Tag Archives: doom

Consciously Navigating Da Nile

As this article on Naked Capitalism points out, some of the smartest pessimists out there are starting to get significantly more bearish lately.

I have hesitated to to publish some of this content, but I think it is worthwhile to consider positions like the ones discussed here: Roubini Foresees Possible Market Shutdown

After the Fed, ECB,, Bank of England, and other central banks took unprecedented measures over the last month to restore liquidity and recapitalize banks, Nouriel Roubini sounded slightly less gloomy. He had deemed that the authorities has avoided a systemic financial meltdown, but a nasty, protracted recession was in the offing.

It appears that Roubini has reversed himself with his latest remarks He now says systemic risks are increasing due to hedge fund margin calls, redemptions, and liquidations, and the authorities may be forced to close financial market

Similar negativity can be found here:
The Folly Of A Depression Thesis

In short we are setting up for what looks like an even Greater Depression, perhaps something similar to the 1873 panic. While the causes would be very different in practice, in principle they seem to be the same – malinvestment caused by “easy money” that, when business conditions turn, becomes “protected” by government – leading to Depression instead of an ordinary business recession and bankruptcy of those who overextended themselves. Now, as then, we have companies that have spent incredible amounts of money to buy influence – it was recently disclosed that AIG, for example, continues to pay lobbyists in an attempt to loosen regulation even though they are now surviving on money borrowed from The Fed!

Be prepared, get out of debt and position yourself so you can survive without the use of consumer or business credit of any sort.

If you have liquid cash, you will be in a great position to pick off property and other goods that people are forced to abandon as the situation worsens. There are many people who became fabulously wealthy as a consequence of The Depression, and all of them had one thing in common – they had cash when things got really bad, and were able to pick off assets cheaply in forced sales.

The difference between 2 years ago, when I was on the same page of many of these same writers and today, is that much of today’s contagion is being driven by forced selling of assets that are far below their intrinsic value.

I am not talking about the toxicity associated with the still deteriorating real estate market, financial companies, retail-based companies, or consumer credit companies.

Rather, I am talking about the fact that the bank-debt market is trading the $60′s right now for companies that are only 2-4x levered through the bank debt. Basically this implies that many of these healthy companies will go into bankruptcy and liquidate for something like 1-2x EBITDA.

Although I seek to avoid this financial jargon here, the translation is simply this: It is absolutely positively an inaccurate reflection of reality.

I am not one to speak in absolutes, but I can tell you that there is absolutely no rationale for such a valuation for many of the companies that are being “valued” in this way.

The reason for this price-action is completely tied to the forced-selling around asset-liquidations, hedge fund failures, and other “forced” selling action. This is a classic “technical” signal in a market, and although it is important to notice these for trading purposes, it should not be mistaken for a reflection of intrinsic value.

The VIX (a measure of volatility) hit another all-time high today intraday, suggesting that people are panicked, afraid and more importantly they are *uncertain* about the future.

This uncertainty creates a space for someone to fill in the void. They need someone – actually lots of someones – to step up and fill this void of uncertainty with some words of wisdom and common sense to settle their nerves.

Thus, although I think there is a distinct possibility that the uber-bears are right. I am consciously breaking ranks with them because I firmly believe that there is finally a possibility that they might be wrong.

It could be the case that we will find a way to stem the decline in housing prices (my suggestion continues to be to renegotiate mortgages to keep people in their homes), stimulate the economy (likely through more fiscal stimulus), and ultimately find a floor for the various credit markets that are continuing to go through contracting pains.

I am *not* suggesting that you leap into equity markets unhedged, but I am suggesting (perhaps as a broken record by this point), that consciously focusing on the positive will help us determine our future trajectory from here.

The choice of how to fill this void of uncertainty is ours to make. I am choosing to deny the doom – at least for today.