Another Bubble or Deep Trouble?
The markets arrive at a critical crossroads
Is anyone else having the strangest sense of vuja de? Like, we've been here before and we sincerely wish we weren't?
One of our mainstay mantras through the years has been that we masked the disease with drugs rather than curing it with medicine. That, pardon the burp, we gave the drunk another drink with hopes he didn't sober up.
We monitored this dynamic for a long time and watched it morph more than the Wonder Twins.
Form of... dollar devaluation!
Shape of... social mood!
Through it all, we offered "the elasticity of debt" held the keys to the castle and one day, that bubble would burst, following the all-too-familiar scripts of technology, China, housing and commodities.
Except this one, we maintained, would be the MOAB (Mother Of All Bubbles).
We know what happened the last few years and, quite hopefully, Minyans were one step ahead of the crowd in their preparedness. And while we understand the most vicious rallies occur in the context of a bear market, conventional wisdom has again embraced perception that the worst is behind us and clear skies await.
As we've said before, Minyanville stands to gain from an economic expansion alongside everyone else and we hope the worst has passed. I would be remiss, however, if I didn't remind ye faithful that hope isn't a viable investment strategy and there is indeed a difference between legitimate economic expansion and debt-induced largess.
Treasury Secretary Tim Geithner asked Congress to increase the $12.1 trillion debt limit on Friday, saying it is "critically important" they act in the next two months. His reasoning, in a letter to lawmakers, was so "citizens and investors here and around the world can remain confident that the United States will always meet its obligations."
Remain confident? The actions of policymakers -- from Greenspan to Bernanke to Paulson -- have inspired many emotions, but confidence isn’t exactly at the top of the list.
A worthy Minyan passed along this blurb from Fred Hickey, who I have the utmost respect for, which was included at the end of his most excellent newsletter. And I quote:
“We may be seeing early signs of the next bubble(s). I worry that it will be even more difficult to take short positions against stocks than it was leading up to the market tops in 2000 and 2007 – as hard as that may be to believe.”
We pride ourselves on seeing both sides in Minyanville and Fred, along with my friend Bill Fleckenstein, not only nailed the front end of the implosion but were prescient enough to cut bait on their bear bets on the back end. When I read an observation like that -- his nod to the potential for massive quantitative easing -- I take notice.
I see that looming dynamic and most certainly respect it. In fact, that thought was the basis behind the first of my Ten Themes of 2009. At the risk of perceived narcissism, please allow myself to quote... myself:
"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.
This is, without question, the single biggest socioeconomic risk as we stand at a critical crossroads. On the one side, there is orderly debt destruction that will ultimately pave the way for true globalization. On the other, there is isolationism and protectionism as sovereign nations protect their interests at any cost.
If calmer heads don’t prevail and the global community takes a turn for the worse, history books will likely point to Shock & Awe as the beginning of WW3. You don’t have to agree with this assessment; you simply have to respect it.
While speaking recently at a symposium, I posed the question of whether the transfer of wealth has evolved into the transfer of risk from one generation to the next. That seems to be the modus operandi of current policy and a clear-cut path to lowering the standard of living for our children.
I suppose anything is possible, including Debt Bubble: Two Point Oh. That's what the credit markets are telling us and while I would assign a marginal probability to this outcome, I learned long ago never to let an opinion get in the way of making money.
There is a twist, however, and while it’s difficult to define, it must be factored forward assumptions. It’s not something we’ll read on a balance sheet or find in a 10-Q. It’s amorphous, ever-present, cumulative and making it’s way around the world.
The risk to the transference of obligations aren't the motivations of our policymakers but frustrated holders of dollar denominated asset classes and, more to the point, the tipping point when they'll finally cry "Uncle Sam." They’ve taken it on the chin since 2002—the greenback is down 35%—and if they could extricate themselves from this tangled 3-D web (debt, dollar, derivatives), they likely would have already done so.
Until such a time arrives, we must remain conscious of two-sided risk in the marketplace, which is precisely why I'm operating in a stair-step manner. Yes, we could continue to create credit and print currency but for every action there is an equal and opposite reaction. The bar tab is building and the question now becomes who will settle up.
“Risk management over reward chasing,” “debt reduction” and “financial staying power” remain central tenets of any sustainable investment philosophy.
This too shall pass and that remains the single greatest silver lining. For when this confluence of confusion finally clears, there won’t just be opportunities of a lifetime; there will be a pathway that defines generations to come.
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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