Spectacles of Discontent

One of the golden rules of mood analysis is that major declines in social mood will always be accompanied by dramatic outbreaks of mass violence.

While I had watched the growing protests in Thailand, I thought that there still needed to be an even greater spectacle of discontent before this bear market - or at least this leg of it - has run its course.  In the terrorist attacks in Mumbai, India over the past several days, I suspect this moment has arrived.

The attacks suggest a great deal about where geopolitical shocks may be most likely to arise over the next several years.  While it is hard to imagine Iraq fading into second tier status in the public foreign policy conversation, two nuclear armed nations with a history of anti-Hindu and anti-Muslim violence potentially in conflict would go a long way toward changing the subject.

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On the doom and gloom front, I'm looking forward to The Day The Earth Stood Still.  We should see more movies with negative themes in the spring of 2009, even as the likelihood of social mood improving grows   In fact, any improvement we see now will probably be what will make a post-inaugural honeymoon period for Obama possible in the spring and summer of 2009.  As such many of these movies are likely to get a mixed reception - especially the later arriving ones.  Similarly, look for the new political opposition to be increasingly marginalized in the short term, as they continued to be viewed as bickering and petty (where not bizarre, in the case of the Sarah Palin Turkey Kill video gone viral just in time for the November holiday).

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I saw a piece from the satirical newspaper, The Onion, the other day that joked about how a recession-wrought nation was desperate for a new bubble to invest in. 

While that is typically classic great stuff from the folks who were the Daily Show before the Daily Show was the Daily Show, there is something to the idea that we should both welcome the next bubble AND the strategies necessary to fight it.

In a deflationary bust, the bubble is in the value of the currency - particularly the currency with the most outstanding claims.  Debts become more expensive to repay in real terms, making cash increasingly valuable.  This is why we are seeing commodities crash along with financial assets.  It's liquidate, baby, liquidate time.

Right now, gold is the most interesting asset in this regard.  Most commodities have broken down with their 100-day moving averages crossing below their 350-day moving averages.  Gold is one of the few that have not as of yet, even as it has sold off considerably.

Those same long term daily charts also paint an interesting picture of the Japanese yen, which looks very bullish on a long term chart.  The yen has been in a bear market since the mid-1990s and has been making higher lows since 1998.  The yen had a bullish 100/350-day moving average cross in the fall of 2007 - timing I don't think it at all coincidental to the current deflationary meltdown.

The next bubble is likely to be in finance currencies, the yen especially, but also the U.S. dollar.  Both currencies are closer to the event horizon of zero interest rates than are the Euro and the pound, and far closer than the formerly beloved "resource currencies" of Australian, Canada and New Zealand.  For those who are paid in dollars, the much beleagured American middle class, for example, this will be a boon.  Of course, given the contraction, both having a job and not having a lot of greenback debt will be required for real enjoyment of this boon.

Incidentally, I could not be less worried about inflation at this point.  To me, that is like worrying about the threat of flooding while trying to fight a wildfire.  We have long lived in an era when it was possible for central bankers to produce unlimited amounts of money.  We are now in an era where financial institutions are capable of producing a no less limited amount of claims on that money.  And right now, the claims are winning.