Wednesday's sentiment and the market's recent price action has made me step back and stroll down memory lane for some context. The increased debt in our society is very destabilizing even though when it is being created and put to use, it has the appearance of tranquility, and masquerades by the ever so juicy bullish nickname of liquidity. These debts and imbalances are cumulative and must either be paid off,defaulted on, or monetized in the case of a nation.They have not been paid off and some have defaulted but the size of the debt has increased dramatically, and terms have been extended.
Risk - General: Probability or threat of a damage, injury,liability, loss, or other negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through pre-mediated action.
Manifest – 1 : readily perceived by the senses and especially by the sight2 : easily understood or recognized by the mind: obvious
In 2006-2007, perhaps earlier it was clear to me that the market and the economy were going to be hit with a very high magnitude earthquake. The Fed has always been relieving the pressure of any tremors with low rates and bailouts, so that by this time the pressure of debt accumulation was off the charts -literally. Capitalism's destructive side had been banished, and the nation would know only good times thanks to Central Planning. Who is against that? There were so many economic first's that exceeded all of our previous historical extremes, including the Great Depression era,such as CEO pay in relation to the average worker, and debt to GDP ratio's. I had a nice basket of puts on Nova Star,New Century, Countrywide, WAMU, etc….. but I was looking for the glue factory that kept all of this debt together. I stumbled upon Ambac financial and read the following on yahoo finance ABK profile –
"Ambac Financial Group, Inc., through its subsidiaries, provides
financial guarantees and financial services to clients in the public
and private sectors worldwide. The company operates through two
segments, Financial Guarantee and Financial Services. The Financial
Guarantee segment provides financial guarantee insurance and other
credit enhancement products in the U.S. public finance market, the U.S.
structured finance and asset-backed market, and the international
finance market. The Financial Services segment manages interest rate
swap and investment agreement run off businesses for municipalities and
other public entities, health care organizations, investor-owned
utilities, and asset-backed issuers."
I suspected I had hit a future Grizzly Bear junction, but I am only a non-pro -"don't try this at home"- type, with no Street connections. Looking back you must admit that profile is a scream. I A quiet, off the radar, multi -billion market cap black box! I bought Jan08 85,70 and 60 puts from AUG 06 until Feb 07 at prices from $1.45-$2.90. Nothing huge as I had no conviction, just a hunch. By the spring of 07 I was stupefied (extremely pissed) that the market had not priced in what I was seeing.
Then I read this – sounds like today.
"I haven’t had much to say lately. Just more of the same. With money
growth my firm estimates at an egregious 14% (compared to a falling GDP
now quoted in the 1-2% range, we can safely say that the money is
becoming more and more anemic in producing growth), no wonder
speculation in stocks and other assets is unabashedly high, along with
risk. But I don’t confuse risk taking with value and I hope you don’t
either". "I have suspected for a long time that government
“intervention” or “participation” (or whatever you want to call it) in
private asset markets is as high as it has ever been. The markets are
just not acting “naturally” to me. They seem orchestrated in many ways.
Why? With the levels of debt in the system (we have no historical
reference), central banks must keep asset prices rising so that the
debt doesn’t look so bad on balance sheets. To keep the public and
corporate sectors borrowing, they have to have rising collateral.
Governments are becoming a larger part of the real economy with their
debt creation. Free money means lower returns for everyone." – John Succo of Vicis Capital May 17th 2007 full text is here http://www.minyanville.com/articles/5/17/2007/index/a/12859
That might explain it, the Fed starting intervention at 5% from the highs, but finally by July, New Century and some others started to pay off but it was small consolation at the time. Then on July 19th I read something about analysis and pricing that I will never forget.
An Intricate Pas de Deux, Starring Mr. Market and You
"Lastly, I'd like to make a comment about analysis versus opinion. In
the investment business, there are two components of an outcome you
expect to see in the marketplace. The first is your analysis of the
phenomenon or security you are scrutinizing. The second is your opinion
(educated guess) about how other people will greet (price) the outcome
that you expect.
For some time now, I have
been chronicling the problems in subprime and what they mean. It was
possible to look at what had been occurring in subprime and know that a
very large number of these loans shouldn't have been made, as they
weren't going to be paid back. In addition, it was possible to know
that the people who owned the loans were levered up, as were the people
on the hook for them. Thus, it was logical to conclude that many of
these mortgages would be defaulted on, creating ramifications
throughout the financing and economic food chain.
Those
of us who believed in that analysis have been correct, and I believe
are continuing to be correct. However, those people (like me) who
thought that analysis would matter to the stock market (the opinion
part) have been incorrect, as thus far it hasn't mattered. Nonetheless,
I am more convinced than ever that the outcome I envision is
unavoidable, even as the timing remains unpredictable.
In the Final Analysis, Trust Analysis
Why do I bring this up? Because folks at home trying to determine who
they'd like to listen to/and what information to ponder — versus what
to ignore — need to be aware of those different components. I say that
because if somebody continually gets the analysis part wrong but gets
the guess part right — i.e., temporarily makes money buying
stocks because he says that either subprime doesn't matter or is
contained — that incorrect analysis will ultimately see him get
carried out. In the long term, correct analysis is more important than
your guess about how people will react to it.
Today's bulls have all been right about their belief that stocks should
go up every day, but many have been wrong in their analysis. One of
these days, Mr. Market is going to exact a penalty for the guessers
who've guessed right for the wrong reason. I believe that day is coming
sooner rather than later, and will cause far more damage than anyone
expects." -Bill Fleckenstein's Daily Rap 7-19-07
Here is what ABK looked like going into July 2007
Daily "Endurance" Relief Chart
"Risk Manifest" and a true picture of our financial system.
So where does that leave us today? Where are some ABK"s? Looks easy now – remember all the Fed tricks and Jam Jobs to keep the tape together? It was crazy. It is crazier now, but many of those stocks are gone and the problems have changed somewhat and the risk shifted. Fleck has had virtually no shorts since March. Fred Hickey none since October. Jimmy Rogers said today "this is one of the few times in my life I have not had shorts anywhere in the world". The reason? Fear of money printing liquidity re-fueling the stock markets.
Could we see something similar to this again? Of course we could and I should welcome it rather than fight it. Patience. I knew they would keep bailing until they are forced to stop, and that is why I own gold.
Was yesterday our July 19th 2007 and the reality of our economic plight gets priced right? Is it 2004 again? Where is safety? Cash?
Finally an article I re-read frequently as it captures the quintessential nature of "Risk Manifest" in this era. You can read it here -http://www.minyanville.com/articles/index.php?a=24852
"I’d like to discuss human nature and the paper we call money from a
slightly different perspective. I was recently thinking about what's
transpired in this country in the last decade: First the equity bubble,
then the real estate/credit bubble, and then the steady debasement of
the dollar (where a trickle is now threatening to turn into a flood).
I've been struck by how few people seem to understand how all these
events are related, in that at the root, they each have irresponsible
money-printing as the cause; the sociological and psychological
phenomena that go with it (i.e., the regulators not doing their jobs)
are just part of the process. Each problem led to the next, where one
year ago, the financial system was bailed out at the risk of the
country ultimately enduring a funding crisis.
One fact that strikes me is how few people seem to have been able to
protect themselves from the first two (even though they were so
obvious) and how few will be able to do so on this third, huge problem.
In my own little world, I wrote until I was blue in the face about the
risks inherent to both of those bubbles (as did other people), but
still only a small subset of folks managed to avoid calamity." Bill Fleckenstein 10-08-2009- Its All Just Monopoly Money
Make sure you are in the small subset this time around! This is not quite ABK but it is the real glue factory in my eyes and I will be unleashing the put army when it finally breaks. Good Luck to us all!
