Salient

"Shutting down sledding hills is inspired by the same sort of simpering caution that keeps Americans shoeless in airport security lines and, closer to home, keeps parents from letting their kids walk a few blocks to school alone, despite the fact that America today is as safe as the longed-for “Leave It to Beaver” golden age."

What scares me about the Clash of Civilizations is that the three leaders of the three biggest civilizations – the US (Western), China (Sinic), and Russia (Orthodox) – will misplay their hands and take on another civilization directly or, worse, take on each other, and that will vaporize the Narrative of Central Bank Omnipotence in a nanosecond. The existential risk here for markets is not that China/Russia/Europe/America might “collapse”, whatever that means. No, the existential risk is that the great civilizations of the world will be “hollowed out” internally, so that the process of managing the ten thousand year old competition between civilizations devolves into an unstable game of pandering to domestic crowds rather than a stable equilibrium of balance of power.

Recall that just over two weeks ago, none other than Greek currency swap expert Goldman (alongside Jean-Claude Juncker who quite explicitly warned Greeks not "to vote wrong") came out with a Fire and Brimstone worst-case scenario which was nothing but an attempt at fearmongering designed to scare Greek MPs into doing Samaras' bidding, in which it said not electing the designated presidential candidate may lead to a worst-case scenario which involves a "Cyprus-style prolonged bank holiday." Basically what Goldman said is that unless Greece quickly folds back in line and does as the unelected Brussels eurocrats demand, there will be a Cyprus-style bank closure coupled with preemptied bank runs. Well.... oops. Because if that was the doubled-down bluff, then Greece just called it, and the "downside scenario" is now in play.

Behavioral economists study human errors. People don’t always make the best choices for themselves, so there’s good reason to doubt whether they will always make the best choices for others. If you’ve ever received a useless gadget, a horrendous tie or some kind of bowl, you’ll know that when people buy Christmas presents, they can blunder badly.

Despite the authorities' best efforts to keep everything orderly, we know how this global Game of Geopolitical Tetris ends: "Players lose a typical game of Tetris when they can no longer keep up with the increasing speed, and the Tetriminos stack up to the top of the playing field. This is commonly referred to as topping out."

"I’m tired of being outraged!"

Last weekend’s election in Japan was the opposite of exciting. The upcoming elections in Greece, however, are another matter entirely. What’s really different about the Greek elections now and the Greek elections in 2012 is the lack of a Oh-My-God-Look-At-Greece media Narrative today, particularly in the US. Here it’s all oil, all the time, which means that any power transition in Greece will come as a big negative “surprise” to US investors and US markets. What we can tell you with confidence is that the Common Knowledge of the market today is that Greece is “fixed”, which means that any un-fixing will hit markets like a ton of bricks. It’s an asymmetric risk/reward profile – in a bad way – for global markets in general and European markets in particular.

After the entire world learned that young trading whiz-kid Mohammed Islam had "made" $72 million, certainly including the IRS which would promptly come looking for the $36 or so million it was due, the alleged megatrader, who got just the wrong 15 minutes of fame, scrambled to set the record straight, and explained the instead of making money, he actually made nothing, he just made it all up: to wit: "Is there ANY figure? Have you invested and made returns at all? No. So it’s total fiction? Yes. I run an investment club at Stuy High which does only simulated trades."

Nothing screams economic recovery like 2 out of every 5 Americans living paycheck to paycheck. Especially when that number has reportedly increased by 33% since 2012. Perhaps someone should inform these destitute plebs that the stock market is up nearly 45% over the past two years, and after all, nothing says economic success like the 0.01% enriching themselves via fraud and financial engineering.

In the great fiscal scheme of things, October 22, 1981 seems like only yesterday. That’s the day the US public debt crossed the $1 trillion mark for the first time. It had taken the nation 74,984 days to get there (205 years). What prompts this reflection is that just a few days ago the national debt breached the $18 trillion mark; and the last trillion was added in hardly 365 days.

The selling is because the dominant Common Knowledge regarding energy sector stocks is that they move up and down with the price of oil. Common Knowledge is not what everyone knows; that’s the consensus. Common Knowledge is what everyone knows that everyone knows, and it’s the driving force behind the Game of Sentiment. Everyone knows that everyone knows energy stocks are tied to oil prices, we just took another sharp leg down in oil prices, and so energy stocks must be sold. The fact that energy stocks are down “proves” the relationship (a wonderful example of Soros’s concept of reflexivity), which adds to the selling. The reality (not that it matters) is that energy stocks are barely correlated with the price of oil, and their correlation with each other is barely driven by oil prices. What’s really driving this across-the-board decline is the fact that “long energy” has become a very crowded trade.

Is the price of oil today driven more by global growth and supply/demand factors or by monetary policy factors? We hope it doesn’t surprise anyone when we say that we think monetary policy dominates ALL markets today, including the global oil market. What’s the ratio? Our personal, entirely subjective view is that oil prices over the past 3+ months have been driven by 3 parts monetary policy to 1 part fundamentals. How do we come up with this ratio? For the past 3+ months the oil Narrative has been dominated by public statements from influential answer-suppliers talking up the oil price dynamic of a rising dollar and monetary policy divergence. That’s the source of our subjective view of a 3:1 dominance for monetary policy-driven factors over fundamental-driven factors. However – and this is the adaptive part where we play close attention to Narrative development and dissemination – the noise level surrounding this Thursday’s OPEC meeting is absolutely deafening.

• Ferguson in Flames (Reuters)
• Ferguson Cop Told Grand Jury He Feared for His Life (BBG)
• Sharpton: Grand Jury Announcement ‘An Absolute Blow’ (Daily Caller)
• Gunshots echo as violence returns to Ferguson, protests across U.S. (Reuters)
• BoJ members warned on costs of more easing (FT)
• Hagel Exit Shows Obama Has Taken Power Away From Pentagon (BBG)
• Ukraine leader, under pressure from West, pledges new government soon (Reuters)
• Eurozone Stagnation Poses Major Risk to Global Growth, OECD Warns (WSJ)
• ECB’s Coeure Says Officials Won’t Rush as They Debate All Assets (BBG)

If there were no puppet masters in Washington DC or the Kremlin, what would happen next week?  

Russian President Vladimir Putin believes that a serious confrontation with the West is coming. In a recent speech at the Valdai conference in Sochi, laced with geopolitical and historical references, he stated that “changes in the world order – and what we are seeing today are events on this scale – have usually been accompanied by if not global war and conflict, then by chains of intensive local-level conflicts.” What type of conflict is he referring to?

"I have zero doubt that Japan is about to get smacked in the mouth. And when that happens the monetary policy calculus in Japan... and the UK... and even the EU will take on a very different shape. The domestic political dictates may still overwhelm the international economic consequences of extraordinary monetary policy easing."