More Questions Than Answers

“It’s a history from one policymaker’s perspective of the events leading to the crisis, the key choices we made during the crisis, the aftershocks of the crisis, and the fight to reform the system. I hope this book can add to the historical record, help correct some misperceptions that have been entered into that record, and give a sense of what it was like in the fire.”

-Timothy Geithner

I recently started reading Stress Test, an allegedly gripping 2014 memoir of the 2008-09 Global Financial Crisis (GFC) that was authored by former Secretary of the Treasury Timothy Geithner. I say “allegedly” because I’m only partway through the [lengthy] book. And much like a number of Americans on Main Street, I don’t necessarily hold Mr. Geithner in the highest of esteems. In fact, I pretty much find him wholly intolerable, but I’m hoping this book helps alter that interpretation – on the margin, at least.

With “The Big Short” having recently debuted in movie theaters, it might appear as if I’m looking to capture any residual interest in the GFC for a few extra reads this morning. If we were desperate for readership, perhaps I’d entertain that strategy – if only for a few seconds. On the contrary, the reason I’m interested in reading and citing another book on the GFC at the current juncture is actually not because we anticipate the occurrence of a similar event over the intermediate-term; relax, we are not that bearish.

Rather, I’m interested in evaluating an insider’s take on the matter – specifically regarding the events leading up to the crisis and the countercyclical measures enacted during and after the crisis. Specifically, I am hoping to find answers to the following three questions:

 

  1. Given that “hindsight is 20-20”, was it at all possible for the preponderance of investors and [to a lesser extent] policymakers to see the crisis coming with enough clarity and timeliness to respond with far more effective investment strategies and policies than they did?
  2. Some of the world’s greatest investors have a view that a financial crisis cannot occur until a fundamental and widely-accepted belief underpinning asset prices has been disproven. Assuming this framework is consistently appropriate, what clues can we glean from the GFC in hopes of identifying such false beliefs in the current economic cycle?
  3. Were the policies enacted during and in the wake of the GFC risky enough to contribute to the relative weakness of the subsequent recovery and/or perverse enough to sow the seeds of future crises?

 

Wish me luck in discovering the truths I seek.

More Questions Than Answers - cartoon gdp

Back to the Global Macro Grind

We’ve produced a lot of thoughtful research and made our fair share of outstanding calls since our conception in 2008 – and 2015 has certainly been no exception. That being said, I don’t know if our team is collectively smart enough to truly know the answers to the aforementioned questions ex ante. I certainly am not smart enough on my own.

We have, however, produced enough thoughtful research and been on the right side of enough major market moves to be in a position to offer up relevant conjecture. Often times the best answer to any question is, in fact, a question in and of itself:

  • With respect to question #1: The preponderance of investors we meet with that push back on our #LateCycle theme cite the lack of “speculative excesses” in the real economy and/or financial markets. Are they looking in the right place? Did their process prospectively uncover “speculative excesses” in time to book gains by early-2000 or mid-2007, or are they risk managing prior crises – effectively driving forward while peering into the rear-view mirror?
  • With respect to question #2: One such belief is just that – the lack of “speculative excesses”. Just how much speculation in both the real economy and financial markets was predicated on Bernanke burning the buck to its all-time low in 2011? With the USD up +31% on a broad trade-weighted basis since then, how much of that speculation has already unwound and how much more unwinding is left to be done? Another widely-held belief is that the U.S. economy is experiencing a run-of-the-mill #MidCycle slowdown. What if it isn’t? What if Hedgeye is right in concluding that 2015 was just a classic #LateCycle slowdown that everyone missed?
  • With respect to question #3: I’m not even sure how to show this visually (suggestions welcome), but we can all agree that the post-crisis recovery has been generally disappointing and quite muted relative to previous cycles, yet equity and credit markets arguably priced in the best recovery we’ve had to date. Just how distorting has the “Greenspan/Bernanke/Yellen Put” become and what happens to asset prices if/when that factor is [perhaps forcibly] removed from the collective psyche of investors? The spread between asset prices and the economy has rarely – if ever – been this wide.

By now, I’m guessing you’ll have noticed that I haven’t been as overwhelmingly quantitative throughout this research note as most of you have come to expect from me. That was actually my intention – mostly because I want this to be the kind of thought piece you click and drag into a specially-earmarked folder to return to for review at a later date.

While I could’ve certainly been far more analytical and/or chosen a far more cheery topic altogether, I did not think that was appropriate given our team’s dour outlook for 2016. Indeed, there is actually a lot to celebrate as we conclude 2015 and welcome in the New Year.

This year was far and away the best year of my 29-year life in terms of personal growth, my personal well-being, the well-being of my family, as well as the progression of my career. Having learned what it takes to be a true team player, it’s no coincidence that this was also the best year of our 8-year-old firm in terms of revenue and earnings growth, as well as the accuracy of our research views.

But, as we often say on and around the gridiron, “forget about it; next play”. But before we evoke the “next play” clause, I do want to send a special shout-out to Coach Keith McCullough, his son Jack McCullough, Chloe Cleaves (daughter of Hedgeye Director of Sales Gene Cleaves) and their Mid-Fairfield Rangers teammates for winning their statewide youth hockey holiday tournament yesterday in Simsbury, CT.

There has been much to celebrate indeed – especially if your portfolio is over-indexed to the right side of the Chart of the Day below. No, 2015 was not a “flat-to-up” year for stocks as many strategists and pundits would have you believe. In fact, there was plenty enough dispersion of returns at the sector and style factor levels for some market participants to win big and take share in terms of AUM and/or relevance.

Please accept our sincere congrats if you’ve had a good year as well; this was not an easy year to get right. And if we continue to be right on the economic and financial market cycles, 2016 could be even tougher to risk manage.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.16-2.33% (bearish)

SPX 2003-2090 (bearish)
VIX 14.25-21.64 (bullish)
USD 97.41-99.51 (bullish)
Oil (WTI) 34.71-38.27 (bearish)

Gold 1049-1081 (bearish)

Keep your head on a swivel,

DD

Darius Dale

Director

More Questions Than Answers - ZZZ EL Chart of the Day