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Minyanville Round Table: Social, Political, Economic Polarization Threatening Recovery


Kevin Depew, Peter Atwater, Conor Sen, and Professor Pinch discuss the European crisis and what it means for the coming years.

Remember, too, the most important point, that the narrative always survives even as the mode of projection shifts. The current macro construct is like our TV set. It's how we view valuations, currencies, debt, relationships. Ditch the TV set, however, and we still have the media. We have revolutionized -- and are feeling the impact now of it -- immediate communications. By immediate I mean proximal and physical. Finance is a form of communication, but a secondary form, always subordinate to the physical, which is why it has always gravitated toward the immaterial, as if to disguise its origins, "filthy lucre." Its revolution comes next, is occurring now.

Conor Sen:
I'm in the bull camp as well, I just think we have to get some combination of a fairly massive debt jubilee/reconciliation, whack the top 1%, help out the bottom 50%, and/or break up Too Big to Fail and some of our archaic political/corporate/media/academic institutions along the way. Do I think the major US markets, let alone individual names, double over the next 10 years? Yes. But that path is going to be incredibly bumpy, and I suspect there will be major crises along the way (just as there have been over the past decade, and throughout history, of course).

Professor Pinch:
Two things:

1) Bullishness wins way more than it loses. There will be a constructive outcome from all of this, the question is how much pain is endured in the process.

2) I'm starting to wonder how significant these crises are. None of us has the context to know what it was like to live through The Banking Crisis of 1907 or the Wiemar Republic or The Great Depression. So I'm starting to wonder if it's merely a function of the instant accessibility to so much media all the time. That maybe these aren't big deals or at least not as big as we hyperbolize and pontificate them to be.

Kevin outlined it: Either these issues get resolved or not. We wring our hands and speculate and opine 24/7 these days. And why? To pass the time. We already know the possibilities. There's five chess pieces left on the board and several sequences of moves are known. There's not much left to say or add.

I know collectively we've spilled a lot of virtual ink on this. But sadly, it seems we're going to spill even more virtual ink on this kind of crap before it's over.

Meanwhile, I'm just going to enjoy the beach.

Peter Atwater:
One of the toughest conversations I had to have with my clients last year was the one where I told them that the core fundamental of banking -- credit -- no longer mattered because all of our assumptions about borrower repayment patterns were going to be trumped by social and political unrest. Rather than being the dog, the banks would become the tail.

What we are witnessing in Europe right now is the political equivalent of cash-hoarding, only today we call it burden-sharing. The problem with burden-sharing is that it acts like a vortex -- the closer you get, the more it pulls you in. And with Northern European voters demanding more and more of it, more and more of the South will be sucked into the vortex. And unfortunately, when she demanded it last October, Angela Merkel did not understand that burden-sharing eliminates time, not adds it. And to me that is what Moody's finally awoke to this week with Portugal.

Societally our worlds are shrinking. We want everything more local because more local feels safer. It's as if we no longer trust the interconnectivity that technology and the financial services industry spawned. We are "logically" becoming more protectionist.

What is so interesting to me -- and I think this picks up on Kevin's theme -- is that as I look back in history, the big bear markets/political crises always follow major advances in communication:
  • The panic of 1857 - telegraph
  • The 1907 Crash - telephone
  • The 1929 Crash - radio
  • 1970's bear market - television
  • Today - the Internet

I don't know if this is because we present value too much from valuation perspective, we get overwhelmed by interconnectedness (both systemically and psychologically) or what -- maybe a combo. But the pattern is clear.

Finally, to Kevin's point about stocks, I agree that there are and will be many opportunities. The problem that I see is that those who determine price -- the top 1% economically -- are beginning to come under siege -- socially and politically. And whereas in March 2009 politicians were willing and able to do whatever they could to help this group, today the opposite is true. (As Stephanie Pomboy pointed out in her piece this week, from an economic dispersion perspective we now resemble Jamaica!)

As I try to narrow it down, it feels to me like price stability is entirely a function of the top 1% confidence in whether they can ride this out. If they can, they stay in. If they can't, they leave. That said, the hedge fund closures by successful managers makes me think that the smartest guys have already figured out that they can't ride this out and it is better to exit sooner rather than later.

The net to me is that we have a white swan in terms of business opportunity with a black swan in price.

If the banks are the leading indicator that I think they are, from here on out, price will be determined in the Halls of Congress and in the streets of Athens (if not Detroit).

Kevin Depew has positions in CSCO; Conor Sen has positions in CSCO, MSFT;

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