Politicians Playing With Fire; Will Investors Get Burned?

By Todd Harrison  OCT 16, 2013 10:47 AM

The more things change, the more they stay the same.

 


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

"Fire is a funny thing. We need it to live, cook and warm our homes, but if we don’t respect the power of the element, it can ruin our lives." 
 
I remember an article I wrote in 2007 that discussed the potential for a financial crisis resulting from how banks accounted for their off-balance sheet liabilities. The sector was a stone’s throw from all-time highs and investor confidence reflected that; the pullback was seen as transitory.
 
The Banking Index (INDEXCME:BKX) tumbled 80% over the next 16 months.
 
There is a case to be made that the financial crisis of 2008 was a once-in-a-lifetime event, a confluence of a mountain of credit coming due, accounting standards brought into question, and conditioned expectations of upside returns. It was a perfect storm of sorts; it was one of the nuttiest times in history.
 
In a normalized world, we would expect another 80 years to pass before the next crisis. Given our digital landscape—and an interconnected financial fabric tying the world together with derivatives—we can’t be so sure.  The Internet, in addition to being the most deflationary invention of all-time, has quickened the pace of everything from business cycles to mating rituals.

An eleventh hour deal that kicks the can into early 2014 remains the most likely outcome in Washington; financial positioning aside, we should all be hoping that calmer heads prevail. 
 
What happens after, however, remains to be seen; the greatest trick the devil ever pulled may have been convincing the market that Washington is the binary catalyst into year-end.
 
Once step at a time as we together find our way.

Random Thoughts:
R.P.

Twitter: @todd_harrison

Position in SPY.

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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