Wednesday, September 20, 2006

A Butterfly Flapping it's Wings in Thailand?

During the summer of 1997 an "ex-Pat" client kept trying to tell me there was a very serious crisis unfolding in Asia. She was "involved" on the ground, so to speak, and convinced it would spread globally. I kept responding "Nobody here cares about Asia" (pointing out our market was doing great, and Americans are famously uninterested in world affairs). At one point she shared with me how and where the dominoes were falling, which had started with the currency implosion in Thailand. Somewhat embarrassed, I once again explained nobody cared about Asia- worse yet, there's maybe 10 people in this country that can even find Thailand on a map.

By summers end I became a believer, and of course it turned out she was right. Emerging markets were shellacked, and eventually the US experienced a fairly ugly selloff.

However, that big ugly Asian Contagion correction was a distant memory very quickly, as the US was preoccupied with the design/engineering of the largest bubble in the history of the world.

In fact, a year later, when the Russians defaulted on their bonds, Americans were completely unaware, or had no idea what it meant. The correction that came following the LTCM debacle was so brief, most dip buyers were up big before their trades settled.

Investors had been trained like pavlovian dogs to buy every single selloff with both hands and feet. The more severe the crisis the bigger the reward for stepping up to the plate.

Someone called it the Greenspan Put, which at some point got twisted into a slogan on Wall Street, as the public was reassured at any and every turn: "Greenspan won't let the baby boomers get hurt."

Of course the Y2K bubble got so big even the Fed reached a point where they decided it would be prudent to step back and let the markets clear. And when it became an absolute rout, and they started cutting rates, all the King's horses and all the King's men couldn't put Humpty together again.

It turned out serious problems suddenly mattered. And there was no quick fix. As John Kenneth Galbraith observed, "recessions catch what the auditors missed." Not only did the auditors miss a heck of a lot, but we learned a bunch of them were up to their ears in the financial engineering, too.

Fast forward to our current moment in time and we find the senior indexes in the neighborhood of those old highs. Our clients are generally happy, business is good. Buying on the dip, say, if there's a bombing in London, remains a sure-fire winning strategy.

Fact is, from what I see, investors want more risk. There may be a bunch of them crowding into puts or double short Q's, looking to score in October, but that's just a trade- they don't actually think anything bad is going to happen!

We need to remember that at the bottom of this increasingly complex system there are... regular people. They will once again reach a point where the pile gets too high. Or something bad will happen- and this time it will matter for some odd reason. There will still be business cycles, rising unemployment, painful recessions, stock market crashes.

And some of those gunning for new all time highs on the Dow- even if the market keeps going for a while- are liable to find themselves hitching their wagon for a round trip.

P.S. I hear a hedge fund lost $5 Billion in one week... wonder if we should be long gas?!


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