I have a completely different Market Recap today yet there is a “method to my madness.” My views of the market at this present time are not technical driven. I believe we are upon a huge macro trade, one of the few in our lifetime where one can truly trade on the macro theme alone.
It has taken time to develop and has been a source of frustration the past few months. I have struggled to understand why this lag has been so long. I would suspect a number of readers have even labeled me as a super bearish guy. However people wish to label my investment thesis I believe my words reflect the truth something I have learned is rarely a favorite subject unless it confirms a bias.
“Men prefer a false promise to a flat refusal” – Quintus Cicero
I often wonder why shows like Mad Money or CNBC can stay on air. Although everyone talks of disgust about these programs apparently there is a large enough audience to make them financially viable.
One of the great mysteries of life is that people would rather be told a lie than the truth. Often the truth forces introspective thinking which is far too difficult for many. The thought of realizing one is not perfect is simply too painful. The truth often goes against our beliefs and therefore if we ignore it our hope is the problem will simply go away.
We can use the stock market as a perfect example. Participants are aware of the problems facing the global economy. They are aware of the unsustainable debt which has become the only source of growth yet they fail to acknowledge the risks. This has always been the case though. In September 2008 as emergency lending facilities were offered and global financials were nationalized there was still a period of time where participants bid stocks higher.
Then a switch was flipped and markets sold off. Even a $700 billion TARP capital injection was unable to stop the slide. Think of that. Participants today are long in anticipation of a Euro Bond which has been flatly denied yet the reality is for Euro Bonds to be offered the markets need to tell the EU they are needed. In other words we need much lower market prices as a way of telling leaders they need to fire the bazooka. Yet when leaders finally get the message it is too late as TARP has shown.
Readers of this site sense my frustration and voice their own as to why there is such a disconnect between the risks facing the global economy and the perception of that risk among the majority of participants. The same disconnect appeared in 2008 but today is even greater. Post 2008 market participants were also bailed out. They like to talk about how bad it was to bail out the banks but the Fed has also bailed out the market. Like it or not we are all Wall St if we trade the capital markets. We have been bailed out. Risk has been shifted to the public sector. Plain and simple.
So that human tendency to ignore reality has been strengthened via bailouts. Few truly believe 2008 can happen again. Few truly believe the actions of the central banks on Wednesday were acknowledgement that a crisis has materialized. To acknowledge the risks present in this current market means missing out on any further upside in stock prices. Once again the fear of missing out is greater than the fear of losing.
This post was partly motivated by a client letter sent out by Kyle Bass where he discusses the sovereign debt risks facing the global economy. It’s a highly recommended read but what is most recommended is simply the first page. The full letter can be found here -(Kyle Bass Letter).
“However it is clear that some previously unquestioned qualitative beliefs are hard to shake.”
He clearly discusses the psychology of this disconnect. Why markets are slow to price in risk. And why when that perception of risk changes it takes those inherent risks and makes then that much greater. He uses Italy as an example where problems were present for some time but not until investors changed their perception that overnight the third largest bond market in the world become unable to self fund.
Think back to what I said above about Euro Bonds and TARP. Participants are either long or afraid to short in anticipation of a Euro style TARP but to get such a program asset prices need to fall a lot further. But when that happens as TARP has shown it is to late to stop the slide. When the perception of risk changes from disbelief to acceptance it takes more than $700 billion in capital to stop the immediate slide.
Images: Flickr (licence attribution)
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