The first of many Black Swans took flight this week in the shape of the simmering Dubai Debt Crisis. It appears that it's not enough to build fancy high rises, shopping malls, and man-made islands, there's this "sustainable economy" thing that is also important to the overall prosperity equation.
Although as I wrote here I am not a big believer in "Black Swan Theory", it seems that Wall Street has a way of constantly being caught off guard by these pesky critters. The problem is that most on Wall Street suffer from a distinct form of myopia, that I will hereby label "Bonus Relevancy Syndrome" characterized by an incapacity to absorb or even care about any information not deemed relevant to the current year's bonus. Therefore, with only a handful of weeks left in the year, for many hedge funds, their attention deficit disorder has now shrunk to a mere ~22 trading days.
This set-up bears out several observations:
1) The average hedge fund manager is as strung out and giddy as a crack addict coming off of a 9 month binge. Fund managers overall were not well paid last year (by their standards) and many funds are just getting back to their high water marks. The high water mark is the crucial level that must be exceeded in order to allow bonus payouts. Considering we have just had one of the best 9 month rallies in the history of the stock market, suffice to say, the "boyz" are praying with all might that the market stays up between now and 12/31.
2) Yet not withstanding these at-risk bonuses, the technical indicators are all (continuing to) line up on the side of bullish complacency: Vix at a year-low 20 on Wednesday (90 last fall), ISE call/put ratio above 175 twice last week, Investors Intelligence Sentiment Index showing only 17% bearish sentiment (lowest level in several 5 1/2 years) i.e. the dry tinder is set, all we need now is the match...
3) The Dubai Debt Crisis is only one of MANY looming Black Swans (I know, by definition, Black Swans are not supposed to flock...) getting set to take flight directly in front of the metaphorical Wall Street 787 DreamLiner which is straining fiercely toward its golden 12/31 destination. Beyond Dubai, there are many other sovereign and corporate financial participants on the brink of default (Latvia, Hungary, Bulgaria, Ukraine, Spain, Greece, Ireland, UK, Japan, etc. etc. etc....)
4) Wall Street's current short-term bonus fixation combined with multiple looming INTER-LINKED geofinancial crises could create a potentially highly volatile shit storm at a most untimely juncture. For while the dollar carved out a new marginal low against the Euro on Wednesday, the dollar then proceeded to SCREAM higher vs. the Euro on Thursday when news of the Dubai crisis hit. Stay tuned for future events, because the markets will not withstand an abrupt unwinding of the dollar carry trade and the resulting flight from risk that would ensue...
How did gold perform as a promised safe haven you ask? Well, gold promptly tanked $50 on Thursday on news of the Dubai crisis (recovering somewhat on Friday). I will say it again: at this juncture, gold is not a safe haven, it is a greed haven that will get violently unwound along with the rest of the anti-dollar trade.
What say you? Would a December panic collapse off of a 666 March low in the S&P be a hellatiously sinister event, or just a burnt offering to the God of Financial Justice (assuming such a God even exists...)
