Monday, March 2, 2009

Debt Watch

"Things they do look awful c-c-cold (Talkin' 'bout my generation)
Yeah, I hope I die before I get old (Talkin' 'bout my generation)"

-The Who, "My Generation"

The babies born in the 1910s and 1920s lived in such dread of another Great Depression that they acted in such a way that, despite periodic fears of one, it never occurred.

And due to Social Security and Medicare, those of that era still alive are relatively well protected from the current economic mess.

The post-WW II "Boomer" generation took prosperity, including guns and butter, for granted.  Too many people in government, the media, the economics profession, and in business drank the permanent prosperity Kool-Aid that all sense of history was dispelled.

A rickety financial structure of every-increasing indebtedness was created, with repeated bank crises, along with the greatest spreading out of military personnel the globe has ever seen from one country.

The "Merchants of Death" (arms dealers) were joined by "Merchants of Debt".  The Boomer generation and the subsequent one were induced in a million ways to want own a stairway to heaven- but with borrowed funds.   The generation without direct experience of the errors of the Great D is in danger of causing one for the same basic reason:  debt piled upon debt.  

We are seeing the historical theme of alternation of generations play out in a smaller scale in the stock market.  For all the fraudulent aspects of valuation of "growth" stocks in the 1990s and to a lesser degree in this decade, at least the tech stocks had a culture of ownership as opposed to debt.  Their VC's and managers knew how risky and cyclical the high-tech business is, and built companies with no or limited debt, such as Microsoft, Intel, and Cisco, along with a host of others.  These companies may well continue to have overpriced stocks, but none of them have imploded as have the leveraged ones such as Fannie/Freddie, AIG, Citigroup, and many smaller ones.  The tech stocks had their quasi-destruction in the 2000-2002/3 bear market; the theory of alternation of cycles suggests that they will lead the market up if and when we ever see an up-cycle again.  The same theory of alternation of cycles suggests that real estate will sit out the next bull market in financial assets to an extent, which is to say that it will be pulled upward in the next strong bull market but just as with the NASDAQ, it will ultimately move back toward its bear market lows.

Now that everyone sentient fears another Depression, the long-term odds are finally more balanced toward equities than they have been for many years, no matter the historical fact that another 80% down from here would match the 1929-32 experience and therefore would not even represent a record bear market.  One wants to follow stocks and markets that have structurally strong or relatively strong chart characteristics.  This includes precious metals and well-run purveyors of timeless necessities, such as Wal-Mart and McDonald's.

Unfortunately, right now stock markets as a whole across the board look poised for collapse and are thus very risky. Vast amounts of debt need to be rationalized.  Tragically, governments across the world and their central bank enablers persist in trying the hair-of-the-dog that bit you strategy by increasing debt loads rather than reducing them.  If the owners of capital see governments finally reject the Merchants of Debt, they will put money to work and the world will see its next cycle of prosperity.  

Unless that happens, investors in corporate stock and most bonds will do well to recall the immortal words of Chauncey Gardiner:  "I like to watch".

Copyright (C) Long Lake LLC 2009

1 comment:

  1. Yes my favorite movie. Truly the story of the "The Peter principle."

    We read the book by Jerzy Kosinski back 1971 for an English class assignment.
    I see the PP pretty much everyday and everywhere. BO is the second coming of Chauncey Gardiner. I am sure of this. And time does not lie, does it?
    Guess who?