Monday Morning Quarterback: War is Hell
Debt destruction is necessary, but it will pass.
While this is akin to wounded soldiers setting up a hospital tent in the middle of a battlefield, the hopeful goal is to prevent further industry toe-tags.
Casualties of War
As all eyes were on Lehman and Washington Mutual (WM) last week, we highlighted the big, bad elephant that is AIG (AIG).
American International Group turned down an investment from a private equity group this weekend because it would have meant turning over control of the company.
The alternative strategy? To seek $40,000,000,000 from the Federal Reserve.
It might be “too big to fail” but a Federal reprieve is precisely the perception Hank Paulson and Ben Bernanke are trying to distance themselves from.
They may not have a choice.
The most likely scenario from my perch is the creation of a conservatory not unlike the Resolution Trust Company. The government has already established itself as the buyer of last resort and I expect that role to further expand.
The primary difference between 1989 and now is the finance-based global economy is inextricably linked together by derivatives.
The reaction by foreign holders of dollar-denominated assets will play a huge role in how that process plays out.
It is, in many ways, what we warned of as we watched our Wishbone World unfold in real-time.
The Process of Discovery
A wide chasm remains between equity markets and credit markets.
We’ve offered that one of two things must occur—either credit must improve or equities would trade demonstrably lower.
September is a huge month for credit issuance and further supply looms on the horizon. That’s not good news, particularly as risk appetites abate.
Those who traded through the Asian Contagion, Long-Term Capital, the dot.com implosion and the days following September 11th understand that price discovery is a process rather than a point.
Each was a painful reminder that there are two sides to every trade and risks to every reward.
Our current situation is the culmination those imbalances and the result of years of financial engineering designed to prolong the inevitable.
The business cycle isn’t dead and recession isn’t anathema.
Indeed, the sooner we go through it, the quicker we’ll get through it.
It’s a bitter—yet necessary—pill.
There will certainly be opportunities to prosper for those with fresh powder and preserved capital.
They will exist—and continue to present themselves in both stocks and real estate—as we edge forward through this multi-year malaise.
One Step at a Time
I will again remind Minyans that the only true medicine for what ails the market is time and price. There are no quick fixes or easy solutions regardless of which way the market trades today.
Social mood and risk appetites shape financial markets.
It’s a theme we’ve discussed for quite some time, offering that the 1929 stock market crash didn’t cause the Great Depression, the Great Depression caused the stock market to crash.
The point isn’t to precisely pontificate on the coming price action, it’s to highlight that the period was an era rather than an event. I continue to foresee a few lean years as debt is destroyed and a more sustainable socioeconomic foundation is built.
That’s the bad news.
The good news is what awaits in the great beyond.
The Internet prophecy came to fruition—everything they said the Internet would be has proved true, albeit not without a tech crash.
Globalization will play out much the same way, albeit not without debt destruction.
These aren’t easy days in the world, Minyans, but as my grandfather Ruby used to say, “This too shall pass.”
We’ll get through this and we’ll be better people because of it.
Think positive, operate intelligently and understand that it could worse.
We will find our way through this as we do all else.
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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