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The Battle Ahead

The forces of control are about collide with the forces of chaos...

THIS SHOULD be rather interesting. The Germans brought the stock market rally to an abrupt halt with their Teutonic realism yesterday, writes Dan Denning, editor of the Daily Reckoning Australia.

"Dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled," says Angela Merkel's spokesman Steffen Seibert. The S&P 500 fell by 1.94%. Crude oil was down 1.53% and copper down 2.02%.

You wouldn't want to play poker with the Germans, would you? Are they bluffing and trying to force European bondholders into taking larger haircuts on their Greek bonds? Or do the Germans really have their serious face on? Are they telling everyone else in Europe there will be no easy inflationary way out of this debt trap?

The forbidding news out of Berlin has prevented the S&P 500 from breaking out to new highs. But you can see that there are a lot of traders just itching for an even more powerful fourth quarter rally in "risk" assets. 

For example, Bloomberg reports hedge funds are piling in on the growth/commodities story.

"Speculators boosted their wagers on higher commodity prices for the first time in five weeks as increasing confidence that the global economy will avoid another recession spurred the biggest rally of the year."

Speculators and confidence: the stuff that new highs are made of?

The story reveals that:

"Money managers boosted combined net-long positions across 18 US futures and options by 0.2 percent to 656,691 contracts in the week ended Oct. 11, Commodity Futures Trading Commission data show."

What's the trade here then? How about: short the Dollar and long commodities? See the chart below.

The CRB and the USD: ships passing in the night

The Dollar index is the blue line. The CRB commodities index is the black line. The weaker the US Dollar, the more Dollars it takes to buy stuff. You can see that once the fourth quarter began, the CRB rallied and the Dollar fell. The question is: why?

Well...why not?! A market isn't a market if people don't have different ideas about what things are going to be worth in the future. But yes...this has the feel of a self-fulfilling (self-deluded) rally. Stocks and commodities are rallying because traders say they must and are putting their money where their mouth is.

The Germans have more spine than the speculators. And at heart, the speculators are just looking to make a buck. Our guess is the speculators will throw in with the Dollar against the Euro, and you'll see the US Dollar/Treasury bond rally while everything else falls. But we'll see soon enough.

In the meantime, let's get back to the disordered universe we all live in. Trying to redesign an economic system based on ideas like fairness, social justice, and equality is bound to fail. Those may be admirable concepts. But you can't remake the universe in your own image. It just won't work. You'd better quit while you're ahead...and go home and take a shower.

The economy is a complex adaptive system, like an ecosystem, and perhaps like the cosmos itself. As Lee Smolin writes in The Life of the Cosmos...

"A great deal of the order and regularity we find in the physical world might have arisen just as the beauty of the living world came to be: through a process of self-organization, by means of which the world has evolved over time to be intricately structured."

It is hard for busy-body social scientists and engineers and economists to imagine that given a few simple rules, an economy might self-organize and a complex system emerge. It's hard to believe because the result is that millions of people (nearly 7 billion now) act without knowledge of each other's intentions and without instructions. But they still somehow manage to produce a diverse economic order that offers vocations, employment, incomes and a huge variety of goods and services...without anyone being in charge of it.

The fact that the universe, like the economy, is a changing, dynamic, evolving thing is bound to deeply unsettle some people. Some people prefer eternal truths, unchangeable laws, and the certainty of a highly regulated order in life. These people are usually scared of the future, highly controlling, and naturally gravitate toward politics. Their natural instinct will be to fight back...against the universe.

So get ready for the war to preserve the cosmos...or the war to preserve the old order. In one camp IS the old order, the oligarchs and plutocrats of Europe and America who want the next 100 years to be like the last 100 years. And on the other side is...everyone else.

The situation is evolving and unstable. Only psychopaths and criminals like a revolution. They will be agitating for one. But our guess is that the Occupy Wall Street movement will be pushed, from the margin, into an act of violence that terrifies what's left of the middle class. They will crave for order and demand that someone bring it to them.

By the way, has anyone seen David Petraeus lately?

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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