The brilliant historian Barbara Tuchman used that title for a book explaining the series of foolish decisions that eventually embroiled America in the Viet Nam war, and kept it going long past the time when honest observers recognized it should have ended.
It could just as easily be applied to the current impasse in the U.S. government, now entering its third week in “shutdown” mode and about to encounter (on Oct. 17) the first of what will surely be many deadlines for a default on government debt.
PATHOLOGY IN WASHINGTON
How did it come to this? The government now rarely seems to reflect – or respect – the wishes of the people. The U.S. Congress is widely perceived as institutionally, systemically, corrupt – when was the last time anyone lost money by making a career in politics? – and is almost universally despised. Head lice are more popular than Congressional politicians.
And the ability of successive minorities to prevent the majority from implementing its programs has rendered the U.S. virtually ungovernable.
We are seeing the latest mutual suicide pact unfold in Washington because the government has to rely on a series of “continuing resolutions” to fund its activities. The reason it needs continuing resolutions is because the Congress has been unable to agree on a proper national budget – arguably its most important function – since 1997.
WHAT HAPPENS NEXT?
How this will eventually play out is anybody’s guess. Our guess is that the U.S. government will not default on its obligations, despite the supposed deadline Oct. 17, and that the government, whether ‘shutdown’ or not, will continue in its condition of chronic dysfunction for the foreseeable future.
But the ideological struggle will have a continuing impact on financial markets, and one result will be to make them unattractive to longer-term investors, while at the same time providing lots of opportunities for short-term traders using fast-in, fast-out strategies.
For example, the current sharp rally in the equity markets – the S&P mini futures have gained 50 points in three days – is deeply suspicious. It looks like a classic pump-and-dump maneuver, and the first harsh word from Washington (or even the rumor of a harsh word) will send it crashing back down.
But if you were on the right side of that move, you made $2,500 per contract. Sweet … if you can keep it when the next politically-induced “crisis” hits. This is a market for the quick or the dead.
TECHNICAL ANALYSIS
Technically, we see the 1708.25-09.50 range in the S&P500 e-minis (ES) as a short-term key zone. A break above this zone will indicate that a short-term low has been posted and a further move up near the September high or higher could be in view.
Failure to move above that area puts the market at risk of a decline to the momentum support region around 1682.50 – 87.50
But this market is not driven by technical considerations. It is driven by political events which are volatile and unknown. The moves, when they come, will be very rapid and probably very large. Unless you are sitting with your finger on the trigger and watching every tick, this is a good time to stand at a safe distance and let the other guys fight.
A final word of caution for people who consider gold a “safe haven” in these troubled times: we disagree. We think that regardless of political dog fighting, gold is more likely to go down than up. This is another market where the best strategy is to stand aside until the winner becomes clearer.
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Naturus is the web-name of Polly Dampier, the brains behind www.naturus.com, a subscription service for active traders.
