Conversations With Nick & Toni
Editor’s Note: The following conversation is shared for the benefit of ye Minyan faithful. For real-time market analysis, please tune into our premium Buzz & Banter each business day.
So, did I miss anything?
After taking a much-needed respite on the eastern end of
Minyans shouldn’t be shocked to see this rough and tumble ride—we’ve been waiting for it since last summer—but reading it and living it are two entirely different dynamics.
Thursday night, while sipping an El Corazon and noshing on gnocchi at the wonderfully fantastic Nick & Toni’s, I had the pleasure of dining with one of the world’s most renowned short-sellers.
Having stayed at his
As a soft summer breeze blew gently across the patio and the Divine Ms. T sat nearby with a perfect posture, we delved deeper into our wild world.
Tony: How bout them Yankees? And quiet week in the market, eh?
Minyan Nick: It comes down to containment vs. contagion. Government officials have assured us of the former last spring but we’ve watched the latter matter in a big, bad way ever since.
From sub-prime to Level III to dilutive offerings by the financials to fed-up sovereign wealth funds, the bloom is clearly off the credit rose. Now, after a full year of pain, we’ve finally arrived at the center of the mess, Aunt Fannie (FNM) and Uncle Freddie (FRE).
This is, in many ways, ground zero—the whole magilla—their ability to maintain credit-worthiness will dictate the next leg of this market.
Tony: Pithy words for a Slacker, like yourself, who spent the week contemplating his navel on
You summed it up well, but, as always, the key to the market's riddle is not what happened but rather what is about to happen. Quite frankly it's hard for me to be convicted as the solutions have been obvious for months - in housing and credit - but the Three Blind Mice (Administration, Congress and Treasury) lack creativity and are all characterized by policy inertia.
Nick: I’m not sure there are solutions outside of time and price.
Remember, the grand experiment of financial engineering began after the tech bubble and manifested through 9/11, Iraq, the elections. There is a big difference between a legitimate economic recovery and credit-fueled growth.
The DNA of this market is vastly different than during any other time in history. Debt destruction, while painful, will ultimately allow for a sustainable foundation for future growth.
Unfortunately, it could take up to five years for that to fully flush though the system.
Toni: I agree that in magnitude the current mess is unlike anything in the past – after all the you-know-what is really hitting the Fannie.
We're currently at write-downs of $400 billion and counting – and one of the most credible credit analysts extant, Bridgewater Associates, issued an apocalyptic report last week that the aggregate losses in our world’s financial institutions might exceed $1.5 trillion.
The investment and economic worlds are today characterized by either Cassandra or Pollyanna – though I'm a skeptical short seller, I lie somewhere in-between.
Rarely does an automobile experience four blow outs at the same time on the Long Island Expressway – maybe two but never four! Similarly, hard-hitting solutions, even within the context of the massive credit mess, seem possible, if not probable. The Treasury plan to save Fannie Mae and Freddie Mac are a case in point.
Whether or not you agree with it, the perception of a government backstop might shift perception.
Nick: I agree that perception is reality in the marketplace—in fact, while I foresee risk to S&P 1050 and understand the sharpest sell-offs occur in an oversold condition, the trader in me is looking to buy into further weakness, particularly select financials, for a trade. Downside tail-risk, by definition, is a low probability affair.
That’s my short-term sense and it’s offered with the understanding that our Recipe for a Market Melt was shared less than one month and 1000 DJIA points ago, in addition to our offering a steadfastly bearish equity posture for some time.
Through a larger and more problematic lens, we must remember that we’ve shifted from a manufacturing to service to finance-based economy and that has ominous implications at the beginning of a multi-year deleveraging process.
While you’ll surely hear choruses of “the coast is clear” on the other side of the if-and-when rally, we would be wise to remember this conversation after it arrives.
Trades, as they say, are made to be taken.
Toni: Well Carnac, my crystal ball is murkier than yours – I would prefer at this point to play the role of Ed McMahon rather than Johnny Carson and be less anticipatory than I normally am.
With so many moving parts of the credit problem and solution, I have grown less convicted and more reactive in my investing. I want to let the market dictate my investment strategy in the months ahead. As to trading, it’s another story as the volatility is providing facile traders one of the greatest backdrops I can remember.
By contrast, most investors and traders should probably err on the side of conservatism by keeping positions at levels that are far smaller than they're accustomed to.
It's funny (well not so funny!) that neither of us has even addressed the headwind of higher crude oil - as if credit alone is not enough.
Nick: I agree that this is one of the most difficult investing junctures ever and for investors, capital preservation, debt reduction and financial intelligence are core components of any investment strategy.
While I understand your thinking in adapting to the market, I would be careful being too reactive as the market is a forward-looking discounting mechanism.
I’m hearing war stories on the hedge fund front and that’s causing forced flows. The ability to wait for your pitch and take a proactive (and disciplined) cut will differentiate returns. Not many people are currently in a position to do that.
As for crude, it’s the other side of the double-edged sword (with credit). While geopolitical risk (Iran) remains, I’ll again offer that this bubble will follow the path of dot.com, real estate and China. It’s always different until it isn’t.
What will be different, I believe, is the equity reaction when precipitously lower prices arrive. My sense is that, after a knee-jerk rally, it will be more endemic of slowing global demand.
Alas, that’s what makes markets my friend—I look forward to continuing these conversations. Thank you once again for your hospitality and I wish you a speedy recovery on you torn ACL!
Toni: That's probably a good stopping off place as the sun is shining and
R.P.
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.
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As historic as this weekend was, it is nothing more than a repeat of the past.
I heard the exact words that my father repeated to me when he heard then in 1928 and 1929.
It is not realistic for the taxpayers and future taxpayers to bail out private entities, whom share holders have reaped huge profits but now do not want to share the risk burdens.
A great economist once told me you can print money to buy your way out of a recession but not a depression.
We are (investors, our government and shareholders) doing nothing more than our last generation did in 1928/29.
We need to stop, look very intently upon what is happening and take what write-offs we can now afford in hopes of protecting our future.
This is not a private market problem, as in the late twenties and early thirties our Federal, State and local governments have all extended themselves beyond an acceptable and fiscally responsible level (through continued debt speculations via the bond markets) into an area that once the Federal government becomes saturated via bailouts of private companies, there will not be sufficient monetary funds to bolster the public section during this crisis.
This is the bankrupt loaning money to the drunk to buy a dead horse. The only difference is that normally, neither would be able to print their own money.
The other difference from 1929 is that in 1929, the U.S. was floating on a sea of cheap oil, plenty of power to motor everyone around the country, building dams and planting trees at government behest, and almost everyone had a garden, so didn't have to worry about starving to death without cheap-energy-based agriprocessing and transportation. Oh, and there were about 1/3 as many mouths to feed, and they didn't eat nearly as much per capita.
The best thing we could do is make the government go home, turn off the lights and put a bag over their head, taking the lobbyists, the banks, and their investors with them. There is no 'promise' ahead. The only growth will be after massive decline. The other difference between now and 1929 is that our parents and grandparents didn't have nearly as much junk in their way.
1. Bush was T.V for the briefest moment and said we have a oil supply issue. Of course he wants to drill more, but it is looking more and more to me like a real supply problem, as both agencies that track this showing little growth in World supply since 2005.
2. IndyMac was taken over by the FDIC (debt unwind).
So I agree there is a bubble in oil, but I think it is a supply shortage that only will be solved by decreased demand. And the bubble is caused by people betting that this is a systemic problem, and it won't go away.
Plus all of this oil money is simply being taken out of the economy, and sent overseas. It will just kill growth.
I am starting to believe Merryl Lynch and others that oil will go up to $200+ per barrel. It will keeps going up until demand is killed. And demand will be killed by the World not being able to afford the oil.
This will certainly slow down our economy, but I don't know if it will be enough to really start the deflationary spiral. If oil chokes the economy enough, then no one will have money to service any kind of debt. The deflationary spiral will be here before we know it.
If it does not cause a deflationary spiral, then inflation will be rampant with anything made of oil costing a lot.
A lot of this was outlined by Steven Leeb (who I at first did not believe, but now so far is on track).
I say, let's start a "Manhattan Project" sized effort to get off oil, and start new industries and technologies now.
I hope I am wrong about all of this.
This is not going to be 'just another recession'. Let that sink in.
It isn't over yet because it hasn't really started yet.
When housing values drop by 50%, when interest rates are in the high teens, when the Dow is at 5000 and gas is a dollar a gallon only then can we start the long, slow, hard slog back to rebuilding this country.
We need to rebuild our manufacturing base and start producing products that are better and cheaper than the rest of the world. This involves using what has become some very dirty language...sacrifice and hard work.
Fancy accounting tricks and government bailouts are not a solution...restoring our currency and, more importantly, our work ethic are.
This is not the 70s or even the 80s...there is no easy fix.
To paraphrase Mr. Harrison: 'Its always the same until its different'.
This time its different.
So I think it is time for the government to spend like a drunken sailor on shore leave. But this time spent on things that actually move us forward. In other words, INVEST in the country and it's future and economy. Not just silly spending. Technology, new industries, infrastructure.
The debt crisis, is like an heroin addict. The addiction has now reached the levels, where the patient can no longer take fixes of more drugs (as mentioned on Minyanville).
So there are two choices:
1. Go "Cold Turkey", which will cause deflation and be very painful.
See John Lennons song "Cold Turkey", about how he got off heroin
and for fitting lyrics.
2. Substitute methadone (inflation), and get the patient addicted to a lessor drug. At least the patient will function, and can be weaned off this drug in the future (with higher interest rates once some growth returns).
But as Mr Practical points out, we may have no choice. But I think we should try for #2 as much as possible.
The real lesson is "Don't do drugs (debt), as they will only make you forget your problems for a short while". And more and more drugs will be needed to help you forget your old and now new problems.
Enough for now, must go out and earn the bacon.
There's a reason we have an oil shortage: we keep throwing it away.
Gas is never going back to a buck a gallon. Not unless someone uses neutron bombs on the Middle East from the Med to the Pacific.
Texas-owned politicians are making WAAYYYY too much money on this clustertruck to expect them to stop buying wars.
Temperature's rising
Fever is high
Can't see no future
Can't see no sky
My feet are so heavy
So is my head
I wish I was a baby
I wish I was dead
Cold turkey has got me on the run
My body is aching
Goose-pimple bone
Can't see no body
Leave me alone
My eyes are wide open
Can't get to sleep
One thing I'm sure of
I'm in at the deep freeze
Cold turkey has got me on the run
Cold turkey has got me on the run
Thirty-six hours
Rolling in pain
Praying to someone
Free me again
Oh I'll be a good boy
Please make me well
I promise you anything
Get me out of this hell
Cold turkey has got me on the run
Oh, oh, oh, oh
I remember babysitting a drunken sailor after a port visit to Mombasa: he was completely incoherent and chained to a bed in the medical bay until getting airlifted to a nursing home in some quiet little Nor'east town.
These 'fixes' that our 'leaders' are coming up with are just like the dope that kid got in his veins. Thanks to 'free trade' products, corn, gasoline, and cheap debt, our society is a raving lunatic, foaming at the mouth and looking for more victims. You can't reason with it.
Sometimes pulling out the rug
Sometimes pushing all the buttons
Sometimes pulling out the plug
It's the power and the glory
It's a war in paradise
It's a cinderella story
On a tumble of the dice
Big money goes around the world
Big money take a cruise
Big money leave a mighty wake
Big money leave a bruise
Big money make a million dreams
Big money spin big deals
Big money make a mighty head
Big money spin big wheels
Sometimes building ivory towers
Sometimes knocking castles down
Sometimes building you a stairway --
Lock you underground
It's that old-time religion
it's the kingdom they would rule
It's the fool on television
Getting paid to play the fool
Big money goes around the world
Big money give and take
Big money done a power of good
Big money make mistakes
Big money got a heavy hand
Big money take control
Big money got a mean streak
Big money ...got ....no ......soul!
Lyrics by Neil Peart, Rush, "Power Windows"
Dan, its simple supply and demand. When the United States (and the world) goes into a depression oil and gas will be plentiful and cheap. Oil was $10/barrel and gas was $1/gallon as recently as 1998. When the factories are shut down (the few we have left) and unemployment is 30% who will be buying all this high priced gas?
People just don't get it. This isn't just a 'correction'...it is the mother of all corrections. If not this year or next then in the next decade or two. The punchline is that the longer it is delayed the worse it is going to be.
Yes, the United States still has the guns but is that really the best solution?
I wasn't saying that we SHOULD N-bomb anything, just that that is the only thing which will eliminate the conflicts and open up big enough spigots to meet world demand (for a while).
In the long run, though, fossil fuels are temporary.
Maybe we should give the government SOMEthing to do while we are learning to garden: build a pipeline to Titan for methane. They'll fall for it if it puts money in the Florida swindle coffers.
A hanging chad in November hasn't a ghost of a chance against thousands of dollars spent at the gas stations and Wal-Mart on cheap junk.
It's not like we have any actual choice about the future government: A pack of wild dogs would have a longer attention span than our representatives. Its all a show. Sure, I'll play the game, too, but to what end? Another 4 years of lies and 'berry' picking that merely scratches the backs of the corporations or pads the grant-sucking universities and 'think' tanks to do more 'studies'. Aren't we better off to just call in sick and let it all fall apart? It's not like we get paid any more than we did when Henry Ford promised 5 dollars a day in 1914.
The value of the dollar has become completely detached from the value of a person. Now, it's just a promise to print more money, not a tender of promise for someone to produce something worth a dollar.
I prefer to stay here, and hope to in some tiny way be part of the solution. Maybe I am crazy.
So we have stagflation or worse "recessiflation" (I say recession mixed with sustained high energy prices, and energy related inflation, caused by some global economies doing well enough to keep the cost of oil high)
