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Saturday, May 21, 2011

Market Thought... no boom-boom?

Well, the world didn't blow up. Despite the world seeing its fair share of fucked up disasters this year already. I happen to enjoy life, and a functioning society. But going with the end-of-world theme, lets look at real viable systemic threats that can take us one step closer to a non-functioning society, which would equate to the end-of-the-world, at least as we know it.

1. An abruptly restructured European debt. (Or the PIGS kicked out of the Euro.)

Greece alone may not cause the crisis, but as the dominoes fall, the combination would. A credit crisis would happen, and the financial system would have to get saved again. Fortunately, Portugal got the loan this weekend, Ireland is making progress and Merkel voiced her support to all of Europe (ie Greece).

The powers-that-be seem like they are doing everything in their power to prevent a systemic issue, and I think they will succeed.  In the mean time, mid-to-late June we will see the progress report on Greece.

2. The debt ceiling not being raised.

Sheila Blair, Tim Geithner, Jamie Diamon, Warren Buffett and many other prominent figures did not mince their words, not raising the ceiling will be catastrophic. The political tit-for-tat is childish.  But really, does the current political leadership want to be the 'assholes' that cause America to default on its payments, remove its triple A status and unquestionably accelerate its decline from the economic status we currently benefit from?

Well, who wants to be the asshole?

I do not think any of the (relatively) smart leadership wants to be the asshole, so I think it will be raised. They have until Aug 2nd to decide not to be the assholes.

3. Arab Spring.

An entire region of the world is shifting toward a truly democratic way of life. It is quite beautiful to witness the people taking charge of their destiny, but the images and stories make it hard to watch.  The ton of uncertainty caused the market to flat-line in late Feb as people demanded more in Libya.

Syria does not look to be budging anytime soon, but Yemen hopefully shows promise. Hopefully progress is made to unleash the true potential of the regions people, as democracies usually do.

The only time this will pose a very real threat is if protests Saudi Arabia cause oil disruptions. The threat of this can cause shocks to the system. (But they seem to have things under relative control. Hopefully, the Monarchy is smart and gradually shifts control toward a Parliamentary system, similar to Great Britain.)

4. Natural Disasters.

With the market funk caused by Libya, the nuclear issue in Japan caused the market correction in March.  They are still dealing with cracks in the reactors, and this weekend we got two new ones. The volcano in Iceland erupts again, and another quake off Japan's coast.  These look to be less severe, and hopefully they say that way.  Lets not forget about the floods and the tornadoes in the south/mid west.

No one can control or foresee natural disasters, relatively speaking. We can only be prepared for the worst, and wish/pray for the best.

Four issues that cause macro-economic uncertainty are a lot for a given period of time.  Especially when the first two are in the hands of political leaders.  The global economy is flexible enough to with stand a level of geopolitical turmoil and natural disasters.  I can even say it is flexible enough to absorb some political stupidity.  But there is only so much it can take.  Some of the uncertainty has to be removed.

Right now, the very low multiples are suggesting we will enter a new recession, even though the 10yr is not. (Or the low multiples are a tremendous buying opportunity for a lot of names.) IMO, the only way we enter a new recession is if there is a systemic hit to the system. I only see two legitimate reasons for that, the first two listed above.

So, who wants to be the asshole? We will see in June and by August.


  1. Don't know if you saw this, but I thought it was an interesting twist on the argument. I don't like the idea of playing "chicken" with the debt ceiling either, but at some point, there has to be a recognition on the part of politicians that the can has been kicked down the road far enough and serious negotiations must take place.

    It was discouraging to me after Paul Ryan's proposal, that Obama opted to ridicule and politicize rather than offer his own ideas on how to stop the growth of entitlements.


  2. Guess it would be helpful if i posted the link! Dan

  3. I agree with the gist of article, and put our fiscal house in order. But the debt ceil should not be apart of that discussion. I am glad it sheds light on the spending, and needed increase in tax revenue. But for the function of a market analysis, I want to know what the outcomes would be to properly trade it.

    last week, This Week had (what I thought to be) a good discussion about the ceiling.

    what struck me to most was how Sheila Blair had the need to stop the rhetoric, and make it clear the domino effect. (its min 10:40-11:24) The sincerity in her remarks took me by surprise when I was watching it last week.

    I know of Druckenmiller, and I know he is a smart guy, but the main crust of his argument boils down to the fact that "the market knows the difference between a real default and a technical one".

    I take serious issue with this. Intelligent people know the difference. But the market is not just played by intelligent people. It has to deal with the imitators and idiots as well, and there are plenty of them out there.

    Also, the market is only as efficient as leverage allows them to be. The general consensus is that the market is acting on the whims of the commodities market and the Euro. Declining commodities are causing the SP500 to go down. Despite the fact that declining commodities in the presence of mild economic growth is very good for equity profits. The market is acting pretty stupid, but 'intelligence has nothing to do with the mechanics-of-the-market.

    And the mechanics-of-the-market is what Blair touches on as well. With a technical default, the rating agencies may be forced to downgrade the treasuries (considering we are already on negative watch), forcing trillions of dollars worth of money market funds to sell, causing a horrible domino effect.

    We should not 'see-what-happens' with this one. If they don't raise the ceiling, all my positions will be sold, and I will take out a heavy short position on the market. Because a massive decline will begin the first trading day after Aug 2nd.

  4. I don't think it will go as far as an actual event of default, but I see nothing wrong with using the ceiling as a negotiating tool. You want to raise the limit 500B? Fine, show us where you're willing to cut 500B over the next X number of years. There simply has to be an honest attempt at some resolution to the spiraling mess that's been created.

    Example: I'm retired, 68 years old and I pull $150 to 200 grand a year out of my IRA. My wife and I also collect another $2,000 a month in Social Security. I had a kidney transplant two years ago (billed at $150,000) and Medicare paid every penny of the cost. Medicare also paid 100% of the cost of my dialysis for 3+ years prior to transplant (about $80,000 a year according to my nephrologist). I never saw a bill. As part of my continuing care, I've had bone scans, a parathyroidectomy ($14,000), monthly blood draws, immunosuppressant drugs (to the tune of $1,000 per month) all paid for, with no hassle or paperwork, by Medicare. Shouldn't I pay SOMETHING for all this? I can certainly afford, at the very least, a portion. The average senior pays $150,000 into Medicare and gets benefits of $450,000 in benefits over his/her lifetime. Can you say unsustainable?

    What does it take to get these clowns to have a serious discussion about resolving the budget mess? I'm OK if they hold the debt ceiling hostage in an effort to find some meaningful way to reduce the deficit.

  5. I am just glad your okay :)

    People will use whatever tools/weapon they have to win a fight. And since the debt ceiling can be used, it will be. That doesn't surprise me, and I am glad it is showcasing what needs to be done to the deficit. I like the concept to explain where the cuts or added revenue will come from for the added debt.

    I just hope the politicians know when to 'say when', and constructive changes are made.