CIA Is Your Last, Best and Only Friend

Charts: Since the bull market began in March its greatest technical weakness has been volume. The 2002-2007 bull market saw a net inflow of $250 billion into domestic equity mutual funds. With nearly a 70% gain since March, this bull market has seen a net inflow of only $7.8 billion. If this were a normal bull market, the inflow would have been $150 billion by now. In recent months and weeks volume has been getting worse to the point where we are now seeing outflows even as the market rises. The rally attempt that we are currently in has seen very low volume, so low that even with big price gains it has not yet qualified as a technical rally. What all this means is that retail investors are not participating in the uptrend and a swath of big institutions are also MIA. Volume this anemic is a hallmark of a cyclical bull market within a secular bear. At some point volume must pick up for a multi-year bull to emerge. But there is a Catch-22 to a volume pick-up. Read on.

Fundamentals: The current bull market can only continue with very weak volume flows because there is so much government debt coming to auction that a massive and continuous flow of funds must keep pouring into treasuries. If volume were to improve to historical levels in the stock market then fund inflows would dry up in the government bond market, jacking up interest rates, clobbering housing, and then tearing apart the balance sheets of the globe’s financial firms who still hold billions worth of mortgage backed toxic assets on their books. We have a fragile Goldilocks recovery where economic conditions are scary enough to keep most investors in bonds but not so scary that a few brave souls are buying stocks.

Geopolitics: The Saudi Army has retaken a key mountain from the Yemeni rebels. The mountain in question straddles the border between the two countries. Media reports say that 6 Saudi soldiers have been killed so far and maybe 100 bad guys. The rebels claim to have shot down a Yemeni fighter-bomber and the Yemeni government admits that a jet did go down in the battle zone but denied that the bad guys were responsible (they probably were). The rebels are fighting both the Yemeni and Saudi Armies simultaneously and it is hard fighting on all sides. Saudi Arabia reached out to Pakistan, vowing to cooperate militarily. Saudi Arabia is waking up to its responsibilities in the global conflict. The Long War cannot be won without Saudi Arabia providing leadership to the Muslim world.
In Afghanistan, Afghan soldiers killed 17 bad guys in a fierce battle Sunday, backed up by NATO jets. This shows good progress on the part of the Afghan Army which numbers about 200,000 soldiers.
In S. Waziristan, the Pak Army is slowly moving into the biggest and most important Taliban cities, including the Taliban capital Makeen. And it is still killing about 30 bad guys a day. Unfortunately, the Taliban is once again stepping up its terror attacks against the non-tribal regions. It killed a score of civilians over the weekend. Pak civilian morale is holding up even under this savage onslaught, so far.
In Somalia, as heavy fighting continues in the north and central regions between the government and Al-Shabab, the super-bad guys are complaining vociferously to Kenya about its training camps that are readying an anti-Al-Shabab militia. There are reports that these camps are paying villagers large sums to have their young men enlist and fight for the good guys. Large sums in Africa mean only one thing: CIA involvement. Scholars call the global conflict the Long War against Islamic Extremists Militias. Someday we will call it the Long War between Islamic Extremists Militias and Islamic non-extremist Militias. When the CIA creates good guy Islamic militias it means that the US Marines will not be taking casualties and enraging American liberals, making America’s role in the Long War more sustainable. The CIA is your last, best, and only friend.