The Kudlow Report.” Sadly, Kudlow decided he did not want to do the show any more, and I thought at the time that CNBC would continue this important overview of world events by replacing Kudlow with another anchor.
I guessed wrong on that assumption–instead, CNBC chose to fill in the 7 o’clock hour with one of its many previously recorded reality shows about greed and scams. I guess you can’t blame them, really. The reality docu-dramas are probably cheaper to produce than is a live news show with satellite links to high-expense-report journalists in remote and dangerous parts of the world such as the streets of Baghdad. Not only might the docu-dramas be cheaper to produce, they certainly carry a lower cost per show when they can be repeated as re-runs time and time again.
To be fair, CNBC reportedly has seen lower viewer ratings and decided that many traders and investors were not really all that interested in how geo-political events might affect their investments. Who can blame them, really? We have these conflicts seemingly growing more nasty with each passing day, and yet, stocks keep climbing, with the stock market’s only focus being whether the Fed will keep the easy money flowing.
Only the bond and precious metals markets seem to be paying any attention to the winds of war on a fairly consistent basis. The players who define the stock market seem to take the view that if we wake up the next morning with no serious injuries to ourselves, then it is okay to bid up the stock indexes to another set of new highs.
Let’s forget that Israel and the Palestinians seem to be engaged in some sort of new violent struggle with each other that is killing and maiming innocent families and children and causing great fears in the middle of large cities. So far, it’s a test of wills as each side fires missiles at the other–something similar happened back in the 1980s before a full-fledged war ensued between Israel and Lebanon.
While we’re at it , let’s ignore Russia’s dalliances with eastern Ukraine and let us pretend that it doesn’t really mean all that much to anyone except investors in Russian stocks or in platinum metals, of which Russia is a major producer. We can also choose to ignore a powerful ISIS group in Iraq and the quick, decisive moves of the Kurds in taking over critical oil fields near in Kirkuk. Hey, the oil is still flowing freely out of southern Iraq, so to quote the famous words of the comic strip character Alfred E. Neumann, “me worry?” Heck, no!
However, I am not one to ignore these sudden dark changes in world events, but it is difficult to set up bearish bets on the market when the stock market seems to ignore all the warning signs. It seems this “goldilocks” stock market will just keep plowing its way higher until these crisis events are right at our door-step. I, myself, have placed various bets on gold and silver stocks in this year, and I am keeping a watchful eye on when stocks might finally turn down. Who knows, maybe I am the over-reacting one? Perhaps events are what investors believe– a wall of worry to profit off of, as in the end, rarely do events turn out to be as bad as many fear.
Yet, I am reminded of the folk tale my father loved to tell me as a child of the boy who cried wolf. As many of us know, there was a real wolf lurking out in the pastures, but the boy’s family grew complacent of the boy always crying wolf and nothing was ever there. We know how that story ended, and not well for the family’s flock of sheep!
Similarly today, we have warning bells going off in strategic places around the globe. The US and its people see and hear about these events, but choose to ignore them so long as we are not directly affected. Our leadership in government is similarly in tune with the non-interventionist mood. The standard news media follows in their footsteps by giving the public the kind of news they really want and not what they should hear. Hey, our stock portfolios continue to rise! Our 401ks are getting us back to even! Our homes are getting closer to being above water again on their mortgages. Why worry about events a half a world away?
It seems that only gold investors, those humble and seemingly misguided souls, understand that something big is brewing, as the price of the precious metal is up 13.5% so far in 2014. Quickly, precious metals are becoming the number one investment class of 2014, after a couple of years of selling off. Finally, in the words of the great British leader, Winston Churchill, there is this: “Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing has happened.” Year 2014 is fast becoming one of those years marked by such ignorance.