Bear Mountain Bull

Jeffrey Cooper quotes Paul Volcker:

“A good many years have passed since I last appeared before this committee but during all of that time, there’s never been a more critical time for the American economy and particularly for stability. That’s true not just for the United States but globally. To put it starkly we are in a serious recession with no end clearly in sight. The financial system is broken. It’s a serious obstacle to recovery.

There’s no escape from the imperative need for the federal government to come to the rescue to right the economic and financial ship of state. Over time, the hard fact is that several trillions of dollars will be necessary to be committed in a combination of budgetary expenditures and various guarantee and insurance programs and extensions of credit by the Federal Reserve. Obviously, commitments made of that magnitude raise very large questions. They are not only questions of avoiding waste of the tax payers money as important as that is; there are also risks of undermining confidence in the dollar and raising fear of future inflation… we are in the midst of the mother of all financial crises.”
Former chairman of the Federal Reserve Paul Volcker, January 21, 2009

There you have it… the imperative need trumps moral hazard. It would have been nice if Volcker had been consulted prior to the day the world changed, September 15, 2008, the day they let Lehman Brothers fail. After all, what would the good folks say? Apparently, THEY should have been more worried about what financial market participants would do.

Sometimes events overtake the path of best intentions. Damage always stands and delivers on a road paved with nefarious negligence and sins of commission. The question is with the ship of state listing; will the bailing best the water flowing in? No matter how many trillions are tried, nothing short of a restructure of the system will plug a fundamental, philosophical, socioeconomic hole in the soul of state.

We can’t know where we are going until we know what path brought us here. A problem can’t be fixed unless you know what the core of the problem is. At the same time, good can’t be sacrificed on the altar of a quest for the best solution. In short, this is a path we have never walked before. And, although the patterns and periodicities of the past may serve to shine a light, the bottom line is that however things play out over the next 10 years, however the cycles line up, the important thing to remember is that there is something fitting about the notion that the mother of all bull markets may be followed by the mother of all bear markets.

No one knows what the thud will sound like and what the ramifications will be when the Fed attempts to reduce its balance sheet. No one knows what the reverberations will be when the balance sheet is brought back to earth. We can only hope it won’t be like the meteor that extinguished the dinosaurs. Actually, it seems like the banks already dropped that securitization comet on themselves and the ensuing dust is choking the economy.

So, when it comes to identifying what cycles may be at play over the coming years, there is a caveat that should be cleared up: not all waves are created equal. No matter how good we may be at surfing the markets moves, this may be one of those times in history that in the fullness of time is characterized as a tsunami. I guess that’s a long winded way of saying, that while the 18 years from 1982 to 2000 it paid to give risk short shrift, the next decade will be one where being risk adverse pays dividends.

I say the next decade because I am counting 18 years from the peak in 2000. That does not mean market dynamics must border on the diabolical over the coming period, it means that there will be a great cost associated with uncertainty and that it will pay to recognize that cost in any approach to attempting to take money out of the markets as I believe uncertainty will cut as wide a swash for the foreseeable future as did confidence for the 10 years from 1990 after the market recovered from the crash of 1987 and it veered from the much ballyhooed consensus of the time that it was 1929 all over again.