Can’t see the Forest for the Trees
by Miss America
Originally posted February 3rd, 2011
Five years ago, when I showed up on the doorstep of Nouriel Roubini’s RGE Monitor, I was in the minority of macro economists who saw a financial tidal wave coming. For the rest of the world, including Wall Street’s financial analysts, Fed bankers, politicians, or even Moses himself, none of them could see how the contagion from subprime loans could cascade into a systemic crisis. A crisis that would then expose larger problems that would eventually lead to a complete financial meltdown.
|Similar to the subprime loans and the subsequent credit crisis, we face a new tsunami of what on the surface appears to be of minor financial relevance, but what will be the final straw that breaks the camel’s back if not politically achieved. What it is, is ownership and accountability, from a political standpoint, for ALL of the politically- fueled economic decisions being made as well as their side effects.
For investors, it would be a catastrophic misjudgment to not escalate these macro political views into the analysis of economic work. (This is starkly different from a political debate, but rather a true non-partisan skyview of policies and rhetoric and their overall effects on the psyche of the economy.) For a financial system that is running on the fumes of confidence, we need to properly analyze this new dynamic.
Quite simply put… The cross pollination of politics and economics is not only the #1 factor in investing right now… IT’S THE ONLY FACTOR!
We are not facing a credit crisis. (The printers solved that.) We are facing a confidence crisis. Papering over financial voids, changing accounting rules, socializing loses, removing moral hazards: these are the death throws of a ponzi scheme that is allowed to continue through the TBTF virus of our worldwide interrelated financial systems. The current green shoots are nothing but weeds of “well if we’re all screwed, then none of us are screwed.” When that’s the good news, what’s the bad?
It doesn’t take a rocket scientist (or a high frequency trade algorithm) to see that stocks are now all trading within a standard correlation with one another. From an analytical standpoint, fundamentals are dead. (Yes, there can be momentary exceptions, which is what keeps the addicted gamblers coming back, but from a macro standpoint, nothing withstands the tsunami.)
In Egypt right now, no one is looking at the p/e ratio of the Egyptian Company for Mobile Services S.A.E.! No one is looking at what the likelihood of the National Bank of Egypt paying a dividend! No. Instead what is driving that market is civil unrest. The results of events like these can be easy to see in hindsight. We can accurately dissect them afterwards, but the warnings are almost always unseen in forethought. I guarantee you that no current investment models place the proper risk management weighting on this tsunami.
What starts as a cultural awareness, eventually grows to an upheaval of entitlement and elitists. This is the ebb and flow as the meek try to once again to inherit the earth. (Or at least 50% of it from the top 1%) An Egyptian setting himself on fire was the spark that set Egypt on fire. To try and time our markets is the financial equivalent to dousing yourself with gasoline and hoping things turn out all right.
Five years ago, I watched people’s eyes glaze over as I explained the financial Armageddon we faced. It was a fictional story that could never actually happen. Now, two years after the collapse, understated unemployment still grows, growth is muted or faked, but most of all, faith is swaying.
The next dominoes to fall
In Europe, Eastern European countries (EECs) that grew, and enabled EU nations to leverage their own growth through funding these EEC’s, will now see the rugs pulled out from under them. As the EU has to ringfence themselves to bail one another out, there is no longer spare change to debt finance these EEC countries. These same countries who are not part of the Euro then are forced into the reality of inflation as they have to print their unwanted currencies to pay off their Euro denominated debt …and this speaks nothing of the actual size of the obligation due to the Euro zone countries that have no cross border contractual obligations to one another other than fear of contagion.
Similar to the problems of Europe, the US at the muni level will see the states run similarly dry. As this trickles to local governments who largely depend on the trickle down, we see a cascading affect on the negative outlook for economic recovery. As these funds fizzle, they cause more cutbacks, more layoffs, more mortgage defaults, less tax revenues from houses and unemployed, and a greater dependence on federal aid, which once again circle back to the taxpayers and our future generations.
For those EEC countries, they know violence. Their existence is born from revolution. Not much differentiates a social regime from a debt slave regime! For Americans, the fantasy of the past 99 weeks of paid unemployment, comes to a reality end. Those barely treading water, no longer receiving aid, and having less decent prospects for work will have to find a means to survive. While at the same time, cutbacks in police forces, education, and various other evolutionary services will be the enablers for those who have no other choice to find their means. A future without civil unrest seems a bit unrealistic.
Mark my words, in the coming two years not a single word a CEO says, nor a single dividend a company announces, will have nearly the financial importance of how society grades the current politicians who are now in control of our economy. This new social science of pricing in the psychological effects of things like truth and accountability will paramount. And being pioneers in understanding the political effects of the market are what will keep you ahead of the game.
In the meantime, if you feel you have to invest, then invest in real productive (not servicing) things that will affect the society you are part of. Invest in your health. Invest in your relationships, and invest in the future of our kids. Avoid the servicing sectors of the world. For example, Facebook, which was born in 2003/4 has no historically comparable measure. (Forget the fact that it is born from stolen ideas, affiliated with napster/music theft… and we are just handing them all of our personal information?!?!?!) This king of information in the information age, who collects advertising revenue, is service, servicing a service. The “pro’s” over at Goldman Sachs buying a 1% share, thus valuing the company at $50,000,000,000…
Well, of that $50 billion, what portion of Facebook would an Egyptian want to own right now… especially when the internet is shut down?
In god we trust? In the politicians we trust? (Who speak for our currencies, our countries and our economies?) Well, this new level of “faith economics” will have to stand up to scrutiny that leaves us potentially valuing a service somewhere in-between $0-$50billion. That’s a wide range of trust. That’s a wide range of faith!
Now do you get the underestimated risk assessments associated with civil unrest and political economics? Do you see the Tsunami of accountability?
All the best,