Crisis of Confidence: We are concerned a “black” day or “days” may lie ahead as people realize the serious nature of so many sovereign debt problems and the impact on economies and financial markets.
What We Think: Given the market action of the last several weeks in response to Greek debt worries and our views on major economic and political moves, market technical indicators, fundamental valuation, market sentiment changes, headwinds to the U.S. economy, and the fundamental difference between this recession and all those we have experienced since the Great Depression, we cannot rule out that a “black” day or days are ahead – that being a severe test of the equity markets. We are concerned with the serious nature of the problems governments, economies and markets face over the long term as a result of the credit crisis, subsequent recession, and the incredible run up in so many governments’ sovereign debts. There is a general feeling that the worst is over and we are ready to “vshape” back up in the economy and the markets. Unfortunately, as we discuss later in this commentary, data show that historically this has not been the case.
Too much complacency is usually followed by “geez, I should have thought of that.” Luckily, the market always gives warning signs.
We would be remiss not to say that we see a parallel, in terms of complacency, between today and late 2007/early 2008. Just this week, the CEO of CISCO, John Chambers, stated during his company’s earnings call, “I have been in this business for 30 years…it’s the strongest global economy I have been a part of.” We understand Mr. Chambers’ enthusiasm for his own company’s performance but wonder what global economy he is watching. We see now, as in 2008, a failure of people to recognize the very serious nature of the potential contagion that may loom. That said, let us be clear, we do not see a crisis on the level of a near total financial system collapse that we saw in 2008, but we do see serious sovereign debt issues ahead that aren’t going to just go away and will have a serious impact on economies and financial markets. In 2008 there was Bear Stearns, then Lehman Brothers, then AIG. Today we have Greece; tomorrow it could be Spain, then Portugal, Ireland, etc. The obvious difference between the two cases is that governments don’t file chapter 11 or dissolve, but they can default and/or be bailed out at the expense of other countries and financial institutions. As financial markets’ recognition of crises generally goes, it usually is in the realm of “geez, I should have thought of that” then boom, you get a big fall. We as investors want to be ahead of the game. A big fall is almost always preceded by weeks like we have seen in late January and thus far this month – weeks where the “smart money” gives you an indication that things are not as right as they seem.
- Sellers of equities in general
- Long “smartest” tacticians for exposure
- Long sound/ commodity-rich sovereign debt
- Long solid private equity