Saturday, March 31, 2012

Ubi Est Mea?

Another week of gains are in the books and a lot of asset managers are desperately trying to validate their value.  The irony is from 82 to 2000, there was no need for asset managers.  Anybody can buy some shit and watch it go up.  Good times like those, stock pickers are routinely beat by monkeys throwing darts at the WSJ.  But when the good times ended and when money managers are hypothetically most valuable, keeping their clients out of fire, they were shellshocked.  First by tech bubble then the housing bubble.  Most missed both, but you cannot blame them.  20 years of smooth sailing were far too long and caused them to forget how unstable capitalism can and should be.

This reminds me of a story I read on the internets.  In New Orleans, there didn't used to be levees.  Shit would just flood every year.  Then somebody got the bright idea to build levees so the people didn't have to endure the flooding every year.  So fifty years pass and citizens live the good and dry life.  But there is always the generational flood that doesn't give a fuck about your levees.  It was ordained by God himself to destroy everything in its path.  Naturally, people panicked, then looted.  Can you blame them?  They haven't lived through a real flood in so long, they have forgotten what to do.  The levee represented a mitigation to the risk of flooding.  To them, it was 100%, but it never is so.

Such  is the case with capitalism today.  For the past one hundred years, we have tried to tame capitalism, attempting to take the entrepreneurship and advancement without the volatility and busts.  This has caused our society to build a bunch of levees that were supposed to mitigate those risks: FDIC, the Fed, SEC.  So whenever shit hits the fan, people learned not to panic.  Those who panicked and sold were punished because these levees bailed them out.  Over and over again.  So the incentive was to never panic.  Everything was a buying opportunity.  Nothing will ever fall apart because the protection is there. 

So the question becomes: will there ever be a generational flood for capitalism (or was 2008 it)?  And because we outlawed all smaller catastrophes, can we be able to deal with one on our own if our levees fail?  In other words, will there ever be a situation where the Fed and the governments are not able to effectively intervene?  What will the private sector do then? 

Until then, never short a uptrending market.  Down markets start with tired buyers, not overactive shorts.