Financial pundits, academics, fund managers and analysts all have an amazing tendency to over-complicate matters.
Sometimes, however, it takes just one person spelling out the obvious to really get to the root of the problem.
Gregg Gibbs, senior foreign-exchange strategist at global investment bank RBS, recently did just that when he appeared on CNBC and said:
“We have been looking at the Dow as the new safe haven,” Gibbs said on CNBC’s “Asia Squawk Box” on Wednesday.
I’m not sure if Gibbs himself appreciates the breathtaking implication of the point he is making. When you really think about it, it’s potentially quite monumental. After all, in one neat sentence Gibbs arguably sums up the key difference between the old economy and the “new normal”.
That being, the path out of this crisis depends on turning as many people as possible into stakeholders rather than borrowers.
It’s a view that happens to compliment the innovative thinking of Anat Admati and Martin Hellwig – who believe the future banking model should be entirely focused on equity funding, not debt funding.
Yet it grates the more traditionally minded deeply.
Consider, for example, the views professed by Duquesne Capital Founder, Stanley Druckenmiller, in a recent Bloomberg interview. Not only did he outline that equity was anything but cheap, he claimed the current course of equity markets was heading towards another equity bubble — so anything but a safe haven — one whose origins could be traced back all the way to the Dotcom era. That, he warned, ended badly, and so undoubtedly will this.
To support his view, Druckenmiller added that he had already successfully predicted the subprime bubble. He never made the view public at the time because he had been burned once before when making views of this sort known. This time he wasn’t going to make the same mistake again. Hence his current public declaration that a storm, much bigger than the one that hit in 2008, is coming. Ye all be warned.
But here’s the thing. While I agree with a lot of the points that Druckenmiller makes — I too, for example, believe the current crisis can be traced all the way back to Dotcom, and that the demand for government bonds won’t go away all that easily — I don’t think his assessment will necessarily be correct this time around.
Something very important has changed, which makes this a very different type of bubble.
The government will continue to support the market no matter what.
This one fact arguably impacts not only Druckenmiller’s view but the views of all those people who continue to make predictions based on previous success in spotting the 2008 crisis.
The crisis happened precisely because there weren’t preset expectations of government support. In fact, by allowing Lehman Brothers to fail, the government was signalling that “implicit guarantees” were not worth their salt at all. Consequently, all predictions which were based around the notion of free markets were proved right.
But not for long.
You see, I like Druckenmiller, used to think I “predicted” the subprime bubble and subsequent financial crash. I even had the timing perfect. What I’ve now realised, however, is that even if I did predict the crisis, I predicted it for entirely the wrong reasons or at best due to a partial understanding of the problems at hand. And I suspect there are many others out there like me.
Here’s a quick rundown of how I remember things back in 2006-2007 to explain what I mean.
The mainstream — so, everyone from TV pundits and academics to fund managers, journalists, banking analysts and regulators — reacted far too slowly. They continued to cheerlead stocks and deny the problems at hand even when it became overtly obvious that something was very wrong in the matrix. Some did so because they were motivated by their own interests or a personal agenda, others were plainly naive. Others still suffered from something best described as status-quo bias, not to mention historical myopia and complacency. They seemed to forget that history was full of examples of unexpected crises striking those who had become too comfortable with the paradigm at hand.
By now, this group has taken the brunt of the criticism and blame when it comes to failing the system.
Yet, as we now know, there was also a smaller group of academics and finance veterans who spotted the crisis exactly for what it was. They predicted it confidently, accurately and most of all for the right reasons.
This group, however, must not be confused with one last group, which I would describe as the financial doomsayers and perma-bears. This element — much like me — also managed to predict things accurately, yet their success was linked more to chance, coincidence or even a partial understanding of the problems than anything approaching genuine insight. A large number of respected financial figures make up this group and still continue to promote many of the same ideas they did back then. Their forecast records post-crisis have, in many cases, largely disappointed.
Sure they’ve probably been right about the macro gloom, but it’s fair to state the perma-bear view on market valuations has misfired in many cases.
Why is it that those who once got things so right are now failing to predict things accurately?
I would argue it’s because, just like me, they have been slow to recognise the awesome power of government intervention.
Once we appreciate this, and the fact that markets have de facto been nationalised, it’s easy to understand why we’re sitting on such a major inflection point when it comes to equity valuation.
Government support for debt markets has gone about as far as it can. From here on the scramble for a finite number of “safe” debt assets becomes self defeating on account of negative rates and the zero bound. What you acquire in safety you must pay for in negative yield. There are consequently no real safe debt assets anymore.
Equity on the other hand has no such cap. It has, as many people now recognise, infinite potential.
Related links:
Is that a buy from the Coppock indicator? – FT Alphaville
Albert Edwards, uber bull? (not quite yet) – FT Alphaville
