There could be heroes that emerge in the market tumult, but I urge you not to try to be one of them.
Financial markets around the world are now fraught with uncertainty and fragility. The cemetery of those who have lost their shirts trying to call "the bottom" is rapidly running out of vacant grave sites.
Wall Street is now littered with the corpses of the many who were considered to be among the brightest and most experienced financial leaders and experts. What makes us think we could do better?
For those who do correctly predict the bottom, the fame, glory and rewards will be immense. But their achievements will be much more the result of luck than skills and multitudes. More will meet their demise in the pursuit of this allured folly (or already have). There is little on the horizon to give us hope.
Take our political 'contestants', for example. They are currently more concerned with scoring political points than they are with actually addressing and fixing the problem. This indicates that they do not understand the gravity of the situation. That assessment is being charitable. The alternative is that they do understand the implications of a market meltdown which would trigger an economic depression and they are placing their own political interest above the others who will suffer severe pain and suffering.
Many existing politicians will be simply trying to save their necks. They will be consumed trying to rewrite history. There will little time for leadership coming from them. The dirty little secret is that many of them were complicit in the cozy relationships that existed among our quasi-private/public financial institutions and they profited handsomely, either politically, financially or both. I suggest that we proclaim amnesty for Congress: Congressional members have one week to resign or face the full wrath of the findings any investigations would reveal. The only problem is there is no guarantee that the investigations would not be corrupt and compromised. Who could we trust to do the investigating?
Am I an alarmist? I hope so. Perhaps today (September 17) will produce the gut-wrenching capitulation of sellers that will actually create the ever elusive bottom. But if it doesn't, then we could be in for a period of trouble, the magnitude of which virtually no one in the mainstream is considering. If my writing and views seem a bit nihilistic and overly cynical, then I suggest you readjust your expectations because it is probably be just of whiff of what's to come. The scariest aspect of this unfolding financial crisis is that there is an eerie feeling of confidence and complacency. Past panics in fact were proven to have been opportunities as we have managed to successfully to work our way out of them (though there were many casualties along the way). What concerns me is the possibility that all of these past successes in our history have created a false sense of confidence.
This crisis is not just confined to the US. Gone mostly unnoticed among our financial turmoil, are the shocks we are seeing from capital markets all around the world. Russia has halted trading for a second day on their markets and their government is pouring money into the banks to try to recapitalize the system as the ruble plunges and bond yields soar. The Chinese stock market is down 60%. Unlike past crises, the US is cause rather than the 'fixer' of this one. There is no one left to assume worldwide financial leadership. Government balance sheets around are now beginning to melt. Central banks around the world are injecting mounds of cash as lending among banks is freezing up. Will this be a futile attempt to assure market's liquidity? What gives you confidence that the melting will stop? Do you have faith in our leaders? Do you have faith in our system? Are your savings safe?
The answer to that last question is maybe not. One of the first and largest money-market funds "broke the buck", halting redemptions for one week, and only in now only guaranteeing to pay 97 cents on the dollar. Will there be other money market failures. Are government bonds safe? They were currently benefiting as investors flee to this historical safe haven. Will they maintain their status? Perhaps not. US T-Bills will be used to fund the Fed bailouts for now. With the death of the Wall Street broker-dealer model, where independent investment banks and their 'shadow-bank' co-conspirators were the lynch-pin of our modern financial system, providing most of the liquidity for our world economy, we need to now prepare ourselves for a period of monetary mayhem in this vacuum of leadership. Markets abhor vacuums in leadership and uncertainty.
You now have them both in spades. It is not as if we here in the US have rosy long-term outlook with over $100 trillion in unfunded liabilities staring us in the eye. Credit spreads may in fact collapse again, but as a result of sovereigns rising to catch corporate rates! Treasury owners had been willing to look past the horrible US balance sheet because they could make the 'plausible case' that we would address our gross imbalances in 'due time.' Well, 'due time' could vastly be approaching as our short term situation rapidly deteriorates. Perhaps the bigger reason for the flight to US bonds was the simple fact that there appeared to be no other alternative--either liquid enough to move your capital or safe enough to preserve it.
We might look back on the post-war period as the pinnacle of our existence, economically speaking. Considering the waves of history which have occurred in the past, as David Hackett Fischer did in The Great Wave -- Price Revolutions and the Rhythm of History, it is possible that we are entering a time of transition in which we taste treacherous tumult. The era at the very end of the Medieval Age saw the glorious emergence of the first world's first great banks -- first in Siena, then in Florence. But instability ensued in the brief period between the end of Medieval Age and the beginning of the Renaissance. Many of the warnings signs parallel today's environment as Fischer notes, "In the late thirteenth century, the medieval price revolution entered another stage, marked by growing instability. Prices rose and fell in wild swings of increasing amplitude. Inequality increased at a rapid rate. Public deficits surged even higher. The economy in western Europe became dangerously vulnerable to stresses that it might have managed in other eras."
Admittedly, it is utterly impossible to have accurate historical perspective as you are trying to digest and decipher events as they happen. But it sure seems like we are entering into storm of considerable scale. As the confidence in the system is legitimately shaken and the value of paper is validly questioned, we today are witnessing a stampede in gold and gold stocks. As I write this the early rally in oil has faded (after bullish fundamental news) while the gains in precious metals have strengthened. Other commodities are selling off as gold soars.
William Saffire wrote a recent column in the New York Times about the increasingly usage/overusage of the phrase "game changer." Many of you reading this have no doubt heard commentators use this to support their political and investment views as they present events (game changers) as evidence that their predictions will be fulfilled. I think the 'real' "Game Changer" just stood up and it is sparkling more brightly as it ever has throughout its history as the only real money to withstand the test of time -- over 5000 years.
I advise establishing a position that allows you to hold through any downturns. The recent volatility in the fluctuating price of gold and precious metals equities has taught many investors a very painful lesson. Hopefully you have your cash position located in a place that will at least retain its nominal face value. There are other investment strategies you might consider to hedge yourself which you should discuss with your investment advisor, but ownership of gold is now a must and should play a major role in your overall portfolio.
If we are entering a period of transition, similar to the one Fischer writes about at the turn of the Fourteenth century, we should brace ourselves for some rather dark days:
"In the period from 1314 to 1348, the great wave crested and broke in a shattering catastrophe. As it did so, the people of Europe suffered through the darkest moment in their history: a terrible time of starvation and pestilence, insurrection and war, persecution and political chaos. This was more than merely the collapse of medieval economy. It was the death of medieval civilization."
I don't know whether we will face 'the death' of whatever we end up calling this era, but we should not be so cavalier to dismiss the prospects of it occurring. As for the destiny of our beloved politicians, they should consider being voted/thrown-out of office as getting off rather easily compared to the fate some others had suffered. Fischer, chronicling the downfall of King Henry II in 1324 writes:
"For England's much-hated King Edward II a worse fate was in store. He was forcibly deposed and cast into a deep dungeon at Berkeley Castle in the west of England. His captors faced a dilemma. They could not let him live, but neither could they appear to kill their sovereign. They solved their problem by inventing a unique method of execution that left no visible marks. The king was seized and tightly bound. A red-hot iron was driven slowly upward through his anus until it penetrated his brain. It is said his dying screams could be heard for miles across the Severn Valley."
Now I am not proposing that we unleash Hannibal Lector on our current crop of corrupt officials, but I do hope that the electorate wakes up and demands better. Hopefully it is not too late. And we might consider taking a closer look at ourselves in the mirror first. In a democracy (as opposed to a monarchy) our officials carry out our collective will for the most part. By in large, we deserve what we get.
Excerpted from the 9/15/08 Global MegaTrends Portfolio's Newsletter:
To learn more about Kurt's Kasun's Global MegaTrends Portfolio, click here.