|Freaky Friday Potpourri: Time Out for Truth!|
By Todd Harrison AUG 14, 2009 8:10 AM
A call for lucidity on the path to progression.
The phrase "short squeeze" is being tossed around a lot these days and a few folks have offered that the action off the March lows has been a function of that paper chase.
My initial reaction when I heard that, said in my best Matt Hooper voice, was "This isn't simply a short squeeze and it wasn't a propeller, it wasn't a corral reef and it wasn't Jack the Ripper, although, at times, it's felt that way." (pause to splash water on my face) "It was a coordinated effort from every corner of the earth to stave off a cataclysmic collapse."
While that's true, I will say is that we must appreciate the role the short squeeze played in this process. Remember, the conditional elements of the crisis—the same ones we've been monitoring long before the wheels fell off the wagon—very much remain in place, namely a derivative machination that is somewhere between $500 to $700 trillion dollars.
Lemme say that again lest you're speed-reading. $500 to $700 trillion dollars.
For purposes of this discussion, my point is simple: The sword swings both ways. Just as an unforeseen pebble such as American Home Mortgage triggered a tsunami of Biblical proportions, the government dumped boulder after boulder into the water until they turned the tide. Once they did, that leverage reversed course and caused a massive melt-up.
An outsider looking in would say, "So what? Turnabout is fair play and the bears got what they deserved."
While we pride ourselves on "seeing both sides," I'll humbly offer that argument is flawed. The imbalances that preceded the financial crisis have been cumulatively building for many years. The fact that they reached a point of maximum saturation was simply a matter of time.
Insofar as that's true, our current course is all the more troubling. I don't profess to know the timing of the next comeuppance and recently delved into both sides of the ride in, "Another bubble or deep-rooted trouble?" What I can say, with as much certainty as I've ever said anything on Minyanville, is that it's not a question of if this will come home to roost; it's simply a matter of when and how.
Listen, I have no agenda here. While I've got short-side (defined) risk on, this isn't me talking my book or trying to sway your opinion. Win, lose or draw, my P&L is a pimple on an elephant's arse. I'm talking about something entirely more profound, something that is generationally significant, a dynamic that will shape the course of world history.
I started Minyanville with one mission in mind: To effect positive change through financial understanding. You don't have to agree with me—heck, you can take the other side of my bets—I'll simply ask you to remain open-minded to what's being said by the mainstream media, take it with a grain of salt and understand that this could play out over weeks, months or years.
I'm not smart enough to know, my friends, but the fact is I care.
While on the topic of magnitude, I'll take a moment to quote the always sage Mr. Practical, who offered these thoughts on the August 7th Buzz & Banter:
"Hello Minyans! I don't have a lot of time today to talk about markets...the movers are keeping me busy. I have moved back to the USA, not because it is the best place to be, although it is a wonderful country. But because I expect the dollar now to be the strongest currency (more on this later).
The amount of deflation, or debt reduction, is beyond real comprehension. The derivatives market, where a good deal of the debt is stuffed, is still $600 to $700 trillion in size. That notional amount does not reflect the overall risk, but a slice of it. The risks of debt are embedded in interest rate swaps and CDS, but one has to look at mis-markings not notional.
Look at it this way, if the derivative market is mis-marked by 1% (that's conservative), that is $6 trillion in losses that the banks are worried about. No wonder they are holding so many reserves at the Fed. No wonder the Fed is still monetizing slowly. Those auctions are going well because the Fed is telling the primary dealers they will buy treasuries outside of auction. The recently bought about $7 billion from primary dealers once the auction was complete.
We had a great non-farm payroll number that had the market excited and every bear covering their shorts. A deeper look into the numbers sees very heavy seasonal adjustments by our friends at the BLS, adjustments that should make the next few NFPs much worse as they are unwound.
Most of the jobs, about 100,000 additional are coming from stimulated auto production and unexpected census hires. Nothing to hang your hat on. And that better unemployment rate is exclusively due to people falling off the employment rolls permanently.
The economy remains mired in a deepening downturn despite what the media and government are cheering about. Risk is very high."
Now, I've known Mr. P for 20 years and will tell you, unequivocally, that he is the single best risk manager I've ever known. He, too, has no ax to grind other than expressing perspective gleaned from many years of experience. Neither of us is saying the S&P can't jump another 100 or 150 points--given the stakes in play and the ever-changing rules we play by, we can't rule anything out.
I—we--are simply saying, as we have for many years, to think for yourself, ask "why" rather than "what" and operate through a much broader lens of financial staying power.
I've said it before and I'll say it again, there will be profound opportunities on the other side of this. Franchises. Dynasties. Fertile ground and spectacular pathways to prosperity. The leaders coming out of a crisis are never the same as the leaders that enter it. We spoke about this in The Great Expression and it very much remains true.
As Minyans, we take great pride that you'll be among those who capitalize when this prolonged process passes and hopefully, quite hopefully, we'll be able to enjoy the journey along the way.
Name and word; honesty, trust and respect. Those aren’t marketing tools; they're the fabric of who we are, what we do and how we do it. And by we, I mean us.
Thanks for listening; for I know the most important messages sometimes aren't easy to hear.
And breathe, for patience and perseverance will serve us in good stead.
Answers I Really Wanna Know...