Politicians Playing With Fire; Will Investors Get Burned?
The more things change, the more they stay the same.
"Fire is a funny thing. We need it to live, cook and warm our homes, but if we don’t respect the power of the element, it can ruin our lives."
I remember an article I wrote in 2007 that discussed the potential for a financial crisis resulting from how banks accounted for their off-balance sheet liabilities. The sector was a stone’s throw from all-time highs and investor confidence reflected that; the pullback was seen as transitory.
The Banking Index (INDEXCME:BKX) tumbled 80% over the next 16 months.
There is a case to be made that the financial crisis of 2008 was a once-in-a-lifetime event, a confluence of a mountain of credit coming due, accounting standards brought into question, and conditioned expectations of upside returns. It was a perfect storm of sorts; it was one of the nuttiest times in history.
In a normalized world, we would expect another 80 years to pass before the next crisis. Given our digital landscape—and an interconnected financial fabric tying the world together with derivatives—we can’t be so sure. The Internet, in addition to being the most deflationary invention of all-time, has quickened the pace of everything from business cycles to mating rituals.
An eleventh hour deal that kicks the can into early 2014 remains the most likely outcome in Washington; financial positioning aside, we should all be hoping that calmer heads prevail.
What happens after, however, remains to be seen; the greatest trick the devil ever pulled may have been convincing the market that Washington is the binary catalyst into year-end.
Once step at a time as we together find our way.
When I saw the Fitch ratings warning last —do these folks matter anymore?—the S&P (INDEXSP:.INX) futures were down 12 handles. A few hours later, they were up 12 handles. F.U.B.A.R.? Yep.
- The most bullish thing this morning? Nope, not the price —it's the cover of the New York Post. Now, I love the Post—it's one of my guilty pleasures every day—but disaster is rarely front page news before the fact.
The most bearish thing this morning? The sad truth that the devolution of social mood has clearly infected Washington, DC, and as such, the most logical sequence of events, while still the most likely outcome, is not guaranteed.
What remains unknown is how "real" tomorrow's October 17 deadline is; and while it may not be the rip-cord level for funding, whether that perception will shape reality in the markets is unclear.
Back to the futures; my first thought last night, when seeing that reversal of fortune, is that somebody (big) knows something. Personally, I would like to see a forensic investigation into whether folks in Congress directly or indirectly added exposure.
The reaction to news is always more important than the news itself. Through that lens, keep close tabs on Bank of America (NYSE:BAC) and the rest of its financial brethren as they chew through earnings. And yes, Goldman Sachs (NYSE:GS) reports tomorrow; it's always the granddaddy of that complex.
My big beta complex—which is a proxy for performance anxiety into year-end—trades firm, with LinkedIn (NYSE:LNKD), Tesla (NASDAQ:TSLA), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Priceline (NASDAQ:PCLN) higher on the session.
Meanwhile, the Russell 2000 (INDEXRUSSELL:RUT) is trading near all-time highs. Respect, don't defer.
- I attended a wake yesterday to pay my respects to a close friend who lost his sister. We often say that there is a massive difference between loss and loss, and I’m reminded of that now. Keep the market in perspective, for this too shall pass.
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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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