Bear Markets and Holiday Reading...

After a refreshing week in the Greek Islands, I retain my view that the equity markets are poised to rally strongly from oversold levels, and having exited my short futures positions a week ago am now looking for opportunities to selectively trade a counter trend move. I've also noted the dreadful economic news flooding out of the UK in the past week and being a Dollar bull in general, I'm opening a short in Stg/$ expectation of a move below 1.80 by the Autumn. In between teaching my 3 year old to swim, I've read a couple of books on holidays which are pertinent to the current market hysteria. Firstly, 'The New Deal', a history of the Roosevelt Administration's famed efforts to combat the Depression of the 1930's. What is striking about the period is the extent to which the US 70 years ago resembled the biggest emerging markets today like Brazil and India, in terms of income inequality and the concentration of economic power. During the Depression, the top 1% of the US population earned as much as the bottom 40%, and controlled 30% of all household wealth. Agriculture still accounted for 30% of the labour force, and the deflationary spiral that began in farming spread across the industrial economy as wages and prices chased each other inexorably downwards in a crisis that in essence reflected structural flaws in income distribution; industrial and farming productivity had massively outstripped the consumption capacity of American workers. The New Deal as such was overall a failure (in fact 1937 was the worst year of the Depression and 9m were still unemployed in 1940), and only the outbreak of war finally absorbed the millions of unemployed and excess industrial capacity. Ironically, it was the reluctant unleashing of union power and collective bargaining that finally spread wealth to the masses, and by the mid 40's 25% of the labour force was unionised and millions of blue collar workers at giant corporations like GM were finally secure in their employment, well paid and ready to kick off the post war consumer boom. As for the invoking of the Depression by media commentators (and Goldbugs) as a model for our current modest travails, it's so ludicrous it doesn't even bear comment. The other book I recommend highly is 'The Yacoubian Building', a novel set in Cairo that stylishly dissects the rampant corruption, economic frustration, and brutality of life in a one party Arab police state. Having been to Egypt a few times, it rang all too true and I suspect it is only a matter of time before the burgeoning young populations of countries like Egypt and Syria explode in revolt against oppressive and economically incompetent regimes. Both books serve as a reminder that we are very lucky indeed to live in developed democracies at this time, with all the more or less effective institutions of state we take for granted. The sub prime crisis and commodity driven inflation surge that currently obsess markets are significant issues, but are worth keeping in broader perspective. And perspective is what holidays are all about.

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