Converging Fall Excitement
“When markets move swiftly you either lose money or, make money. This is one of those times we when see half a dozen freight trains running through the same intersection simultaneously. Obviously, it appears a smash approaches. How do we win and how do we avoid losing?” - Roger Wiegand
What Was The Cause?
1. History, cycles and time all conspire to do both happy and unhappy things in markets with amazing regularity. The emotions and psychology reflected by humans is consistent and seems to deliver events on remarkably similar time tables. Let’s follow a complete cycle from inception to finality.
2. Growth moves from a modest, even sideways market into new opportunity.
3. Opportunity is recognized and business people either add on to an existing enterprise or, start a new one. Some do both.
4. Economic atmosphere grows increasingly upbeat and faster. Increasingly, higher and higher potentials seem to appear.
5. Business people, investors, traders and consumers “just feel” richer and more agitated to succeed. Suddenly, they feel an overwhelming excitement about possibilities and what these potential life-style changing events could do.
6. At this juncture, the group casts aside any ideas of risk and goes hell-bent-for-leather borrowing and buying with abandon.
7. Lenders see the action and throw open the money doors. At this point, the solid and better quality deals are all done. Now the marginal stuff is funded and trouble begins. If, not for the euphoria and excitement, the expansion would stop right here. That is not the case, however, and the largest borrowers, investors and traders “leverage up.” They are taking millions and billions and multiplying the leverage by borrowing more. Mr. Banker is only too happy to comply as he is raking in millions for fees.
8. At this juncture, nobody is paying any attention to the solidity and quality of the deals, trades and business. All unanimously concur, trees do indeed grow to the sky and there are no limits. What is risk? Risk is nothing! Full bore ahead. Damn the torpedoes. This time it’s different.
9. This combination of ultra-leverage, with no clear-cut asset transparency (think derivatives) muddies-up the game, and pulls an opaque curtain down over RISK.
To Get Paid You Need an Exit Strategy
1. Now, the game is running for bore. While things seem to be so good and fast, they become truly fearsome as traders and investors pile on even more leverage. They will never stop until the lenders stop lending.
2. Suddenly, with any warning, the worst of the Wild West deals cannot pay the interest or, cannot meet margin calls. This is the El Supremo Moment when the spector of risk rises from the depths of opacity and scares the ---- out of these wild and crazy guys and gals.
3. Next, early failures begin to surface. The most marginal of trades and deals out-right collapse. Since the first few are normally the weaker and smaller ones, they are largely ignored. Times are just too good to have failures right?
4. Now, a large investment bank or, hedge fund dumps over and its magnitude is a slap in the face to lenders, traders, news analysts and of course those ever present politicians. This horrid, disastrous mess is now sitting right out there for the whole world to see.
5. The smarter and quicker ones recognize the seriousness of this problem seeking to escape immediately. Their unwinding of deals is at first done in secret as they prefer to not raise any red flags. Only, the swift and super smart are able to exit at this point. Only a few of them can get out with their skin intact. For the rest, something else is on the table.
6. The reality of unreality has hit home. Disaster has struck. Failures that started on the edges become a cascade. With the passage of only a few days, frightening liquidity problems emerge as “everyone is invested.”
7. NOBODY IS LIQUID AND NOBODY HAS CASH. FUNDS ARE GETTING THOUSANDS OF CALLS FOR TRADERS AND MANAGERS WANTING TO CASH OUT RIGHT NOW. THERE IS NOT NEAR ENOUGH CASH, AS ITS ALL IN SHARES. EVEN WORSE, DERIVATIVES ARE SO SCREWED-UP WITH OPAQUE PRICING NOBODY KNOWS WHAT THIS JUNK IS WORTH. FURTHER, EVEN IF YOU KNEW THE REAL PRICE, THE SELLERS CAN SELL FOR ONLY HALF OR, LESS AS THE REST OF PILE SINKS TO THAT LEVEL. TODAY THERE IS NO DERIVATIVE BUYING MARKET. TODAY, THEY ARE ALL SELLERS. TODAY, THERE IS NO EXIT.
8. Nobody wants to catch a falling knife, but bottom feeders holding cash are ready to buy for huge discounts and have begun to circle like sharks looking for bargains at pennies on the dollar. Some will make money but, we think it’s too early and many might get burned again.
9. Catch 22 at its finest has presented itself and it is really ugly. Credit markets seize-up and stop. No new deals means no new fees for anybody. The unfortunate owners, managers and investors in this STUFF CANNOT MAKE IT LIQUID TO DUMP IT. THEY ARE STUCK WITH VALUELESS TRASH AND SUDDENLY THEY KNOW IT.
10. Now the deflationary spiral begins. The neato new catch-word phrase RE-PRICING OF RISK IS THE THEME OF THE DAY. EVERYBODY IS PARALYZED WITH FEAR AND INACTION. OH’ OH’ WHAT EVER SHALL WE DO?
11. Naturally, they call government for help and the politicians who never saw an emergency they didn’t like (Wow! What a Great Chance to Buy More Votes!) So, Mr. and Ms. Politico Fixit run to the rescue with billions in new, phoney, manufactured taxpayer cash. They will solve the problem, buy more votes and bail out their buddies who reside in the Too Big Too Fail super luxury condo towers on Park or, Fifth Avenue in New York City.
The End Game
Now we approach the end of the movie. Re-pricing of risk and mark-to-market are realities. The failures accelerate with greater speed and some real pain begins. The safety valves and back-stops in program trading are only mild impediments in a race to the bottom. What fools markets, traders, and analysts, is the slow motion time table.
In 1927, early edgy signs of failure appeared and were dismissed. In 1928, Europe began to severely fall apart. Even as late as 45-60 days before the stock crash of 1929, things appeared a little touchy but most remained optimistic. Then the mess hit with blinding speed like a car crash out of no-where. The follow-on recovery in 1930 coupled with reassuring political words, gave important credence to the notion, the worst was over and it was time to buy in again on this new recovery.
Then in 1931-1932 a really vicious smash hit like a hurricane and the worst of several other problems became visible and it was all down hill. In 1934-1935 there were signs of recovery and traders with some capital that survived the first smash bought in again thinking it was all over and the good times would resume.
In 1937 the markets crashed again like thunder, sliding -45%, nearly duplicating the down-draft of the early 1930’s. This cured investors and traders of ever again wanting to buy shares. Markets did not resume normal function with volume for years and mostly this final recovery period was after the Second World War.
In the 1934-1935 period, the few left standing with cash bought fantastic companies for 5-10 cents on the dollar. My grandfather traded a 100 pound sack of potatoes for a nice low mileage Model T Ford. THERE WAS NO CASH. CASH WAS KING.
Buy Gold, Silver and Farm Land
The trick of all this is a lesson in loss avoidance. Avoid getting run over in the down-draft and be liquid in things that are solid and hold value. Gold and silver are rock solid hard cash that cannot be trifled with. Did you notice in this recent credit crunch how big traders first sold some precious metals raising cash to get out of their other failures? That’s because gold and silver are liquid. They represent no counter-party debts. They are absolutely pure.
Now, those smarter traders are buying gold and silver back, in very large positions, to first preserve capital and secondarily to make more money. Precious metals are in a new rally as we write today’s essay. First, avoid risk. Second, go make some money in gold and silver.
Read Trader Tracks and Kitco.com for new ideas on timing, trading and preserving your wealth in these troubled times. You’ll be glad you did.
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