From Peter Tchir of TF Market Advisors
Print It And They Will Come
I have to admit, I never understood Field of Dreams. I "get" why it was popular - a quasi-mythical figure who just "knows" things. Some good looking guys with enough sentimental moments to make women happy, and just enough baseball to make guys not cringe. But honestly, I never understood the movie.
So, what does that have to do with printing money? I guess I just don't understand the fascination with it. Why is printing money the best solution? Why isn't trying to pick up the pieces after some defaults, a better solution than printing. With stock futures down again already, and Jackson Hole coming up, you know we will hear Wall Street (and anyone caught long) clamoring for the Fed and ECB to PRINT more money. It seems to be the only "solution" to the debt burden too many countries are facing. I agree that it is the only way to avoid some defaults and some pain.
But is the cure worse than the problem? There will be problems if we let Greece default. It would drag down some banks, which would not be good - short term. But I remain convinced that in 10 years, economists will praise FDR's patience. They will talk about how waiting for the system to recalibrate was a difficult but important decision. Only once the system had "reset" would the policies work to create a great rebound. We will learn that throwing money out of a helicopter only gets the money caught in the blades, destroying most of it, and possibly damaging the helicopter. Those who felt Countrywide needed to be saved, or Bear Stearns had to be saved, will be vilified. Those that let Lehman go, will be questioned on why they didn't do a couple of things (guarantee swap lines, for example) but in the end, will be respected for their willingness to let excesses collapse, and let those that were prepared to prosper.
Every time we come up with a new "solution" to our problems, we gravitate towards "unknown" unknowns. Maybe we should just take our medicine and try and deal with "known" unknowns. I don't know much about Rumsfeld, but that phrase resonates with me. We continue to put out new policies, attempt to solve problems, but only seem to create new ones, that are even bigger and more complex. The Fed can misuse words like transitory or unintended consequences as much as they want. But many of the "unintended" problems could have been (and were) foreseen. And even Dorothy couldn't just click her heels and wish bad things away as easily as Ben thinks he can make them disappear by uttering the word transitory.
I had a boss once who explained the difference between a structurer and a structured trader. The structured trader would try and come up with a solution that left more risk, but the risk was quantifiable, and hedge-able. They were nervous and analyzed their positions daily and tried to constantly adjust to a changing world. The structurer would create a solution that solved most things that were likely to occur, but was left a few disaster scenarios in place. And the solution was unhedge-able. All you could do was own the risk, and hope for the best. The "structurers" were arrogant and were dismissive of anyone who questioned their idea, and somehow any rational argument about the potential downside was twisted, with a wave of the hand, a raising of the eyebrows, and a lightly uttered "hrmph" made it look as though you were arguing that leprechauns existed. All of the Central Bankers, IMF, and World Bank, "Chairman", "Managing Directors", "or Supreme Commanders" are structurers.
So, we will get money printing. That to me, is dangerous, since we don't know what printing so much more money will do. It doesn't in any way, shape, or form address the root cause of the problem. It is hard to hedge (buy more gold?) and it potentially unleashes problems we haven't even contemplated. Hyper-inflation causes riots in countries where China bought land to produce food and gives them an excuse to enforce their rights by sending in troops? Maybe that is crazy, but in my defense, I am wearing my IG200 hat, not a tin foil hat. I am not sure what can or can't happen in a world where we decide that printing money is the best way out of our problems. So many bizarre things have come out of our alternative solutions, and few of them good, that we should spend more time thinking about accepting the default of the weak, and seeing what we can do with that.
If Greece defaults and there is a run on weak sovereigns, stocks will go down. Things like gold will go up, though they may be held back by profit taking since so much else will get hurt. Basic soft-goods probably hold in, as people still need to eat. Steel and energy will go down, but maybe that isn't bad for most of the 6 billion in the world.
We spend so much time worrying about the stock market (well, those of us not glued to American Idol, Jersey Shore, or Housewives of some city), but if QE2 showed us anything, it is that the wealth effect is exaggerated. The wealth effect impacts a small portion of society, and the companies they buy stuff at - tiffany's. The majority of people have very little invested in the market. Maybe their 401k's are invested in the market, but few people are so stupid to get excited that their measly 401k is up 20% when everything else points to reduced pensions, reduced health-care, and higher taxes in the future.
I am short the market. I felt that we were not going to get any new support announced over the weekend and I believe Europe will struggle tomorrow. But at some point it will be time to cover. The voices of important, smart, powerful, and rich people, will drown out any objections the fringe may have and government will embark on a program of printing. In the short term, that will be positive for risk assets. In the long term, I suspect it will be disastrous. I continue to hope that some leaders have the conviction to try and stop the "pretend and extend" program now. It will be painful, but I think we could still pick up the pieces. The longer this goes on, the harder it will be to fix it.
As an aside, if the dot-com bubble and Enron brought intense scrutiny on to Wall Street and to fortune 500 CEO's, shouldn't this crisis bring the same level of scrutiny on government? Shouldn't Sarbanes-Oxley be adapted to fit government? Maybe we should have access to their e-mails where they tell a colleague that there is no way we default, but that he (or she) is going to tell the press that the government might because it will scare the bejeezus out of their constituents and ensure that their next fundraiser is full of high paying donors. Or that next time someone writes in a private e-mail that they agree with a bill but think if they hold out a bit longer, they can get a little earmark in the next bill, the public should know.