My Toe is Hurting

So I am in NYC sitting at a conference today and one of the speakers notes his partner just emailed him that the Dow was down over 900 and the partner was wondering what he had done in NYC to cause this. Everyone chuckled and everyone pulled out their respective mobile devices to see if it was true and not just a joke. After all, I looked before I went to the conference in the morning and futures were pretty much flat, but he was not joking about the Dow. I am like,"Wow, I did not see that coming."

Well, actually, I did. I have seen it coming since March 9, 2009, when the market started its incredible climb off the recession lows. I was not sure exactly when or how or what the precipitating event would be, but looking at fundamentals it was just a matter of time. Now everything could be honky dory tomorrow or next week. I have totally given up trying to figure the market in the short to medium term as there are simply too many variables to consider, but I am still a bear in the long term and my investment strategy this year has totally focused on long term fundamentals.

The world debt problem has not been corrected. It has shifted to government coffers in many countries but is still there. Greece is one somewhat extreme example of it but by no means alone. This is a worldwide problem and few countries are immune. Even the "immune" countries, i.e. those with no real internal debt issues, are going to feel it as trading partners suffer. It ain't going to be pretty folks.

So what happens next. Undoubtedly governments in Europe, the U.S. and elsewhere will put new assurances in place that everything is fine to calm the markets. Perhaps a few billion more here or there will be spent to calm fears and we will have a recovery of sorts from the current anxiety. the VIX will go back down, credit markets will calm and all will be fine - at least on the surface. But then we will catch up to that damn can again. Each time it seems the can gets bigger and heavier and we cannot kick it as far as last time. When we catch up we will try to kick it again and will probably succeed a bit, but eventually we will not. Eventually it will be time to pay for our foolishness. Greece is already there and some other countries are not far behind. Eventually, virtually all of us will be there including the good old U.S. of A.

You see this is what happens when you do not take your medicine. When you do not try, in an orderly fashion, to dismantle corrupt companies that caused the problem and do not deserve to survive, and instead spend hundreds of billions to keep them alive continuing to do a lot of the same stuff that got us here. This is what happens when you try to solve a debt crisis with more debt. This is what happens when you have policies in place that promote people, corporations and governments living wildly beyond their means. This is what happens when you focus on short term gains over long term stability, which we have easily done for at least a generation.

So here is where I see things unfolding. As noted above, given the market woes this week, you will see some government support coming out; it could be the EU, IMF, U.S. or whoever, but some, probably many, officials will be making a lot of public statements on how the situation is controlled and Greece will be fine. The folks in Greece will, meanwhile, continue to riot as their lifestyles just got flushed down the toilet. Mind you, none of us would like this to happen to us so I understand, but the truth is they made their bed - we all did. Greece will then be followed by other countries facing the same situations. It could be the other PIGS, it could easily be the UK or the U.S., it could be Japan. We could also see a bubble or two soon pop in China. There are so many ifs here no one can say, but I can say I do not see many rosy scenarios. Debt is only going away if either those owing - either individuals, companies or governments - default, modify or pay it down. I think default is in the long term cards for Greece and a few other countries as the people simply will not live with the relatively long term pain of paying down the debt. The middle ground of some negotiated modifications, i.e. haircuts, is certainly possible and probably a good middle ground, but that still will cause some havoc in the markets as a lot of financial institutions - you know the ones we just saved - hold a lot of this public debt. It is going to be painful any way you look at it.

So what do we do in the U.S.? It is not rocket science folks. Dismantle companies that should not survive. Put in place policies that promote people spending less, paying off debts and, God forbid, saving some money. But politicians cannot fathom this. If people spend within their means we cannot possibly support an economy built on excesses. The housing market depends on people spending beyond their means. Retailers do too, as do all those commercial real estate landlords. We would most certainly suffer a long and hard recession. It would be absolutely horrific if we have to live within our means as our U.S. economy would take a hit of several percentage points on the GDP. We, like those in Greece, do not have the tolerance for such financial pain. After all, we love our stuff. I am not immune, I love my stuff. I do not want to live without my stuff. No one does. And so, we incur more government debt and we kick the can again.

I don't know about you, but my toe is beginning to hurt.

Disclosure: I have put options on various financial and other companies - and they did very well today (after being down a boat load on put options the past year).