Active traders be on the lookout for the Wolverine Confidence number at 9:50 a.m.!
So, So you think you can tell
Heaven from Hell? Blue skies from pain?
Can you tell a green field from a cold steel rail?
A smile from a veil? Do you think you can tell?
Good morning and welcome back to the time machine. I'm sure that many Minyans looked at the title of this post and thought "Holy Guacamole, the critters are loadin' the boat!" While that may (or may not) prove to be a profitable endeavor in the near term, that's not exactly the message I was looking to send. Rather, it's an allusion to the confusion regarding the recent upside protrusion.
There's no better time to discuss potential "issues" than when the good times are rolling. Our business is filled with bandwagon types willing to offer the obvious reasoning why something has already happened. That's entirely alright if you're a reporter but not if you've got exposure in the marketplace. In other words, if your portfolio has already melted away, does it really matter which direction the heat came from?
I'm not a doom and gloomer by nature. On the contrary, I'm a relatively optimistic guy when it comes to everyday living. I will also offer that this is one trader's humble opinion and, in the immortal words of Henry Hill, "Once in a while, everybody's got to take a beating." Nobody is smarter than the market -- nobody -- and I'm humble enough to understand that I may be mistaken in my big picture thesis.
With that said, it's my contention that there are some serious potholes in our financial foundation and the "higher ups" are well aware of them. There's been a conscious effort to inject massive amounts of liquidity into the system (both domestically and globally). Call it an electoral agenda or "proactive medicine" on the part of the Fed. While this may be par for the business cycle course, I fear that they are prolonging the inevitable pill that the Minx must eventually swallow.
Our tech bubble was massive. To put things into perspective, it was roughly twice as big as the Nikkei or the Dow Jones (circa 1920s) renditions (trough to peak). While it's certainly true that both those markets saw substantial bounces in the years immediately following the pin prick, the excess capacity and residual affects of the carnage took many years to absorb. In the case of Japan, they're still probing levels not seen since the Reagan administration.
For the most part, the "hand" has likely accomplished its goal. The market is 2000 points higher than it was heading into the war and that's a fairly decent cushion. I'm not saying that a portion of the rally wasn't organic in nature -- it likely was -- but I would also be surprised if there wasn't some nudging going on. Remember, other countries have a long history of market intervention which is fine (as they announce it). When the "free market" isn't included in the circulating memo, however, the process becomes somewhat tainted.
If Elmer & Co. continue to buy time and "reflate" equity levels, who's gonna be left holding the bag when the schvitz hits the fan? The consumer is already levered up to their eyeballs and "leaning" against their property values, total debt is hovering around 300% of GDP, our deficit is ever-growing and the proliferation of derivatives are, if nothing else, an exponential force. Any number of sparks could trigger a domino effect of wealth evaporation. While we've established an ability to massage our way through the day, the tab will eventually have to be paid -- if not by us, then by our children.
I know what you're saying -- I'm likely outa my tree on this one. You may be right. As a matter of fact, there's a large part of me that hopes you are. If this bad boy starts to play out, it's not gonna be a fun environment for anybody. Even the bears (what's left of them) who are hoarding cash with hopes of capital preservation might find their net worth diminished if the U.S. dollar cracks (like some of us think it will).
Again, my goal isn't to bring anybody down and I'm certainly aware that this view will (at the very least) raise a lot of eyebrows. However, I would rather "put it out there" while the market is rallying and there's a prevalent prosperity. This isn't a trading call (and we know that our risk profile must always match our time horizon) but it's been on my mind and now it's on your screen.
Minyanville is an educational community and sometimes the best lessons are the toughest to stomach. This big picture thesis is consistent with what I've been saying for a few years but, ironically, it was better "received" when the market was on her heels. The time to acknowledge risk is when prices are higher, not lower, and proactive decisions are generally more profitable. It's not a call for today, my friends, but if with a little luck and a bit of discipline, an intelligent approach could lead to a better tomorrow.
Good luck today.
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 email@example.com.
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