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Shock & Awe!

By

Now that the system is broken, what do we do?

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The bailout proposal reversed that course in one fell swoop and reintroduced the specter of hyperinflation. That will work until it doesn't, which is to say that the patience and appetite of foreign holders of deteriorating dollar-denominated assets is extremely strained.

If they scream "Uncle Sam" and debase our currency, the caveats of a fiat currency will hit home in a hurry. If they don't, the dollar will rally and asset classes of all shapes and sizes will deflate in kind.

Societal Acrimony

Social mood and risk appetites shape the tape and we've drawn analogies to periods past. The stock market crash of 1929 didn't cause The Great Depression, for example, the Great Depression caused the stock market to crash.

Despite numerous discussions on this topic, there is a profound difference between written words and life experience. This presented itself in real-time last week when The Reserve Primary Fund broke the buck, halted redemptions and denied people access to what they believed were liquid and safe capital conduits.

On the other side of the societal spectrum, a different scenario has taken shape. Between the Lehman Brothers toe tag, a shotgun wedding between Bank America (BAC) and Merrill Lynch (MER) and the dressing down at Goldman Sachs (GS) and Morgan Stanley (MS), the crisis arrived for the precious few still in a position to spend.

These seemingly separate situations introduce two very important dynamics: voluntary and involuntary thrift. The former involves people who have savings but choose not to (or can't) spend it while the latter describes people who can't afford to fill up their car and take the family to Applebee's.

Both processes are currently in play. As folks digest personal issues, it stands to reason that social tension manifests as a whole. That curbs risk appetites, which reduces spending habits, harms the economy and drives us deeper into recession. It's a vicious circle, akin almost to a bubble in reverse.

We flagged this unfortunate theme at the beginning of the year but again, living through it is an entirely different dilemma. The angst is palpable and tension is high as we edge towards what promises to be a very tenuous election.

Indeed, anticipation of social unrest may be the catalyst for the decision to transfer troops back to the States. Beginning October 1st, a military army brigade will be an "on-call federal response force for natural or manmade emergencies and disasters," the first time an active unit has been given a dedicated assignment of this kind.

Clarity Now

This is far from fun and anything but easy, but in order to get through it, we must go through it.

On the other side of the prolonged period of socioeconomic malaise, an "outside-in" global recovery awaits that will reward those who have preserved capital, reduced debt and armed themselves with financial intelligence.

While opportunities will certainly present themselves, proactive preparation and lucid awareness are far more important than the next best trade.

It's about building a future so our children will have a stable home.

It's about winning the war, both in a literal and figurative sense.

It's about seeing all sides as we edge through historic times.

Identify an appropriate horizon and sync your risk accordingly.

Understand that opportunities are made up easier than losses and the ability not to trade is as important as trading ability.

Remember that risk management trumps reward chasing and profiting is a privilege rather than a right.

Most importantly, take the time to be mindful of the little things in life, situations that you may have once taken for granted.

It should never take something bad to make you realize you've got it good.

No matter where you are, it's never too late to start.

R.P.
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.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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