The Short Sale of American Icons
Social mood will play a major part in this market movie.
The leaders coming out of a crisis are rarely the same as those who enter it. That's true for corporate America and it applies to many of the folks high up on the societal pedestal.
In the summer of 2007, Minyanville openly asked if the fall from grace of well-known icons such as Paris Hilton, Lindsay Lohan, and Britney Spears was indicative of the shifting social mood and by extension, might be predictive for financial markets.
The notion seems silly on its face; the obsession with the whereabouts of a trio of social starlets couldn't be further removed from the inner-workings of Wall Street. We posited the question, however, as social mood and risk appetites shape financial markets, sure enough, the tape turned lower a few months later.
A chasm of discord has again emerged in American society. It's evident in the great divide between the "have's" and "have not's," red states and blue states, and Main Street and Wall Street. Moreover, high-profile public relations disasters such as Tiger Woods, Ben Roethlisberger, and Jesse James suggest the socionomic tide has turned anew. (See: A Conversation With Robert Prechter.)
Even Warren Buffett, the esteemed patriarch of finance, has come under scrutiny of late due to his close-knitted relationships with Goldman Sachs (GS) and Moody's (MCO). When the Oracle of Omaha, widely considered the epitome of class and wisdom, is openly questioned, you know the times they are a-changin'.
The Robin Hood Economy
In early January, Professor Peter Atwater of Minyanville offered, "As we enter the New Year, I'd recommend that Minyans review their investment holdings with the growing wave of populism in mind. I anticipate that in the year ahead, the phrase "For those to whom much has been given much is expected" will take on new meaning." (Also read 2010: The Robin Hood Economy.)
Who would have thought that five months later financial services, health care, and energy would all be considered "evil?" From the bulls-eye on the back of "fat cat" bankers to tough talk on the beltway -- the White House vowed to keep a "boot on the neck of British Petroleum (BP)" -- it's hard not to notice the forward path of the wrath.
At the beginning of this year, we warned of the "tricky tri-fecta" of societal acrimony, social unrest, and geopolitical conflict. Between the tea party uprising, riots in Greece, and the specter of civil war in Thailand -- not to mention the inevitable aftershocks in Europe -- it's safe to say that we're migrating across this most unfortunate spectrum. (See: Ten Themes for 2010.)
At what point does an industrialist become a robber baron? Or a savvy speculator a profiteer? At what point does success become privilege? The answers to these questions have profound implications for the future of free-market capitalism in an intertwined finance-based global economy. If we don't stem this progression, the bottom line might be the least of our concerns.
We often draw attention to the fact that one of the great misperceptions in financial market history is that the crash caused The Great Depression when in reality the roles were reversed. While public psychology can be manipulated for extended periods of time, free will can never be caged and the attendant social mood will shape behavioral patterns and by extension our collective financial decision-making processes.
War and Peace
There are certainly two sides to the current equation. The bulls will point to the upside window for equities given the strength in corporate credit, better-than-expected earnings and the reemergence of M&A. The bears will counter that the improvement in market fundamentals is discounted by the 80% lift off the lows and the rally has been induced with drugs that mask the symptoms rather than medicine that cures the disease.
Given that financial markets have morphed into a matter of national security, we must respect the motivated agendas of central bankers around the world. When the German Chancellor declares war on speculators and the Greek government hints at legal recourse against stateside financial institutions, we would be wise to respect the unexpected and appreciate the unintended consequences that may follow. (See: The War on Capitalism.)
Doing the math -- not only abroad but with regard to the state of our states -- upward taxation and austerity measures won't cut it, although we'll see aggressive efforts in those regards, neither of which is pro-growth. More likely, we'll eventually experience something seismic on the regulatory front (including but not limited to the ban of short sales) akin to what we saw in September 2008 ,and that's the single biggest risk for the bears. (See: Back in the U.S.S.A.)
There are two alternative forward paths: On one side, debt destruction, asset class deflation, and an outside-in globalization once the dust settles. On the other, we continue to give the global drunk another drink with hopes he doesn't sober up. The sad truth is that he one day will and our children will be forced to pick up the bar tab if we don't change our ways and soon.
As we together find our way, prices will serve as the ultimate arbiter of variant views and the friction between opinions will be where true education is found. That's why it's so important to understand the crosscurrents, respect potential catalysts and assimilate them into your risk profile.
There's no shame in admitting it's hard, there's only shame in pretending it's not. As we edge though this age of austerity, navigate the increasingly complex societal structure, and find our way to better days, I will simply offer that those who aspire to the lifestyles of the rich and famous should be careful for what they wish.
May peace be with you.
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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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