Pop Goes the Weasel

How about a little thematic thinking?

As everyone knows, investing, finance, and business rely on confidence. And confidence relies on trust. For example, if the pricing of assets cannot be determined, then trust is eroded and confidence is shaken. On a financial markets basis, solutions to such problems tend to be very disruptive yet solvable. Recent case in point, sub prime mortgages and credit derivatives. A work in progress, but progress is being made. It is, however, quite another story when it comes to world’s economic leader, the US.

If confidence in the world’s economic leader is brought into question, then investors start the process of self preservation of their assets. Such is the case with the weakness in the US dollar, the single one factor that strikes fear in the hearts of the superbulls.

With the US so far out of step with the rest of the world on so many levels (geo political and economic, for example), it is understandable that the US dollar should bear the brunt of any loss of confidence. What matters most is the fact that it won’t take much to tip the balance and require more than the usual stopgap, emergency words and actions to stem a tide of fear that results from a heightened case of a lack of confidence.

In a larger context, it is reasonable to assume that, in time, the current world economy and markets will be viewed as being in a transition phase. Like a first year college student, the body may be in college but the mind and heart are still stuck in high school. Such is the case with our 21st century world.

Economies and markets, made up of people, are products of their past. And that includes systems and processes that may not be best suited for new era, one wrought by globalization and innovation.

Now, what is most worrisome is when things go wrong, very wrong, say a precipitous decline in the dollar. Or some other unforeseen global macro event that requires a more comprehensive and coordinated solution. What then? Are the policy makers prepared to manage such a massive disruption? Or will the world accept the blended solution of the market discipline and individual country driven policy actions?

Investment Strategy Implications

A crisis looms in our future that liquidity, technological and financial innovation, strong corporate growth and profitability, globalization, and good old-fashioned animal spirits have thus far helped to forestall.

When, not if, that crisis emerges, a new world order will be called for in which economic, monetary, social, and cultural issues will have to be addressed in a more cohesive fashion. The fragmented nature of a market based global economy coupled with nation state agendas will prove to be unworkable when, not if, a global disruption emerges. And when, not if, that occurs, the pressure to resolve the issues that are truly global in nature will be enormous. Hopefully, the policy makers will be up to the task.

For investors, when the global crisis does occur, all the traditional tools of equity valuation analysis will go out the window as the crush to get out the door will put into motion George Soros’ “reflexivity”, with its feedback loop to the real economy will be felt, as animal spirits run wild (in reverse) and conventional thinkers do lots of head scratching.

Until that day, happy times will be punctuated by mini panics. The US yesterday, India today, somewhere else tomorrow.

The music will stop one day. It always does. Until then, it’s all around the Mulberry Bush, as the monkey chases the weasel.

Note: Click on the above blog title for a little musical treat.