Where We Were and Where We're Going
Revisiting ten themes for 2009.
As last year drew to a close, we revisited our 2008 themes and weighed them in kind.
Some of them came to fruition, others were early but most hit the mark.
When we entered 2009, we offered a fresh set of forward-looking expectations. With a conscious nod that we must stay humble or the market will do it for us, it's time for reflection as the first quarter comes to a close.
Theme 1: The Not-So-Quiet Riot
January Thought: 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.
Update: This theme continues to build with each passing day. From public outrage in response to AIG (AIG) bonuses to vandals attacking the home of the former CEO of the Royal Bank of Scotland (RBS) to North Korea threatening war against Japan if they interfere with this week's missile launch, the world is angry place.
The socioeconomic mindset remains the single greatest risk as this crisis evolves from financial to economic to social. If peaceful globalization is to arrive, the persistent trend of protectionism must give way to an orderly destruction of debt. As it stands, current policies are pointing in the wrong direction.
Theme 2: Hedge Fund Overhaul
January Thought: Early last year, I opined that 50% of existing hedge funds would eventually cease to exist. The perfect storm of 2008 will expedite that process, as will reactive regulation following the Bernie Madoff scandal.
Update: Most funds typically require 30 to 60 days notice on redemptions so the post-Madoff fallout may not fully be felt until the first quarter comes to an end. Continued migration from this sector, coupled with an abatement of risk appetites, will continue to pressure this once proud industry.
Theme 3: Seismic Readjustment
January Thought: Entering September, we offered that the disconnect between equity and credit would manifest as a car crash or a cancer. Four months later, despite lower prices and massive government intervention, the equilibrium between equity, credit, commodities and currencies remains elusive.
Update: The government introduced new methodologies to combat the crisis, from the recently announced PPIP to the expansion of the TALF and other synthetic solutions. In the process, the inherent obligations of future generations have grown at an alarming pace.
The most intuitive "release valve" for these imbalances is the measuring stick that denominates financial assets. Recent calls from China and Russia to dump the U.S. dollar as the world's reserve currency speaks to the growing unease of foreign holders of dollar-denominated assets.
Theme 4: Motion and Movement
January Thought: My sense for 2009 is that-all else being equal-we'll see wild movements and a wide range, perhaps with S&P 600 as a nadir and one (if not two) 20% bear market rallies filled with false hope and empty promises.
Update: A vicious downdraft began the year and took the tape to S&P 666, following by the first of our perceived 20% lifts. While we've seen a rush to judgment that a new bull market has begun-and technically, that's true-I remain of the view that it's cyclical rather than secular.
Theme 5: Pension Panic and Puny Munis
January Thought: Unfunded pension plans and bankrupt municipalities should jockey for mindshare in 2009 as the financial crisis evolves. The government will fight fire with fire - perhaps allowing citizens to withdraw from their retirement accounts without tax penalties - but that solution is transient at best.
Update: The former chief regulator for the $2.7 trillion dollar municipal bond market acknowledged last week that the governing board failed to save taxpayers upwards of $1 billion of losses due to opaque financial products, according to Bloomberg. My sense is that this represents the tip of iceberg.
On the pension front, it recently came to light that the Pension Benefit Guaranty Corporation-the federal agency that insures the retirement funds of 44 million Americans-departed from its conservative investment strategy and piled much of its $64 billion insurance fund into speculative investments just months before last year's market collapse.
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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