Tragedy and the Central Banker

By: Erik Swarts | Mon, Jan 9, 2012
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Tragedy and the Central Banker

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." - Ben Bernanke at the Conference to Honor Milton Friedman - November 8, 2002

When I first started publishing my thoughts on the markets last Spring, I was of the opinion that although we were headed towards rougher seas (see Here) throughout the balance of 2011, the domestic economy was on the mend and headed towards calmer waters in 2012. The basic premise being - squeeze out the excess sentiment in the momentum darlings, rebalance risk away from commodities and enjoy the fruits of a rebuilt corporate balance sheet - courtesy of a Mr. Ben Bernanke. In essence, short term pain caused by dislocations of a strengthening U.S. currency - long term gain for the U.S. economy. I believe I was one of the first (see Here) to accurately forecast the turn in the dollar during that time period.

In hindsight, the problem with my longer term thesis when considering the timeframe of trauma within the markets was what would be the motivator and catalyst for turning the dollar. The charts can provide prescient insights into the future - but they do not provide an explanation or rational for why.

Was it just the normal secular cycle bottoming out?


A newfound bipartisan ethos in confronting some of our larger fiscal issues?

Ummm - no.

No further need for quantitative easing because the domestic economy could once again stand on its own two feet?

Yes, but ultimately no - because the financial system is now so entangled and susceptible from exogenous shocks (i.e. Europe and China).

Like I have said many times before - causation is mostly a fools game left to the pundits and economists and practically impossible to determine in full faith what is causing the respective movements and gyrations of some of the markets larger forces - i.e. interest rates and currency cycles. Throw in some of Soros' theories on reflexivity to accommodate for the non-linear dimensions (the euro's relative resilience in the past 2 years comes to mind) the markets frequently take on and you will undoubtedly need the perspective of decades to get an idea of what really is wagging the dog. With that said, the primary catalyst for the strength in the dollar in the near term appears to be the unbridled risk aversion away from the euro, because the ever growing tentacles of the almost 5 year old (my timeline has the crisis starting in February of 2007) credit crisis has now threatened the European union itself. Not exactly a panacea for the bulls if your investing with any kind of peripheral vision to the rest of the system.

And yet, if investors were to only read the domestic headlines describing the latest economic data series over the last several weeks, they would likely find themselves salivating over the relatively cheap valuations that the equity markets provides in contrast to corporate profits. This is basically how I expected the domestic economy to improve in 2012 in last Spring's notes. What I did not foresee is that it would be primarily Europe that would cause the dollar to pivot and Europe that would likely cause a recession in 2012.

A contrarian will undoubtedly find cold comfort in the fact that the equity markets have for the most part retraced all of their losses since August when the European crisis magnified. The most recent economic data has provided the reflexive feedback loop the markets needed to reset the sentiment scales for the next decline. Make no mistake about it - the markets over the last 15 years have been as misleading as the propaganda in Pyongyang.

From a contrarian's perspective - you could not ask for a better sentiment and economic backdrop if you are expecting the markets to now trade away from the rising conventional wisdom that now tangibly sees the economy improving in metrics from employment to rail traffic. It will be yet another tragedy of the financial crisis that just when Bernanke could see the light at the end of the tunnel - the tunnel collapses because of forces beyond his reach.

For, if it is true to say that in essence the tragic hero is intent upon claiming his whole due as a personality, and if this struggle must be total and without reservation, then it automatically demonstrates the indestructible will of man to achieve his humanity.

The possibility of victory must be there in tragedy. Where pathos rules, where pathos is finally derived, a character has fought a battle he could not possibly have won. The pathetic is achieved when the protagonist is, by virtue of his witlessness, his insensitivity, or the very air he gives off, incapable of grappling with a much superior force. ~ Arthur Miller - Tragedy and the Common Man



Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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