Is This the Most Important Juncture in History?
Investors cast their eyes towards Europe.
I would like to start today's vibe by making a statement: I want to be bullish in here.
I will follow with an old school axiom: Hope is not a viable investment vehicle.
We've dutifully weighed both sides of the market ride, and a few weeks ago offered that The Critter Compass pointed to S&P 1250 (and we got quite close). Still, we'll chew through the dew one more time, for this is perhaps the single most important juncture of the year -- if not, and I'm not prone to hyperbole, history.
The bulls will point to the strong corporate credit markets (which suggest higher equity prices despite trading off their best levels) and "The Misery Index," which has hit a 28-year high, as a contrary indicator. They'll use technical terms like "stochastics" and "put/call ratios" to support their thesis, and in a vacuum they're 100% right.
Outside the vacuum, here in the world with the rest of us, we're dancing on the head of a pin and few people seem to notice how precarious our position is. Way back when, during the panic of 2008, we spoke about the lesser of two evils, about how the government bought the cancer in an attempt to sell the car crash.
They were "successful," insofar that they jacked the stock market 100% and allowed corporate America to roll their debt and issue stock. What they also did, perhaps unintentionally, is transfer risk from the private sector to an already burgeoning public sector, and heighten tension in the geopolitical spectrum.
Again, and apologies if this is redundant, there are two paths:
- Drugs that mask the symptoms (throwing trillions of dollars at the problem), which triggered a spate of unintended consequences (such as out-sized bank profits) and lead to a tricky trifecta of societal acrimony (Goldman Sachs (GS), BP (BP)), social unrest (Greece, Egypt, Libya, Yemen, Syria, Tunisia, Spain), and geopolitical conflicts (yet to be determined).
- Medicine that cures the disease (debt destruction and/or reorganization), which will be a bitter pill to swallow (there are no easy answers) but once we traverse through that process, it'll pave the way to a legitimate outside-in globalization (the US won't lead, but will participate). This, in my view, is where the market was heading before the synthetic stimuli, and it's where the market will ultimately go whether we like it or not (the question, of course, is "from where?").
I will say it again: I want to be bullish. As a small business owner, an American, and most importantly, as a father, I want to prosper and leave a better world for future generations. The problem is, once you start down the path we're on -- once you begin to dig that hole -- there are only two option: reverse course or dig harder and deeper. We've done the latter, and folks around the world have started to wake-up to reality.
Will Greece trigger the comeuppance? I'll be the first to admit that it's a tad obvious -- remember, we flagged the sovereign sequel to the first phase of the financial crisis sixteen months ago -- but that doesn't make it inconsequential. In fact, one could argue that a conditioned complacency has evolved, as everyone thinks the guy with the bigger pockets will save the day.
We're now faced with the specter of the biggest guys in Europe keeping their hands stuffed in those very same pockets, with their sweaty palms gripping whatever fiat currency they have left. Every man for himself; a chain is only as strong as its weakest link; when the going gets tough the tough take care of themselves. There are a lot of ways to put lipstick on that pig, none of which are particularly pretty.
Here's the rub, and forgive the imagery of rubbed pork. Fitch Rating Agency is saying that even if the debt rollover is voluntary -- which has been at the heart of the issue -- it would still consider this to be a credit event, which is a pleasant way of saying "default."
And if Greece defaults -- and it owes roughly €26 billion by the end of August -- it will trigger a chain reaction not unlike what we saw with stateside financial institutions a few years ago... except global investors will be much quicker to connect the dots from Greece to Germany to European banks to US banks to BAM! Right here.
So yes, I want to be bullish but with a massively binary event in our immediate midst, I must defer to discipline over conviction, and that means no second-guessing regardless of how the market acts or reacts tomorrow.
And I'll remind myself of a simple fact: the definition of a "crash" is when once-reliable indicators no longer work, and those who are staring at stochastics and put/calls and Misery Indices would be wise to, at the very least, acknowledge that risk before they bank on a reward.
Good luck today.
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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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