The Decade of Decadence
Ten years of conspicuous consumption and immediate gratification have taken a toll.
We witnessed technology stocks that rocketed to the moon crash back to earth.
We watched bipolar disorder come full circle in real estate; a manic craze followed by the depression phase.
China seemingly held the key to world prosperity before the devil of deflation brought the other side of globalization to bear.
Crude was viewed as a new paradigm until we discovered the difference between hiding spots and safe-havens.
And credit, the mother of all bubbles with total debt-to-GDP stretched towards 400%, reached the zenith of its elasticity and unwound with furious vengeance until the government saved the day and mortgaged our future.
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It was the best of times and the worst of times, with moments of moderation sprinkled in for good measure. History will describe this decade as a stretch when most folks followed the pied piper of immediate gratification, losing sight of what truly mattered and why.
That's not to say everyone transgressed but few emerged unscathed once the Age of Austerity arrived.
While the aforementioned 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, 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) created a virtuous cycle of speculative frenzy that collapsed the country under its own weight.
Does any of this strike a chord?
If familiarity breeds contempt, the percolating societal acrimony shouldn't come as a shocker. Albert Einstein once said the definition of insanity is doing the same thing over and over again 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 also 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, cumulative still, pose a fresh set of issues for the 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 rear or hear, multiply it by millions and you'll begin to imagine the enormity of the shifting social mood. While the 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," however; 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, incent those who are motivated and punish those who 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 an integral part 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 Here and Now
Over the last ten years, stateside equity returns were underwhelming at best and abysmal at worst, if the US Dollar is factored into the equation. While there is legitimate risk of yet another lost decade -- or at least, from my perch, five more challenging years -- several dynamics warrant respect as we cast our eyes on the road ahead.
The corporate bond market, which signaled the collapse in equities, is forecasting higher prices still. The sheer magnitude of injected liquidity has potentially pushed risk further out on the time continuum and propped open the window of opportunity. Enjoy it while it lasts and take it for what it is as performance anxiety percolates and investors reach for return.
Shorter-term, the recent sideways slither worked off the overbought condition as a function of time rather than price. S&P 1120 -- the downtrend from the 2007 highs and a 50% retracement of the entire decline -- looms large but the bulls may have stored the necessary energy to trigger a fresh round of short covering. Should we mount that technical hump, S&P 1200-1250 will emerge as a viable target.
While it's difficult to gauge the next downside catalyst -- sovereign debt and insolvent states come to mind -- institutions have the carry trade on in size, short the dollar and long asset classes against it. When the greenback gets its groove back, financial assets across the board will most likely face stiff headwinds. See also Pick a Side: Hyperinflation or Deflation?
Price is the arbiter of our financial fate and time will serve as the jury. When the dust settles, we'll find that we've masked the symptoms rather than cured the underlying disease. There is untenable debt around the world and a cacophony of derivatives tying it together. Keep that in mind the next time you hear about seemingly opaque issues in faraway lands such as Eastern Europe, Dubai, and South America.
If we don't learn from the past, we're destined to repeat it. That's important to remember, particularly if we hope to avoid the insanity that got us here to begin with.
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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