Wednesday, June 29, 2011

Marketwatch: Todd Harrison - The Most Important Point in Market History

I wanted to highlight a story on Marketwatch by Minyanville's Todd Harrison.  While the headline is a bit of hyperbole , I've learned many times, headlines are not written by authors but by publishers (but judging from the content of the piece, Todd might have choesn the headline as well).  That said, it's a nice overview of the bigger issues behind the scenes - that of a grand transfer of risk.debt from the private sector to the public, as we focus on the day to day market environment in 'bailout globe'.  As stock speculators this handoff is a "great thing" (as evidenced by huge rallies each time governments transfer trouble from the 'markets' to 'citizens')... and will continue to be a great thing, until one day it is not.  But for now kick the can forever is the only solution 2007-present.

A few snippets

  • Still, we’ll chew through the macro dew one more time, for this is perhaps the most important juncture of the year—if not, and I’m not prone to hyperbole, history.  Yes, history. 
  • The bulls will point to strong corporate credit markets (which suggest higher equity prices despite trading well off their best levels) and “The Misery Index,” which recently hit a 28-year high, as a contrary indicator. They’ll use technical terms like “stochastics” and “put/call ratios” to support their thesis, and in a vacuum they’re 100% right.  
  • Outside the vacuum, here in the world with the rest of us, we’re dancing on the head of a pin, and few people seem to notice how precarious our position is. Way back when, during the panic of 2008, we spoke about the lesser of two evils, about how the government bought the cancer in an attempt to sell the car crash.
  • They were “successful,” insofar that they jacked the stock market 100% and allowed Corporate America to roll its debt and issue stock. What they also did, perhaps unintentionally, is transfer risk from the private sector to an already burgeoning public sector, which has heightened tension across the geopolitical spectrum.  
Again, there are two paths:
  • Drugs that mask the symptoms (throwing trillions of dollars at the problem), which triggered a spate of unintended consequences (such as outsized bank profits) and lead to a tricky trifecta of societal acrimony (over the likes of Goldman Sachs and BP), social unrest (from Greece to Libya), and geopolitical conflict (yet to be determined).
  • Medicine that cures the disease (debt destruction and reorganization) will be a bitter pill to swallow. But once we traverse that process, it’ll pave the way to a legitimate outside-in globalization (the US won’t lead, but will participate). This, in my view, is where the market was heading before the synthetic stimuli, and it’s where the market will ultimately go whether we like it or not. The question, of course, is,“From where?”

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