Are The Good Guys Winning?

Charts: The S&P 500 needs a lengthy and healthy consolidation for the rally to become a multi-year bull market. It hasn’t happened yet. There was a consolidation period between the two big up legs. Unfortunately it was short, sloppily volatile, and formed a bearish head and shoulders pattern. Healthy consolidation means tight sideways movement between well-defined support and resistance. We got that last week. This pattern needs to continue so the rally ceases to resemble the famous bear market bounces of the 30s and 70s that I talked about last Sunday (scroll down to the 8/9/09 newsletter).

Fundamentals: Q2 GDP grew in Germany, France, and emerging Asia. The shocker is Germany and France. They grew on exports to Asia and cash for clunker type stimulus programs within their own borders. Western exports to Asia are still dependent on China’s government stimulus program, rather than private sector strength. China’s federal government runs a surplus but its provincial governments run deficits; the net result is that China is now running a combined fiscal deficit of about 3.5% of GDP, which is what spendthrift America was running as recently as three years ago. Germany has a federal surplus and a provincial deficit something like China’s. Outside of disciplined Germany and China, most major economies are running deficits around 10% of GDP. Germany will not renew its clunker program or jam through more deficit spending and China is grimly draining liquidity from its banking system. So the global recovery is built on quicksand. The only counterargument to the rally/recovery ending in tears is that in times of war governments somehow get away with massive deficits. During the long period of Napoleonic War Britain’s deficit peaked at an eye-watering 25% of GDP with no ill effects because the good guys won. Is the world engulfed in a global war and are the good guys winning? Keep reading.

Geopolitics: North/Central Africa is being scorched by an arc of fire. In Somalia, Al Shabab has carved a de facto Taliban type nation-state out of the lawless country. To the west, Tunisia, Algeria, Mauritania, Mali, and Niger form a block that is plagued by a virulent and powerful bad guy insurgency called AQIM (an Al-Qaeda franchisee). AQIM’s strength is its large numbers, ability to earn big money boot-legging cigarettes and illegal immigrants into Europe, and the vast lawless deserts of its host countries. AQIM is mostly comprised of Arabs that are minorities in black North Africa. Below this block is Nigeria with Islamic rebel group Boko Haram. Nigeria claims that Al-Shabab, AQIM, and Boko Haram have recently joined forces and together are growing much more powerful. America is stepping up its involvement in North/Central Africa.
In the Gaza Strip, due to Team Obama’s brilliant diplomacy the once radical group Hamas has morphed into good-bad-guys and a new bad guy group wants to overthrow Hamas and install a Taliban style government. The new bad guys call themselves Warriors of God (WG) and claim to be an Al-Qaeda franchisee. WG and Hamas have recently been fighting a mini-war in Gaza. Saturday, Hamas killed the leader of WG as well as a dozen bad guys. As we’ve seen in Nigeria, swiftly smashing bad guys and publically killing their top leader tends to knock insurgencies for a loop (bullish).
In Lebanon, with the apparent loss of Hamas as an ally, Hezbollah is making grandiose threats against Israel, fearful over its future as the peace process inches forward. Hezbollah for now is all bark and no bite.
In Pakistan, as of Saturday morning, fighting between Taliban chieftain Turkistan’s good-bad-guy militia and H. Mehsud’s bad guys continued but seemed to be winding down with one good-bad-guy killed. Since Friday the Paki Army has killed 12 bad guys. The SV Taliban is stepping up civilian terror bombings in the Swat Valley and avoiding firefights with the Army.
In Afghanistan, a gigantic Taliban car bomb exploded at the gates to NATO headquarters in Kabul, killing 7 and wounding 91. The Taliban has stepped up its terror bombing in recent weeks, as practice for what will probably be a big onslaught this Thursday, election day. They’ve never gotten this close to NATO headquarters before (bearish).
In Northern Yemen, the fighting rages on between the Yemeni Army and bad guy insurgent group Zaydi. The fighting is moving closer to the country’s capital city, San’a (not good). Facing a second Islamic insurgency to the south, the Army is desperate for a quick victory. This forces it to use airstrikes and artillery, wiping out civilians along with bad guys (hurts civilian morale). Osama Bin Laden is actually a Yemeni, not a Saudi, so the Al-Qaeda franchisee in the south is especially dangerous. And Yemen itself occupies a very strategic position. It borders Saudi Arabia and forms a tangent to the arc of fire slashing across North Africa. We don’t know how America and Saudi Arabia are helping the Yemeni Army although they must be helping in some way.
In conclusion, the world is definitely engulfed in a global war and the good guys are maybe winning.