Nero Fiddled While Rome Burned

Charts: For five weeks the S&P 500 has been correcting within a well-defined, downward sloping trading channel. A savage downdraft on Friday took it to the exact lower region of that channel. A break below this channel could lead to a waterfall pattern, the most damaging possible chart pattern. One year ago we experienced a waterfall pattern which took the Nasdaq down 18%, almost igniting a bear market. That downdraft one year ago was accompanied by a sharp fall in emerging market bonds. But in the current correction emerging market bonds are holding up, even gaining. Continued strength in emerging market debt is essential to avoid Armageddon.

Fundamentals: For about one month a host of forward looking economic indicators such as ISM surveys have plunged at a rate equivalent to the worst part of the Great Recession. The Japanese earthquake has played a part but the real culprit is high oil prices. Which takes us to the Long War.

Long War: Starting Wednesday hundreds of Afghan based Taliban fighters have fought the Pak Army in the upper Dir district of Pakistan in a coordinated and professional assault. The fighting seems to be dying down just about now and the good guys are beginning to secure this part of the Af/Pak border with wide ranging search and destroy missions. Stunned at the size and ferocity of the attack, the Pak Army was forced to call in massive reinforcements and helicopter gunships to stop the bad guys. Dozens have been killed on both sides and the kill ratio seems to be one for one. The Taliban's spring offensive is proving to be much more powerful than anticipated. Pakistan is begging the US for help.

Today CIA drones killed 5 Taliban fighters in South Waziristan. This is the ninth drone strike since OBL was killed. The other strikes were met with fury, anti-American threats and denouncement from the Pak Army. But after the huge and savage Taliban incursion in upper Dir, this strike is not garnering any complaints from Pakistan.

The British warship Ocean and the French warship Tonnerre are sitting off the Libyan coast. Apache and Tiger attack helicopters are idling on the decks of these two ships, ready to fly into battle, but harsh desert winds are keeping them grounded. Facing Gaddafi's army, The Free Libyan Army is bravely holding fast in dug-in positions south of Misrata, taking casualties from enemy missiles, praying for the winds to die down. Once the weather clears the helicopters will carve a swath through the bad guys and the FLA will surge forward, form pincers, surround and destroy the surviving bad guys. If all this happens, then the FLA must begin a long and grueling march to liberate Tripoli. Months of combat lay ahead. Then comes the guerrilla war.

The North Sudan Army (bad guys) is poised to attack the South Sudan Army (good guys). Ethiopia is willing to send thousands of troops to the Sudanese border region but this probably cannot happen without US involvement. If war flares up in Sudan it will be very bad.

Fighting rages on in Somalia where an overly stretched CIA seems to be missing in action.

The Long War has gone from simmer to boil with the death of OBL. The US needs to step up its game. But a cabal of brain dead Tea Party Republicans and moronic Left-wing Democrats almost passed a bill that would have attempted to take America out of the Libya war. House Speaker Boehner through clever political maneuvering successfully passed a separate bill that requires Pres. Obama to explain the reason for US involvement in Libya to Congress but requires no concrete action other than mere words. The words will be scrutinized and debated for a long time. Boehner's bill precludes any other Congressional efforts to tear America out of the fight. So you are not yet hearing the sound of Nero's fiddle playing while Rome burns. Instead, you are hearing the fiddle being removed from its carrying case; which is still a terrifying sound.