Bear with me on this one, as it won’t exactly help you make money, but may help you lose less in the future.
Larry McDonald, the Head of U.S. Strategy at Societe Generale Tweeted the following this morning:
Mr Market is Searching
— Lawrence McDonald (@Convertbond) January 22, 2016
It’s interesting to contrast the two bubbles. While the excesses in the financial markets in the dotcom era were driven by the promise of a new technological utopia, outright accounting fraud was prevalent in 2000-2002, specifically geared to enrich a small group of C level execs. The fraud that landed Bernie Ebbers, Dennis Kozlowski, Jeff Skilling and John & Tim Rigas in the clink, had little do with the rise and fall of the asset bubble before them. While investment banks paid there share of fines for BS research recommendations for their recently IPO’d clients, not one banker went to jail in that era.
In the wake of indictments, it seemed that corporate America wised up to the fact that financial fraud can be easily tracked, and perpetrators will be made examples of. Survival instincts led to the next bubble, with the captains of the financial industry using leverage to enrich themselves while preying on the financially vulnerable, then re-packaging their poor decisions in convoluted ways. And then pass this process off as a legitimate, sustainable business practice. We know how that ended, hundreds of thousands of mortgage defaults, hundreds of thousands of financial jobs lost and the financial world as we know it nearly coming to its knees. And because the payers this time around were Too Big To Fail, not a single perp walk or indictment of note. The king stay the king.
So who’s it gonna be this time around Larry asks? Where are the fraudsters and questionable players? They will be right in front of us, as they had been in prior periods:
I’ll start. Solar Yieldcos, MLPs, Theranos, Unicorn apocalypse https://t.co/bWszzFYgIW
— Dan Nathan (@RiskReversal) January 22, 2016
I am sure, I have missed plenty, that Shkreli turd obviously comes to mind, but he is such a bit player, merely a cherry on the top when its all said and done. I suspect this cycle’s warts resulting from unprecedented free money don’t resemble those of past corporate indiscretions, but are the result of financial engineering that have created the illusion of a stable financial world. Zero interest rates for 7 years has caused companies to get lean, become savers, return capital, do questionable m&a, create corporate structures that have questionable benefits, invest capital in concepts or unproven technologies which have driven private market valuations to stratospheric levels, the financial media and individual investor’s worship at the alter of billionaire investors, U.S. investors getting plugged with questionable foreign IPOs and the financial media propagating the notion that certain stocks are special deserving of special rules, and on and on. Add it all up and while the there appears to be little illicit activity, most seems clouded by easy monetary policy and questionable incentives by those with access to this free money.
These are all topics I have been writing about for a while. Not as a call to action, or to call a top, but merely highlight the sorts of activities that we will look back on and say “oh yeah it was all out in front of us”.