Market Briefing for Tuesday, May 10, 2016

An odd complacency dominates both the market's analysts and behavior; as beside a couple optimists and a small handful of doomsayers; there seems to be a lackadaisical attitude returning to the fore. We think that's an ominous sign.

While this can chug-along a bit more; we argue against being sedated while the efforts to shift or rotate interest between sectors flails and fails to restrain selling.

Today as I'm sure the media reported; the Austrian chancellor resigned; which is another manifestation of the political partisanship splits in Europe which do have a component strongly related to what many politicians call 'reverse colonization' of Europe; and today they point (perhaps unfairly) to London. In the case of the new Mayor of London, let's see if he fights extremism as strongly as he pledged publicly today, which would quiet those who mention his more fundamentalist or extreme contacts (which he says he regretted and apologizes for). Many times it is said that Islam must take care of itself, and stop the radical cancer from within, so here is an opportunity to see (in one of the world's great cities) if that occurs.

Personally I'm grateful to a reader near Munich, who has Austrian roots, for the time taken to refresh my slight recollection of why what's going on is more than the refugee crisis. Some background from me and from our member (may not be entirely accurate; but roughly gives an idea; and also highlights differences still prevalent within the EU):

Austria became a federal republic in 1918. The two strongest parties were the SPÖ (mainly workers) and the ÖVP (mainly conservatives). Combined they had nearly 90% of the votes, so you can compare it a bit with the US system. But, in the late 1920s a civil war between the two escalated and ended in a dictatorship under ÖVP. In 1938 Hitler occupied Austria; thus a non-existent State until 1945.

After the War, they were governed by the Allied Forces with the Soviets milling around (some intrigue involved) until 1955 when they got their Staatsvertrag (= state treaty). Then they founded another republic, and it basically was almost like 1918 again; at the end of the Austrian Hungarian Empire, absent Hungary of course occupied by the Soviets. Other parties were founded too, but those two parties always made up a commanding 60% to 80% of the votes.

A few weeks ago, there were presidential elections. Austria's president doesn't do much (leader of the tiny military of a presumed neutral country, known mostly for OPEC meetings and perhaps some East/West information exchanges; he mostly watches that Parliament doesn't get crazy), so the position is more rather symbolic than actually crucial.

However, the candidate of a far-right party got 35%, followed by two candidates of the left-wing; together reaching 40%. Perhaps that's the real story I'm noting. That left the two big parties SPÖ and ÖVP with roughly only 20% together. Well, Faymann, the Chancellor, is head of the SPÖ. And this defeat is the worst they ever had. As the head of his party it's somewhat his responsibility to keep them going, not to get them lose nearly 40%. This is a radical shift for Vienna, which is more accustomed to opera and Sacher Torte than it is extreme political shifts.

This shift to either the left and far-right is caused primarily by the refugee crisis. The right-wing doesn't like it and screams invasion of Europe. The left-wing for sure doesn't like the right-wing, so they go even more left-wing (familiar ring to it). Both parties grabbed voters from the political middle, which were SPÖ's main power block. (Similar to the political mess in German, or to be further afield we'd look at Turkey, which is very secular and normal in the West; but Erdogran has his support in the East.)

The point:

Actually, Germany and Austria were almost the only countries saying yes to refugees... most others don't like it or like it less now than months ago; to the point of requiring assimilation or basically losing social benefits. Some think in Austria and Germany it was mainly some sort of WW2 guilt; but that's behind at this point. Now there is real concern to end the war; repatriate those they can; and assimilate those who stay. Any other approach is actually risky to the EU.

How does that affect our markets? Easily. If confidence in Europe's stability will be eroding further (let's hope not; especially this time of year) the Euro will slide not rise; the Dollar will firm again a bit (that's our call, but not just for this reason) and if concurrently Oil prices fall, that's a prescription for lower US equities too. It also denotes that we are (to their surprise) past the point of central bank help that can do more than buttress short-term situations. Loss of confidence in both central banks and banks (in Europe particularly) and the bond issues amid those insane negative interest rate (NIRP) policies; can also be deleterious.

In sum:

The global situation remains tenuous if not precarious. The world tries to act sedated from all this; but likely can't remain numb for very long.

Liberal societies (in the tolerant social safety-net vain) like Great Britain, Spain, Scandinavia, the Netherlands and France are all becoming less so rapidly. In an Italy or a Spain, because of economic and unemployment rates so incredibly bad they can't really be compared to Northern Europe; it's even more stressful. I'll be in Spain and the UK in a couple months and reflect a bit on changes (as I have in 2 or 3 of the last four years, so it's a good perspective to have time between visits to appreciate changes; last year Barcelona was stronger and still defiant of too much interference from Madrid. I suspect it will still be the general case).

All of Europe is expensive. High minimum wage, superior infrastructure, good social welfare, high standards for many things. That costs a lot of money. Mainly the reason why Germany has more than 60% income tax, roughly 60% oil tax and 19% VAT... Other countries aren't really that much different; as I recall one of our Dutch members at dinner in Amsterdam remarking how everyone sort of gets by, but not many really thrive. The yin & yang of democratic socialism?

One more thing: We hear reports that London property prices are at the edge of bursting. We already suspected that; and think the same (lighter scale) of NYC. It will be interesting to see how a new market (property not just stocks) slide in the middle of a General Election might influence matters. Mrs. Clinton has tried to support the status quo; Mr. Trump has suggested we have a bubble (no we're unaware if he reads my missives haha). We do; but that's not the point. Mostly we see polarization and agitation more overseas than here; but it's here as well.