Markets and MENA

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"Confidence comes not from always being right but from not fearing to be wrong." Peter McIntyre

"Only the unknown frightens men. But once a man has faced the unknown, that terror becomes the known." Antoine de Saint-Exupery

Markets cringe at uncertainty.  It is the xenophobic-like, fear of the unknown-like response that triggers waterfall selling and massive volatility.  We saw it demonstrated hugely with the Lehman-AIG five-week aftermath.  We saw it recently in a milder version following the Egypt-Libya-Japan-Nuke-G7-No-fly sequence. 

Markets can handle bad news.   And, of course, good news.  In either case, they can quickly adjust the discounting mechanism to reflect the outcomes expected.  The inability to estimate the outcomes creates the uncertainty.

We can now estimate a range of outcomes.  Therefore, we are back to a fully invested position since we believe the trend of the US stock market will resume its upward bias.  We have had (finally) the 7%-to-10% interim correction that is normal in an ongoing bull market.  Events and an uncertainty spike triggered it. 

Now those situations are become more predictable.  For Japan, there is a massive task ahead.  This nation will respond to it with robust and determined effort.  And the critical financing issue has been addressed by the G7 so that wild swings in the yen will be dampened.  Over time, Japan will engage in another series of quantitative easing.  They have had lots of practice.  A time will come when Japan may be taken to overweight.  We are not there yet.

In Libya, the No-fly, no threat zone is already being enforced.  Markets have discounted the Libya impact on oil.  They are now discounting a diminished or removed Qadhafi.   The UN coalition led by France, UK and others cannot allow any other outcome.  And Qadhafi no longer carries the biggest stick.

In the Persian Gulf, we are witnessing suppression and ruthless response.  It results in human loss of life.  It removes the fledging lust for freedom evidenced by the youth.  Suppression is victorious because the power is with the army and bullets.

The response to the demonstrations has morphed from some degree of permissiveness to gunfire and tear gas.  The pro-democracy instinct of Americans does not like to see this.  Our hearts want peaceful but freedom-like outcomes.   That is a pretty picture.  But it cannot be the result of an imbalanced status.

In the reality check currently underway, the seats of power (Sultans-Kings-Sheiks-or their sons) do not easily yield that power to kids with stones and Facebook.   The king must either be outgunned (Libya) or he wins and the kids are punished harshly.   In Saudi Arabia, Bahrain and elsewhere in MENA we are witnessing an outcome that is a blend of policy discussed in two classics.  For details, see Metternich and what is called “Realpolitik.”  For profiles of the victors in MENA, visit Machiavelli’s “The Prince.”  In MENA, bullets triumph over ballots.

Okay, freedom loses.   Kids die.   It is a sad day for those of us who wish it were otherwise. 

But for markets, it becomes a bullish outcome.  Markets like stability and predictability.   Markets know that kings with armies are stable and reliable.  The players in these markets would not like to be born to the common class in those countries.  These players like their life in freedom. 

But when it comes to their money bets, they are willing to look beyond the suppression of the kids.  Markets would rather deal with dependable kings than deplorable kids.

Our professional job deals with the money issues; therefore, we detach emotions from the calculus as best we can.  The outcomes in MENA are becoming more predictable.  That will last for a while.  The suppression will prevail for a while.  We are likely to have some time until the next outburst. 

For now, the markets will like this trend.   We are back in and fully invested.

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About David Kotok