Well, Bento, I am probably going to mark a bottom (see below) here, but at this point (10pm central European time on Sunday), no-one has stepped up to buy Bear Stearns. There was a brief rally into the close on Friday on the prospects of a buyer coming in over the weekend, but they may be disappointed. In 15 hours the US market will open and I will be very interested what will happen. I have to confess to having a few ants in the pants, because it is conceivable it could be something nasty. It could equally be a huge rally; according to the Costanza Doctrine, a very useful guide to investing in bear markets, it is at times of one’s greatest anxiety that you should probably be deploying your capital the most aggressively. Crash or bull market salvation, frankly I and my fund are well positioned for neither.
I won’t pretend to be a huge expert on what has happened, but I firmly believe the long-term, root cause of it all is an excessive reliance on tools which utilise standard deviations, but I can’t prove it yet. Meantime, our current difficulties seem to be more a problem of insolvency than a classic, Bookstaberian illiquidity crisis, although we clearly have one of those as well. Whenever one of these has cropped up in the past the Fed has generally washed it away in a bath of hot money. Somehow I worry it won’t work this time.
Whatever is happening is also highly US-centric at this point (sadly the global effects are still to come). I think this WSJ article was very illuminating about the wider context of what we’re facing. Reading this, it’s possible this is a game changing moment in the history of the global economy, something similar to the collapse of Bretton Woods, the end of the Cold War, that sort of thing.
I have 3 major impressions I want to share: Firstly, the widespread ghoulish glee is misplaced: it is not just about a bunch of deserving hedge fund wankers getting their come-uppance, although we can all enjoy that. We will all take our turn. Baruch happened to spend time recently with some very well-connected people high up in the management of large technology companies. They assured Baruch that things were much, much worse in the real economy than was being said publicly, certainly to investors. Up until that point, Baruch had blithely assumed that the statements of the company management were true, that nothing awful had happened yet, and good old John Chambers (he’s the CEO of Cisco, Bento) was honest when he said something as laughably tautological as “recent events have made me more confident in the long term prospects for our business”.
Instead, none of these Fortune 50 CEOs is willing to be the canary in the coal mine, which, as is often forgotten in the metaphor, is the first to die from the methane. They’re also all hoping that it might somehow all go away. In the meantime they are all cutting back on unnecessary expenditure. No travelling to internal meetings, and if they have to travel the VPs fly coach. Consulting projects are being put on ice. It is true, as Chambers has complained, we are all talking ourselves into a recession. Then again, that’s how they all start.
The immediate hit will be felt in the banks, of course. Already I have an inkling of what it must be like to be old, as many of my broker counterparts are suddenly, inexplicably, disappearing, and they are blameless – they’re in equities for chrissakes. The mass layoffs haven’t started yet, and who can doubt they are on the way? I hope Old TED can hang on. So, I am sure, does he. Personally, running a long only, high-beta mutual fund as I do, I give myself 50:50 — and I’m a genius. God knows how the rest of you are going to manage.
My second impression: archcapitalists are pussies. Friday night I was watching something ghastly on CNBC called the “Larry Kudlow Laugh In” or something. I almost peed my pants watching this. This Kudlow, to his credit, thought the very real prospect of the Fed buying up toxic mortgage debt with taxpayers’ money was a step too far, but there was some clown called Ron Luskin arguing for widespread moral hazard supply from the Fed, who didn’t think it would happen (the market would supply the necessary Manna itself). What rankled were the plaintive cries of these guys, who simply could not understand why the wonderful US financial market could be producing such negative outcomes, ie stocks actually falling. They have clearly not read their Schumpeter, but then, who has?
Myself, I would think it is time for a couple of banks to go under pour encourager les autres, and the Fed moving from lender of last resort to buyer of last resort is indeed a place we don’t want to go to. Then again, if it means me keeping my job. . . More tempered analysis of both sides of this debate can be found here in from the well known Stakhanovite Krishna Guha in the pinko sheets and here, from the Bush-lovin’ but otherwise sane Irwin Stelzer.
Finally, is it just me who has noticed the increase in the number of double-entendres in equity research? Analysts have become no better than blind, randy old uncles – they are all “groping /reaching/looking for a bottom”. Everything is constantly “bottoming”, which sounds quite similar in concept to “cottaging” but is in fact not that at all. The analysts themselves who write the titles must know what they sound like, but what gets me is that the research heads let it through. Is it some giant, secret bet among sell side analysts to see how long they can get away with it without someone noticing? Or am I just completely immature?