“The wheel is come full circle.”--William Shakespeare
My grandfather taught me that what goes around comes around. It isn’t always pleasant, but it typically proves true.
We’re at a painful place in world history. It isn’t something one would wish for nor is it particularly pleasant to discuss.
Avoidance isn’t a viable solution. It is, in many ways, how we arrived here in the first place.
Whoever said ignorance is bliss surely wasn’t involved in financial markets.
Nobody wanted to examine the cumulative imbalances as they built but now that they’ve burst, everyone is placing blame.
Main Street is wagging fingers at Wall Street.
Wall Street is looking to Washington.
The government is passing the burden back to the population.
It’s a vicious circle that has come home to roost.
We, the people, are paying the price and our children will share the tab.
Societal acrimony is percolating, global tensions are rising and the world has forever changed.
There are no easy answers or quick fixes. Time is the arbiter of fate and price is the ultimate judge.
I’ve long said that to get through this, we must go through it.
We’re going through it now and as unpleasant as it is, it’s a step in the right direction.For Sure and Seven Years Ago
Minyanville has long warned of the eventual comeuppance, expressing years ago that the stage was set for “something entirely more depressing than a recession
.” We banged the drum
on Fannie Mae
(FNM) and Freddie Mac
(FRE) in 2005. We shared our fears in 2006
that our once proud industry would seismically shift. We wondered how the Fed would solve an insoluble problem
.We offered that the more things changed
, the more they stayed the same.We flagged the first cracks in the financial foundation
.We witnessed the writing on the wall last summer
. We pondered the invisible hand while it was still a conspiracy
.We watched the witch hunt on Wall Street
.We exposed the dangerous derivative machination
. We monitored moral hazard
.We wondered about our world wishbone
.We dissected the anatomy of recession
. We focused on financial engineering
.We got bullish into the Bear Stearns
(JPM) abyss.And then quickly offered 35 reasons why the market hadn’t bottomed
.We sold in May and went away
. And shared the short side of crude into the height of the mania
.We positioned ourselves positive into the July 16th low
.And mapped our mission across multiple horizons
. We printed Hank Paulson’s playbook
.And ran with the rally before reality set in
.We warned that September would be a month to remember
. And then remembered our friends and the lessons we learned
.Just last week, we watched Hank’s Hail Mary
.Shared that social mood and risk appetites were shifting
. Asked if The Big One was coming
. And contemplated if the contagion could coagulate
As the weekend awaited, we spoke of Russian Roulette for the financial set
. And offered war is hell as we returned to our turrets
. Perspective Directive
I don’t highlight these columns to stake claim to prophecy. We don’t take pleasure in other people’s pain and millions are in a world of hurt. Instead, I share them to provide context and clarity for those confused about how we arrived at our current condition.
To understand where we are, we must appreciate how we got here.
That’s not a quick conversation or convenient sound bite.
It’s a chronology—an evolution if you will—that built the cumulative imbalances that led to this contagion.
The end result of this situation is certain. There will be debt destruction and financial cleansing.
It’s an unfortunate but necessary process, much like a forest fire that’s powerful and scary but ultimately leads to rebirthing and fresh foliage.
Once we arrive at that destination, a sustainable foundation for economic recovery will be in place.
Our singular goal is to get there in one piece.
The path that we take to get there has seemingly boiled down to two scenarios.
The first is credit cancer that is chewing through industries and infecting sectors. This will phase through homebuilders, banks, “financials in drag,” technology, retail, credit card companies and commodities until the body is rid of disease.
The other is an outright crash; a collision where credit seizes, capital markets freeze, price discovery permeates and social mood shifts as we come to terms with the new world order.
Neither is particularly appetizing but both have a silver lining.
Acceptance is the first step towards recovery and the world has finally admitted we have a problem. Character Witness
The greatest opportunities are bred from the biggest obstacles and this will again prove true. Those who preserved capital and reduced debt will be in a position to prosper once this process of price discovery passes.
I’ll draw the analogy between our current environment and the dot.com mania. Everything they said the Internet would be eventually came to fruition, albeit not without a tech crash.
Globalization will play out much the same way when the “outside-in” recovery arrives. It will be led by China and India and be as powerful as the pundits claimed it would be.
Alas, that won’t occur without a debt crash.
Somehow over the last six years, the business cycle ceased to exist. Recession became anathema, the distinction between patriotism and bullishness blurred and profiting was viewed as a right rather than a privilege.
Minyanville was branded Cassandra for repeatedly pointing out potential pitfalls.
Government intervention, dollar devaluation and credit creation pushed the comeuppance out on the curve and we’re now paying the price.
We will eventually be viewed as Pollyanna, seeking opportunities from amongst the rubble and positioning ourselves for global growth. That seems far-fetched given the current conundrum but mark my words, this too shall pass.
Capital preservation, debt reduction and financial intelligence remain core tenets as we find our way to that point of recognition.
I sincerely hope you join me on that journey.
No positions in stocks mentioned.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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