“When you strip away a country’s or an individual’s right to fail, you take away their ability to succeed. Let the natural forces of accountability work for all.”
-Stuart Witt (Mohave Air & Space Port, 2009)
I thought this was one of the more American statements I have read in a very long time. This is what this country is built on – American capitalists taking on tremendous personal risks in search of earning the ultimate reward - their economic freedom.
While we still have to trudge through the vortex of the manic media’s negative groupthink (a Herculean task), my sense is that we may be in the midst of crossing the chasm of peak fear associated with the obvious.
What is the obvious? The #1 and #2 stories on Bloomberg this morning are about Wall Street bonuses (UBS and CSFB); Obama finally pulled the rip cord and confirmed last night that he is of the view that we should let more banks “fail”; and Vikram, “The Pandit Bandit”, is on the tape confirming that Citigroup has “obligations” to the US government…
When the obvious morphs into consensus, you need to be considering the other side. As the “improbable” becomes more probable, I start to get invested closer to those improving probabilities… there’s no hope in that – it’s all process.
Yes, everything has both a time and a price. If you do not respect those two critical factors, you are going to underperform the market in 2009. Right here and now, “investing for the long run” has revealed itself as a narrative fallacy that supports asset management fees and your headaches. Every day this behavioral game of expectations changes, and so does the math alongside it. This game is both global and local. You need a repeatable process to understand it.
Locally this morning, alongside Obama’s now predictable and populist rhetoric, we have the “Bandit’s” sinking ship acknowledging that Citigroup will issue $36.5B of that US government issued TARP. Over 70% of those moneys, allegedly, will be issued in the form of American mortgages. After everyone and their brother freaked out on yesterday’s Senior Loan Officer Survey that quantified the shockingly obvious revelation that banks weren’t lending their TARP – guess what? They’re going to be forced to start lending their TARP!
This expansion of lending is positive for the immediate term “Trade” in this country, as over 70% of America’s economy is driven by consumer spending. Sadly, without credit flowing, this economy doesn’t work. Trust me, Obama has new rooms full of groupthink economists who can figure this out – this is the math.
Alongside forcing Citigroup to behave like the Government Sponsored Enterprise that they have become (no more $50 million dollar planes Mr. Parsons), Congress has effectively summoned all of the bankers who received TARP moneys to testify in front of the American people next week. As my long time hero of investigative reporting, Tim Russert, would have said, “This is BIG.”
Finally, the rhetoric associated with Obama’s fanfare will be tested and tried. Transparency, Accountability, and Trust – that’s been my mantra since I left Carlyle at the end of October of 2007 – now we’re going to at least see the whites of the eyes of those who haven’t fled these horse and buggy whip investment banks. Make no mistake, they will be lending soon, at a bank near you.
Everything that matters in our macro models happens on the margin. While levering up the American consumer will end badly, in the immediate term what I think it should do is provide the impetus for our almighty US Dollar to stop going up. As we transfer the bankers’ toxic waste onto the lap of America’s balance sheet, the other side of that immediate term “Trade” should be a weaker currency. Whether we like the sound of this or not, the only way the US stock market stops going down is if we break the buck’s upward momentum.
The US$ is up again early this morning, and the US futures are down as a result. The US$ is already up almost 6% for the year to date, and the US stock market is down -8.6%. Take that US Dollar down by 300-600 basis points and let me know how what feels in your portfolio. Yes, that would be inflationary… and the only way out of a deflationary spiral, in the immediate term, is to “re-flate”.
Globally, asset classes from Chinese and Brazilian stocks to Gold are “re-flating.” It works. China’s stock market tacked on another +2.4% overnight, taking the Shanghai stock exchange up to +13.2% for the year-to-date. No matter what your views on capitalism vs. communism, at this stage of the global socialization of losses this Chinese leadership march is impressive. Cutting taxes and interest rates, while you plug in the stimulus afforded to you by the virtues associated with cash on your balance sheet works. No, this is not “Chindia” – this is China.
Australia moved to cut interest rates by a full 100 basis points last night to 3.25%. I think Glenn Stevens and the Reserve Bank of Australia has done an admirable job – unlike the politicized and polarized Greenspan Federal Reserve, this man actually saved some of his bullets. While I have not yet bought back a position in Australian equities, they are getting more interesting. They, after all, are geographically located very close to the guys with the cash – China – and they should participate in any global “re-flation” trades that occur.
While hope is not an investment process, it is what we kiss our children good night with – it’s a global virtue. At this stage of consensus’ peak pessimism, it’s actually all we have left. We have to hope for “re-flation”, because without it … our assets continue to deflate. In the meantime, we need to keep allocating capital to the winners as we re-regulate and take it away from the losers. At the end of the day, we need to let these “natural forces of accountability work for all.”
My downside target for the SP500 is 810, and I will be getting invested again on market weakness. Patience will pay in The Year of The Ox.
Best of luck out there today.