Off With The Spigots

Germany is taking steps to dampen the effects of excess stimulus just as global growth begins to slow.  I salute the Germans, but sense they will find they acted at the wrong time the way all governments do.  With global growth slowing, where will Germany find willing and able buyers for their exports?  The rest of the EZ is in a negative growth spiral.  China is slowing and shifting to an internal consumption strategy (good luck).  Will the professional consumers of the USA step in and buy more Krups, and C-class sedans, and hand-forged knives?

And then I find the BRICS nations are threatening to withhold their IMF funding.  Good.  I strongly dislike the IMF and all it represents.  The point is, both this action and the actions of the German government, will ensure deflation because they are both examples of how its psychological aspects are spreading into every nook and cranny of the system.  Inflation is caused by runaway credit expansion and the desire to take on that credit.  Deflation is caused by a contraction in the amount of credit outstanding.  One by one the credit spigots are being turned off.  True, we are seeing higher asset prices due to excess stimulus, but think about it: higher gas prices make you spend more on food and less on non-food.  This too brings about a change in psychology which in turn yields deflation.

I bring this up because, even though asset prices are high and could very well go higher, it is important to understand that sooner or later psychology flicks a switch en masse and the ebullience ceases.  I do not think we've reached that point yet, but the next few days may be key in telling us.

Currently I am gaming that the S&P will find its legs once more and head to new highs.  But it could just as easily break down.  This is one of those times when we won't know until it happens.  This means that the way I'm reading the pattern, the S&P could climb all the way back to just shy of 1419.15 and still fail there.  Or it could fall below my hard stop at 1386.87 and decided to turn around and head higher.

Today it looks as though 1405.67 will be taken out which opens the door to 1414 and possibly higher.  Or the market can stop dead and drop.  I'm playing both sides.  Long SPY 139 calls which I hedged yesterday afternoon (SDS).  The bias on this trade is to the calls.  I may add a different hedge today at higher levels (SH, or e-minis).

Lastly, I am probably rambling this morning because I was out late last night with @Misiu357 and @chicagosean and had a blast.  Sure, I have a headache but it's a small price to pay to hang with such cool people.  We went to Borinquen restaurant for some Puerto Rican food and I had a steak jibarito for the first time, and man was it something else.  Awesome.  It's basically a plantain sandwich, but that does it no justice until you taste it.  It was fabulous.  Thanks for the recommendation Misiu, and thanks to you both for hanging out!