The Last Gasp Bubble of Government.com
History doesn't always repeat but it often rhymes.
I shared that thought after tech stocks dropped 40% in less than two months and then recovered half those losses the next two months. We all know what happened next; the tech sector melted 70% the next few years.
Wash and rinse, Pete and repeat; we’ve seen that sequel again and again and again. From the homebuilders (real estate) to China to crude oil, a “new paradigm” arrived. Every time was different and each offered a fresh set of forward expectations that would finally prove historical precedents need not apply
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I traded all of those bubbles thinking quite sure they would follow the path of false hope and empty promises paved by their predecessors. That proved true as the real estate market crashed, China imploded under the weight of the world, and crude crumbled just as it seemed ready to stake claim to the new world order. (See: Oil of Oy Vey)
While those bubbles hit home for many Americans, they’re hardly unprecedented through a historical lens.
There was the tulip mania in 17th century Holland as Dutch collectors hoarded a hierarchy of flowers.
The Mississippi and South Sea bubbles of the 18th century emerged in the wake of Europe’s dire economic condition.
The roaring twenties, fueled by an expansive use of leverage, led to the crash and Great Depression while not necessarily in that order.
And there’s Japan, perhaps the most frequently referenced modern-day parallel of our current course. The land of the rising sun boasted one of the strongest economies on the planet before a prolonged period of deregulation, money supply growth, low interest rates, bad real estate bets, and “zaitech” (financial engineering) creating a virtuous cycle of speculative frenzy that ultimately collapsed the country.
Does any of this strike a chord?
If familiarity breeds contempt, the percolating societal acrimony shouldn’t come as a shocker. Albert Einstein said the definition of insanity is doing the same thing over and over and expecting a different result. That most certainly applies to our financial fate but as with most journeys, the destination we arrive at pales in comparison to the path we take to get there. (See: What In the World is Going On?)
Our Federal Reserve chairman is a student of history and well versed on the passion and plight of financial excess. We’ve witnessed extraordinary stimuli intended to shift the natural course of the business cycle, one that long ago lost its way. While policymakers conceivably “saved” the system, the resulting imbalances pose a fresh set of issues for the global socioeconomic spectrum.
I’ve repeatedly offered that the financial crisis hasn’t disappeared; it simply changed shape. It--for lack of a better analogy--has gone airborne, migrating from the tangible to the amorphous, from Wall Street to Main Street, from a distant coexistence to an emerging class war. It, like most viruses, will arrive in waves and infect those who haven’t been inoculated with a steady stream of financial consciousness.
Gauge your internal reaction to every opinion you read or hear, multiply it by millions and you’ll begin to imagine the magnitude of the shifting social mood. While the recent stock market rally reflects renewed optimism that can conceivably continue the chasm between perception and reality is widening; while the tape can run, we, the people are running out of places to hide.
That’s not to say we should lose hope, quite the contrary. The greatest opportunities are born from the most profound obstacles and this will again prove true. The trick to the trade and a pathway to prosperity won’t be found by those wallowing in the “why,” pointing fingers and placing blame; they’ll be conceived by those proactively positioned, readily prepared and steadfastly aware of what lays in wait.
The leaders coming out of a crisis are rarely the same as those that entered it and the ability to add capacity into a downturn will define the winners on the other side. We must reward those who saved, incentivize those who are motivated and punish those who’ve transgressed. Until there is culpability for wayward decisions, there won’t be motivation to change behavior and rebuild society from the inside out.
Therein lies the rub of our current course; innovation and entrepreneurialism are integral parts of the solution but many of those in a position to effect positive change don’t have access to capital. While credit worthy borrowers may be a rare breed—and lowering those standards were the root of the problem—the obligations of many have muted the aspirations of most.
The Hot Tub Time Machine
I’ve maintained throughout our time together that the mother of all bubbles—debt— would be the final frontier before free market forces shocked asset classes back towards equilibrium. With total debt-to-GDP stretched towards 400%, we reached the zenith of that elasticity in 2008 and the system unwound with great vengeance and furious anger; the gig was up.
It’s hard to say what would have happened if we let the market do what the market was in the process of doing. It could have created a domino effect that toppled corporate America from JPMorgan (JPM) to General Electric (GE) to Target (TGT) to Goldman Sachs (GS) to AT&T (T); the commercial paper market was frozen, payrolls would have halted and citizens may have taken to the streets to feed their families.
We’re talking potential anarchy here and I’m not prone to hyperbole.
The alternative scenario—the one the created a chasm of discord throughout the land—was the evolution of the last gasp bubble, that of Government.com. $800 billion here, $1 trillion there, numbers so enormous they seem silly; the reality is they’re anything but. (See: Will the EU Bailout Work?)
While we remain in the eye of the storm—the relative calm between the banking crisis and the cumulative comeuppance—a simple yet scary truth remains. We haven’t cured the disease; we’re simply masking the symptoms. (See: The Eye of the Financial Storm)
I will again remind you that the opposite of love isn’t hate, its apathy. We’ve noted the lower volume during rallies and the higher traffic during the declines—a sign of distribution—but a simpler truth may be emerging, that of burnout. After four—or five, or six—bubbles and bursts, folks are both bitten and shy by the gamesmanship in the marketplace.
Perhaps that’s a function of financial fatigue or maybe it’s an intended consequence of the war on capitalism; to be honest, it’s tough to tell. As the machines take over and the secular bear chews through victims, it’s hard to blame the average American for wanting to walk away. (See: The War on Capitalism)
I’ll simply say this; the greatest trick the devil ever pulled was convincing the world he didn’t exist. While financial markets seem docile or worse, backstopped by the powers that be for the foreseeable future, the time to pay attention, remain engaged and prepare for what’s to come has perhaps never been more acute.
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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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