The financial industry: feast or famine?
"Well I'm the mellow, the fellow, the one that like's to say hello." -- EPMD, Strictly Business
The must read article of the day arrives via Bloomberg and touches on what could have been in the UK last year, as well as what still might be. It points to many of the things Minyanville first discussed in August 2007, the notion that credit of a different breed-that of credibility-was the issue at hand for the markets at large in our finance-based derivative laced global economy.
"Trust has returned, but there is too much trust and people are taking risks blindly," said Tom Kirchmaier, a fellow at the London School of Economics. "If you look at the market, people assume it is back to normal, but there are huge risks in the system."
British banks have only recognized 40% of upwards of $604 billion in write-downs from 2007 to 2010, and earnings won't be sufficient to offset this, said the IMF on September 30th, according to Bloomberg.
Michael Geoghegan, the CEO of HSBC (HBC), Europe's biggest bank, added his two pence to the mix. "The banking industry is now engaged in a period of significant transformation and change. These changes in themselves, if not sensibly introduced in a rational and unemotional way, may well trigger a further crisis in confidence at this fragile time."
I share this fare for those that care not to be a Debbie Downer-quite the opposite, we proactively pointed to this issue before the crisis began (or, at least before the point of recognition arrived that we were in a crisis). I revisit this perspective with hopes that Minyans continue to see both sides of the current ride and manage risk rather than chase reward.
As discussed during my recent interview with Steve Forbes, it's my view that the crisis hasn't vanished; it's simply changed shape as it migrates through the financial, economic and societal realms. The Age of Austerity is an era, not an event, and will arrive in waves throughout the secular bear market.
I'm not smart enough to know when or how this dynamic manifests and I certainly respect the potential for the government-sponsored euphoria to continue. The journey to financial understanding will be comprised of many single steps and we'll pave that path of preparedness together, stride by stride.
Watch the dollar, respect--don't defer to--the price action and monitor the reaction to news (more important than the news itself) as we edge through earnings. I'll leave you with an anecdotal data point from an old school tried and true Minyan who runs a retail book. And I quote:
"I'm tellin' ya, Mr. and Mrs. Jones are in a frenzy, especially after we break DJIA 10K. You should hear how desperate my clients are to be/get in the game. While I see that as 'toppy,' we're still in the 8th inning of an extra-inning game."
I certainly hope he's right but will remind ye faithful that we've got some long seasons ahead of us.
Trade, and think, accordingly.
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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