Karzai Calls The Shots

Charts: The S&P 500 closed at 1109, up .2%. The index is above both the 100-day and 50-day moving averages which is bullish. Over 50% of the correction has been retraced so we are definitely in some kind of rally. About half the chartists are calling this a counter-cyclical rally within an ongoing correction because volume continues to be horrible. Volume is bad because investors understand that any default on sovereign debt would be catastrophic. I’m sticking with my assessment that we are in a shaky rally.

Fundamentals: Yesterday wholesale inflation came in hot, so the Fed raised the interest rate on the discount window. Banks are no longer using the discount window so this is a symbolic move. Symbolic or not it terrified the Asian markets overnight, which crashed. Today consumer inflation came in cooler than expected and this calmed everybody down. Interest rates cannot stay this low forever or even much longer. Consider: 90% of the world’s aluminum stockpiles are owned by hedge funds that gobble up the metal in the spot market with ultra-cheap borrowed money and dole it out to industrial companies over time for an arbitrage profit, causing a dangerous price bubble in the aluminum market. Another example, Chinese and Canadian real estate markets are screeching upward, entering bubble territory. Interest rates need to go up to prevent more bubbles from forming but raising them will cause the carrying costs of massive government debts to sky rocket. We’re between a rock and a hard spot. Stock markets think the Tea Party movement will get deficit hawks elected in the November US elections and then spending will get slashed. If this doesn’t happen we are in big trouble.

Geopolitics: In N. Waziristan, Pakistan, a CIA drone blew away a van and incinerated a Taliban compound yesterday; both belonged to the Haqqani network. So far in 2010 CIA drones have made 17 strikes in Pakistan and killed over 200 of bad guys.
In Afghanistan, the Battle for Marja is growing more deadly for NATO as the good guys attack fortified bad guy positions. Five NATO soldiers died yesterday. I’m putting the bad guy death toll at roughly 170.
I was wrong when I said Gen. McChrystal will become the Emir of Helmand Province. McChrystal is actually letting Pres. Karzai call the shots. Some counterinsurgency experts are criticizing this strategy because Karzai is such a worm. But McChrystal is letting Karzai run the country and to some degree the war. For instance, Karzai is in charge of the efforts to turn the various tribes into anti-Taliban militias and reportedly he isn’t doing that great of a job. McChrystal is nursing Karzai along, trying to turn him into a real leader, like a drill instructor working with a soft recruit. If anybody can do it, McChrystal can (I hope).