Five Years After Lehman Collapse, Bears Are Endangered Species
The more things change, the more they stay the same.
Bugs Bunny and Daffy Duck famously argued about whether it was wabbit season or duck season; these days on Wall Street, there isn't much suspense: it's bear season, for those of you who can find one.
It's fitting that this week is the five-year anniversary of the Lehman Brothers collapse, if for no other reason than the stark contrast between the two time periods.
Back then, the S&P (INDEXSP:.INX) was perched at 1250, prior to the seven-month flush to S&P 666. Today, the S&P is tickling an all-time high near 1700.
Back then, the government declared martial law on the markets when it banned short-selling; these days, the markets, given the incessant liquidity-induced push higher, has done it for them.
Back then, policymakers attempted to "buy the cancer to sell the car crash"; nowadays, further upside is assumed with only the degree of gains being debated.
In the meat of the heat five years ago, we attempted to strike a constructive chord when we penned, The Upside of Anger. "This too shall pass," we offered, "We just have to go through it to get through it." We continued:
Main Street is wagging fingers at Wall Street.
Wall Street is looking to Washington.
The government is passing the burden back to the population.
It’s a vicious circle that has come home to roost.
We, the people, are paying the price and our children will share the tab. Societal acrimony is percolating, global tensions are rising, and the world has forever changed. There are no easy answers or quick fixes; time is the arbiter of fate and price is the ultimate judge.
Through that lens—time and price—the bulls can, and are quick to, claim victory. Five years after the fall of Lehman Brothers, the Wilshire 5000 (INDEXNASDAQ:W5000) the broadest measure of stocks, is up 50% while the tech-heavy Nasdaq-100 (INDEXNASDAQ:NDX) is a stunning 86% higher. (It should also be noted that the banks, as measured by the Banking Index (INDEXDJX:BKX), are currently trading at precisely the same levels as they were on that fateful autumn day).
The question remains, however, what exactly we've gone through and whether we've witnessed the cleanse that was all but upon us.
We all know how the Federal Reserve saved the day, and in the immediate-gratification world of what matters now, that will seemingly suffice. If we've learned anything over our time together, however, it’s that unintended consequences have a way of emerging at precisely the time conventional wisdom is looking the other way.
When we spoke of the cumulative imbalances in the system five years ago, we pointed to excessive debt, the interconnectedness of global markets, and toxic off-balance-sheet (Level III) instruments that were one accounting rule—FASB 157—from taking down the entire capital market system. While one could argue that modern-day banks—a tighter, more concentrated version of the Too Big To Fail institutions of 2008—are less leveraged on the aggregate, we have zero visibility on what continues to lurk in the dark corners of their balance sheets.
FASB 157 was considered politically unpalatable and was quietly swept under the rug; it hasn't been heard from since. Five years later, we actually have less transparency into the true state of our nation's banks, but more trust, as measured by the markets. And as is often the case, there is precious little interest in talking about anything that will upset the apple cart, particularly when there is so much money on the line.
We've since shared that the "other side" of fiscal and monetary policy was the bifurcation of society and the devolution of social mood—and the needle continues to point in that direction.
The old saw is that social mood and risk appetites shape financial markets—the Great Depression caused the stock market to crash, not the other way around—but a wide chasm remains between the two, at least thus far. And much like the stretch leading up to the first phase of the financial crisis, a variant view to the upside skew is being ignored, if not openly mocked.
On this, the five-year anniversary of the financial abyss, we should appreciate how far we've come yet not forget where we've been. Pundit after politician after corporate chieftain is uniform in their view that blue skies and clear sailing await; that proved true for a significant stretch coming out of 2009, but it's far from certain given the run we've had and what continues to percolate under a seemingly calm financial surface.
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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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