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Economesst.
The state of the markets is fucked. From my 900-pound mahogany desk in midtown I write, frustrated with financials and angry with oil. Inflation is on her broomstick and the only thing ‘experts’ tell people to buy is commodities and the contradictory everything-green. The last several months can be described as a big long panic, spattered with spells of euphoria—a lot like a night out in Bushwick. Luckily for the disciplined, panic is what to buy.
In order to understand what is going on with the markets, you need to understand what got us here in the first place. There are two major worldwide changes going on right now. First, investors are de-leveraging their holdings on a massive scale. Second, the good ‘ole USA is transitioning from the driver of global economies, to a squealing backseat whiner; throwing siblings out the van in protest.
at home
In order to de-leverage their portfolios, large institutional investors were forced to sell what they owned. They essentially couldn’t afford their holdings anymore. It’s a lot like buying a house, watching the market collapse, and being forced to foreclose because you owe more than your house is worth. All the selling drives down the prices by creating a supply/demand imbalance. It’s a constant battle that supply has been winning handily since November.
It gets worse. Like many homeowners, the stockowners bought with borrowed money to speculate on rising prices. A lot of hedge funds levered up their money 30 times. At 30 times, $50k will buy you $1.5MM in real estate or Phillip Morris; whatever your investment of choice. The problems arise when that $1.5MM loses 3.5% or $52,500. Then you owe money. This happened when the bottom fell out of the institutions’ investments and they were forced to sell. The main point: too much borrowing is very bad. It has affected everything from oil bought on margin (ETFs + futures) to homes bought on credit, and it’s been done with a lot more than $50k. Commodities and real estate are just in different stages.
abroad
The economies abroad are frustrated with us. We hurt their banks and infect them with our TMZ disease. We help run up their equity markets because they are “uncorrelated” but they correlate perfectly when one of our banks fails. Despite our ill effects, they buy our goods and our dollars on the cheap. They emulate our lifestyles and buy our crap made by their children. They have been admirably patient, but there are too damn many of them.
The emerging middle class of Chindia is becoming a real force. What’s going to happen when the ratio of 1 car to 4 people in China increases? That’s a lot of oil. China has more honor students than we have students and they’re multiplying like a Texas Sect. So now what?
We’re releasing the reigns of economic control and it’s an uncomfortable alteration. We still account for 40% of the world’s GDP. We still politically control most economic forces abroad, which is a must. Our banks still set the most important rates. And nobody wants to f*ck with us yet. But, China is like the U.S. 50 years ago. The next 60 years will be an interesting unfolding. Consider it a de-leveraging of American awesomeness.
The resulting markets are effervescent with risk. Investors, uncertain about the future, will panic at the slightest sign of bad news. There was a lot of bad news over the last 60 years, but your money in the market would have multiplied 500 times. There has never been a time during which the markets had no risk. So when people panic and the markets fall, don’t follow. Invest whenever you have the money, go to Chindia when you retire, and buy panic all along the way.
photography by petrick2008
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