The Blame Game
It's time to see how it all shakes out, starting with index expiration this morning and individual stocks in the afternoon.
"I ran out of gas. I, I had a flat tire. I didn't have enough money for cab fare. My tux didn't come back from the cleaners. An old friend came in from out of town. Someone stole my car. There was an earthquake. A terrible flood. Locusts. IT WASN'T MY FAULT, I SWEAR TO GOD!!!"
I was prepared to scribe Freaky Friday Potpourri this morning as per our usual weekly process. There are, after all, four witches waiting to expire and tensions are high as we edge to year-end. Indeed, confluences of crosscurrents abound as we collectively try to find our way through a most treacherous market fray.
We've walked through the risks (stagflation, consumer credit, metric malaise), eyeballed pin risk (S&P 1450), acknowledged agenda (Hank and the Central Banks), talked tape (N's over S's and the potential for an unforeseen rally). Now, it's time to see how it all shakes out, starting with index expiration this morning and individual stocks in the afternoon.
As I read the Wall Street Journal this morning, two themes begged for attention. The first was the transfer of wealth overseas as a function investment in US financial institutions. We've seen it with Morgan Stanley (MS), Bear Stearns (BSC), Citigroup (C), Blackstone (BX) and according to published reports, Merrill Lynch (MER) is in advanced talks to follow suit.
We've talked about this process for some time, offering that globalization was the rationale on the front end of the tech bubble and the sword swings both ways. We can debate the merits of the process but, truth be told, there aren't many other options. US banks need capital and sovereign funds have money. Factor in the 36% decline in the dollar since 2002 and the process seems intuitive.
The other item was one that I've been paying particular attention to as it ties into the emerging trends of societal acrimony. It is the process of pointing fingers and assigning blame for where we find ourselves in the financial continuum. We've discussed and debated both sides of Moral Hazard and, while delicate, it's an extremely important dynamic.
The headlines in today's press are focused on fraud and foreclosures, regulators and mortgage security pricing, the SEC and inflated home appraisals, pricing probes on Wall Street and fingers pointing at the Fed. Heck, the Justice Department started an inquiry into chocolate pricing practices. Chocolate! Is nothing sacred?
I'm not saying there aren't bad apples out there, or even candy bars as the case may be. We touched on these topics at the end of October when we examined the witch-hunt on Wall Street. The difference between the Kozlowski or Ebbers or Lay and Chuck Prince, Warren Specter and Stan O'Neal is that the former folks perpetuated fraud while the current culprits simply practiced a universally accepted, albeit completely misunderstood, systematic process.
I reread a column I wrote in August as it touched on some of these themes. At the risk of redundancy, I wanted to share some of those thoughts as they add contextual flavor to this discussion:
I was flipping channels the other night and caught a debate about whether "media is to blame" for the current financial shame. While I share concerns about how some prominent prognosticators conduct themselves (or, more specifically, that many folks still listen to them), pointing fingers at the media is endemic of the larger "pass the buck" mentality.
There was a witch-hunt for corporate malfeasance after the tech crash (admittedly, there were bad apples in the bunch) and there's gonna be a lynching this time as well. Take me at my word, you're gonna see blame being placed all over the Street, from hedge funds to investment banks to mortgage companies to government sponsored agencies. We're in the top of the first inning as far as that's concerned.
But it's really not that simple.
We, as a nation, cannot continue to live beyond our means for evermore without eventually paying our debts. Life just doesn't work that way. My grandfather Ruby taught me that "what goes around, comes around" and it applies in so many different instances. It applies in a way that will profoundly affect the livelihoods of our children unless we begin to assume responsibility for our financial choices.
So no, it's not the media's fault. And it's not entirely the Fed's fault although, if we took our medicine after the last bubble, we would probably be walking on the road to legitimate recovery by now. While they made our bed - and I would appreciate forthright bedtime stories as we lay in it - it is our dreams we continue to chase.
At the end of the day, no matter how we slice it, we have only ourselves to blame for incessantly consuming, pushing out our obligations with zero percent financing, extracting value from our homes through adjustable rate mortgages and allowing ourselves to be seduced by the bigger, better deal.
Market moves are characterized by three phases: Denial, migration and panic. If the debt bubble has indeed cracked, as I believe it has, we've got a long, hard road ahead. I shared a similar thought in 2000 with regard to the trading dynamic and I offer it again in a much broader context. And please don't shoot the messenger. That, in many ways, is the same conditioned behavior that continues to plague our society.
True redemption, in life, love and the markets, begins within.
Fast forward to yesterday. Larry Summers spoke at The Brookings Institution and offered strong opinions on the economy and the handling of the housing downturn and credit crisis. In his view, there is a "distinct possibility" that the nation will experience its worst economic conditions since the stagflation of the 1970's and the severe recessions of the '80's.
We've been talking about this for a long time. We noodled it in Ojai in 2005. We reiterated the concerns in Vail in 2006. Yes, there was money to be made as perception caught up to reality and I, for one, left money on the table at times. That was then and this is now, however, so rear-view mirrors don't do us much good.
The question everyone wants to know is what to do now? While historic stimuli and agendas are already in motion, there seems to be a growing chorus of "DO MORE." Honestly, I'm somewhat torn as we, the people, need to take our medicine if we ever hope to stand on our own feet again. Again, if we did that after the tech bubble burst, we would already be further along the road to recovery.
What we need to do is accept. Accept the fact that recessions are part of the business cycle and necessary for the greater good. Doug Cliggott said something to me on Wednesday that made a lot of sense. "Recessions are like forest fires, they're frightening and destructive but clear the way for rebirth." My fear is that the longer we go without that fire, the more painful the ultimate blaze will be.
I don't know where the line is drawn between emergency plans, intervention and government subsidies. I do know, however, that we better figure it out and soon. The other side of zero-percent financing awaits and we must fortify our resolve before stiffer economic headwinds arrive.
Capital preservation, debt reduction and financial literacy are viable starting points, in my view, with deep breaths, perspective and mindfulness offering equal, if not fully quantifiable, utility. This may not be year-end business, per se, but they are thoughts I needed to share as we stare through the window and watch the economic tornado form.
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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