Submitted by Todd Harrison Of Minyanville
The Last Gasp Bubble of Government.com
When I began writing ten years ago, I would offer that the opposite of love wasn’t hate; it was apathy.
shared that thought after tech stocks dropped 40% in less than two
months and then recovered half those losses the next two months. We all
know what happened next; the tech sector melted 70% the next few years.
and rinse, Pete and repeat; we’ve seen that sequel again and again and
again. From the homebuilders (real estate) to China to crude oil, a
“new paradigm” arrived. Every time was different and each offered a
fresh set of forward expectations that would finally prove historical
precedents need not apply
traded all of those bubbles thinking quite sure they would follow the
path of false hope and empty promises paved by their predecessors. That
proved true as the real estate market crashed, China imploded under the
weight of the world, and crude crumbled just as it seemed ready to
stake claim to the new world order. (See: Oil of Oy Vey)
While those bubbles hit home for many Americans, they’re hardly unprecedented through a historical lens.
There was the tulip mania in 17th century Holland as Dutch collectors hoarded a hierarchy of flowers.
The Mississippi and South Sea bubbles of the 18th century emerged in the wake of Europe’s dire economic condition.
roaring twenties, fueled by an expansive use of leverage, led to the
crash and Great Depression while not necessarily in that order.
And there’s Japan, perhaps the most frequently referenced modern-day
parallel of our current course. The land of the rising sun boasted one
of the strongest economies on the planet before a prolonged period of
deregulation, money supply growth, low interest rates, bad real estate
bets, and “zaitech” (financial engineering) creating a virtuous cycle
of speculative frenzy that ultimately collapsed the country.
Does any of this strike a chord?
familiarity breeds contempt, the percolating societal acrimony
shouldn’t come as a shocker. Albert Einstein said the definition of
insanity is doing the same thing over and over and expecting a
different result. That most certainly applies to our financial fate but
as with most journeys, the destination we arrive at pales in comparison
to the path we take to get there. (See: What In the World is Going On?)
Federal Reserve chairman is a student of history and well versed on the
passion and plight of financial excess. We’ve witnessed extraordinary
stimuli intended to shift the natural course of the business cycle, one
that long ago lost its way. While policymakers conceivably “saved” the
system, the resulting imbalances pose a fresh set of issues for the
global socioeconomic spectrum.
I’ve repeatedly offered that
the financial crisis hasn’t disappeared; it simply changed shape.
It--for lack of a better analogy--has gone airborne, migrating from the
tangible to the amorphous, from Wall Street to Main Street, from a
distant coexistence to an emerging class war. It, like most viruses,
will arrive in waves and infect those who haven’t been inoculated with
a steady stream of financial consciousness.
internal reaction to every opinion you read or hear, multiply it by
millions and you’ll begin to imagine the magnitude of the shifting
social mood. While the recent stock market rally reflects renewed
optimism that can conceivably continue the chasm between perception and
reality is widening; while the tape can run, we, the people are running
out of places to hide.
That’s not to say we should lose hope,
quite the contrary. The greatest opportunities are born from the most
profound obstacles and this will again prove true. The trick to the
trade and a pathway to prosperity won’t be found by those wallowing in
the “why,” pointing fingers and placing blame; they’ll be conceived by
those proactively positioned, readily prepared and steadfastly aware of
what lays in wait.
The leaders coming out of a crisis are
rarely the same as those that entered it and the ability to add
capacity into a downturn will define the winners on the other side. We
must reward those who saved, incentivize those who are motivated and
punish those who’ve transgressed. Until there is culpability for
wayward decisions, there won’t be motivation to change behavior and
rebuild society from the inside out.
Therein lies the rub of our
current course; innovation and entrepreneurialism are integral parts of
the solution but many of those in a position to effect positive change
don’t have access to capital. While credit worthy borrowers may be a
rare breed—and lowering those standards were the root of the
problem—the obligations of many have muted the aspirations of most.
The Hot Tub Time Machine
maintained throughout our time together that the mother of all
bubbles—debt— would be the final frontier before free market forces
shocked asset classes back towards equilibrium. With total debt-to-GDP
stretched towards 400%, we reached the zenith of that elasticity in
2008 and the system unwound with great vengeance and furious anger; the
gig was up.
It’s hard to say what would have happened if we let
the market do what the market was in the process of doing. It could
have created a domino effect that toppled corporate America from JPMorgan (JPM) to General Electric (GE) to Target (TGT) to Goldman Sachs (GS) to AT&T (T);
the commercial paper market was frozen, payrolls would have halted and
citizens may have taken to the streets to feed their families.
We’re talking potential anarchy here and I’m not prone to hyperbole.
alternative scenario—the one the created a chasm of discord throughout
the land—was the evolution of the last gasp bubble, that of
Government.com. $800 billion here, $1 trillion there, numbers so
enormous they seem silly; the reality is they’re anything but. (See: Will the EU Bailout Work?)
we remain in the eye of the storm—the relative calm between the banking
crisis and the cumulative comeuppance—a simple yet scary truth remains.
We haven’t cured the disease; we’re simply masking the symptoms. (See: The Eye of the Financial Storm)
will again remind you that the opposite of love isn’t hate, its apathy.
We’ve noted the lower volume during rallies and the higher traffic
during the declines—a sign of distribution—but a simpler truth may be
emerging, that of burnout. After four—or five, or six—bubbles and
bursts, folks are both bitten and shy by the gamesmanship in the
Perhaps that’s a function of financial fatigue or
maybe it’s an intended consequence of the war on capitalism; to be
honest, it’s tough to tell. As the machines take over and the secular
bear chews through victims, it’s hard to blame the average American for
wanting to walk away. (See: The War on Capitalism)
simply say this; the greatest trick the devil ever pulled was
convincing the world he didn’t exist. While financial markets seem
docile or worse, backstopped by the powers that be for the foreseeable
future, the time to pay attention, remain engaged and prepare for
what’s to come has perhaps never been more acute.