Sunday, September 17, 2006

Put This on Your Radar

In my previous post I made light of Hedge Fund King Steven Cohen's prediction that the market has about a year before everything goes gunnybag.
He was growing more certain that stocks were in for a significant decline, but ventured that it was more than a year away.

The Cunning Realist complains Charles Krauthammer agrees, though not for the same reasons.

The signal [from President Bush's press conference last week] is unmistakable. An aerial attack on Iran's nuclear facilities lies just beyond the horizon of diplomacy. With the crisis advancing and the moment of truth approaching, it is important to begin looking now with unflinching honesty at the military option...

Then, without flinching, Krauthammer bravely addresses the costs of military action:

Economic. An attack on Iran is likely to send oil prices overnight to $100 or even to $150 a barrel. That will cause a worldwide recession perhaps as deep as the one triggered by the Iranian revolution of 1979...

Military. Iran will activate its proxies in Iraq, most notably, Moqtada al-Sadr's Mahdi Army... Among the lesser military dangers, Iran might activate terrorist cells around the world...

Diplomatic. There will be massive criticism of America from around the world.

These are the costs. There is no denying them. However, equally undeniable is the cost of doing nothing...

One might wonder why anyone would knowingly walk into another mideast cesspool. Krauthammer answers.
Against millenarian fanaticism glorying in a cult of death, deterrence is a mere wish. Is the West prepared to wager its cities with their millions of inhabitants on that feeble gamble?

These are the questions. These are the calculations. The decision is no more than a year away.

Whether you agree with any of these dire predictions- and I've only used two examples- is really not the point here. What matters is whether the political and/or financial media's echo chambers begin to pierce investor consciousness, which could create a self-fulfilling prophecy. And having gone for so long without so much as a 10% correction in the senior averages, complacency is certainly reaching uncomfortable levels. (Not to mention oil is tumbling partly due to a complete flip of conventional wisdom about Iran supposedly making concessions at the negotiating table.)

Mr. Krauthammer predicts IF we attack Iran, then we'll wreak ecomic havoc. Mr. Cohen predicts IF hedge funds, crowded into the same trades, get jammed in the exits, then we'll see a market meltdown.

I'm saying, IF we simply see consensus build for either one of those sorts of events, then we'll discount the hell out of it before the first shot is fired.

Put another way, John Maynard Keynes once said figuring out the stock market is like trying to predict the winner of a beauty contest: beauty may be in the eye of the beholder, but you have to bet on the contestant everyone else will consider the most beautiful. (Or in this case, the most ugly.)

Most of us prefer to focus on the strength of the economy, inverted yield curves, corporate earnings, and other variables in our comfort zone. However, especially in the case of future Nuclear Power Iran, considering the sort of increasingly militant rhetoric the Cunning Realist has railed against (here, here, and here, for example), we need to put this on the radar.


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