What in the World Is Going On?

By Todd Harrison  DEC 09, 2009 7:50 AM

Historic precedent need not apply.

 


We've danced around some delicate topics through the years; subjects that many didn't want to hear, much less accept.

We flagged Fannie Mae (FNM) and Freddie Mac (FRE) in 2005 before most folks blinked an eye.

We mused in 2006 that seeds were being sown for something “entirely more depressing than a recession” as the markets climbed a slippery slope.

When we offered that Wall Street was technically insolvent in 2007 -- as financial stocks were near all-time highs -- we didn’t make many friends.

We argued that an invisible hand was responsible for the unnatural bid to the tape and people thought we fell out of our tree.

When we poohed crude in the midst of the 2008 mania -- prior to the 75% oil slick -- and shared the variant view that lower energy prices would be equity negative, you could almost see conventional wisdom wince.

Indeed, we’ve made a lot of prescient observations -- along with our fair share of mistakes -- as we navigated the twists and turns of this wild world.

Class Houses

One of our mainstay observations the last few years has been the percolating societal acrimony and an emerging class war between the "have's" and "have not's."

As I wrote in my 2008 Themes:
 

“The middle class steadily eroded between the lifestyles of the rich and a struggle to exist. Structurally, my sense is that this dynamic continues. The wealthy will endure on a relative basis as the “other side” gets squeezed. What will change, in my view, is the perception of wealth. Black cards, fast cars and private jets will be frowned upon while philanthropy and other acts of selflessness will be embraced.

Channeling Kevin Depew, I continued, “If the 90s were about wealth, accumulation and consumption, 2008 will continue the mean reversion toward something altogether more austere, if not more sensible. Debt reduction and the rejection of (and guilt projection toward) materialism will continue what began in 2006 and 2007 as meditations on not just doing more with less, but doing less... period.”


I continued that thread of thought in this year’s themes when I shared:
 

"The age of austerity has officially arrived and we’ll see a steady stream of social strife as the rejection of wealth increases in size and scope. While societal acrimony began to percolate last year, this dynamic will manifest through social unrest and geopolitical conflict as we edge ahead."


Now, please understand I'm an optimistic person at heart. The mission of Minyanville is to effect positive change through financial understanding, not beat a steady drum of dire predictions.

It's not always fun -- and not always right -- but as I told a producer in September 2008 when she whispered in my ear to be "more optimistic," immediately preceding the financial meltdown, my opinion isn't for sale.

What's my point? Glad you asked; I sometimes have a tendency to go on tangents.

We're not in Kansas anymore. What was once a craft -- trading was an art, not a science -- has turned into a polarizing profession predicated on predicting unforeseen actions of government entities and the corporatocracies they protect.

This isn't sour grapes or a random rant; it's simply what is, whether we like it or not.

Of Mice and Markets

Free market capitalism; the mere mention invokes deep-rooted responses.

For some, it's a longing for simpler times when an assimilation of primary trading metrics allowed for honest pay after a long day. For others, it's an opportunity to unleash vitriolic criticism on anyone and anything associated with Wall Street. Pick a side or stand aside, people, the nation is dividing as we speak.

I believe history books may one day look back at Shock & Awe -- or perhaps, 9/11 -- as the beginning of WW3 when it was broadcast on CNN.

I'm not talking about a nuclear winter; I'm simply saying the entire global dynamic seismically shifted in that short stretch of time and the needle is now pointing towards an entirely unfortunate direction.

Societal acrimony to social unrest to geopolitical conflict; it's a trifecta that won't pay off for anyone.

I share these thoughts with genuine intentions. When I read stories about Goldman Sachs (GS) employees arming themselves with pistols so they're equipped to defend against a populist uprising, I take notice.

When I see Ahmadinejad thumb his nose at the US and Russia -- and call out Israel, which already has an itchy trigger finger -- I take notice.

When benevolent gestures and philanthropic efforts are immediately met with suspicion and distrust, I take notice.

I view the world through a somewhat binary lens. On one side, there's painful yet inevitable debt destruction that will eventually lead to a prosperous outside-in globalization. That scenario requires lower asset classes, a higher dollar and a lot of patience. The US likely won’t lead the world higher but that's all right; a little humility will go a mighty long way.

On the other side, there is more credit creation, more stress on the system and cumulative imbalances that are destined to manifest in a meaningful way. I'm not smart enough to know how or when, but the "why" is self-evident. When the next phase of crisis arrives, it will be one of confidence that could shake our socioeconomic construct to the core.

Harsh? Yeah, it is. Imminent? It doesn't feel that way, and corporate credit markets suggest it's not. Looming and ever-present? You betcha, and I'll again use the magic word: cumulative. As social mood and risk appetites shape financial markets, we would be wise to watch for the next progression of problems, be it sovereign defaults, state bankruptcies or commercial real estate.

There are, as always, two sides to every trade and the bullish bent is akin to a relay race; the government-sponsored euphoria handed the baton to corporate America (which rolled mountains of debt and issued tons of equity) and the transfer of risk will land in the lap of an unsuspecting public. Yes, the best-case scenario doesn’t cure the underlying disease; it simply masks the systems and pushes risk further out on the time continuum, perhaps all the way to our children.

Know this; it's of no benefit to me or my business to communicate this view but I’ll always give it to you straight; sometimes right, sometimes wrong, and always honest. I offer these thoughts not only to open some eyes, but also to ask for help. As we're apt to say, if you're not a part of the solution, you're part of the problem and society is simply a sum of those parts.

Now, more than ever, we need proactive problem solvers as we edge ahead through this uncertain world.

R.P.

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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 todd@minyanville.com.

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