Everything is decided by the margin. We live in a world where the tail wags the dog. We make big decisions using small ideas with marginal information. The Texas republican primary winner for senator won with less than 6% of possible voters. The stock price for General Electric is established by an average trading volume of 3.5% of the outstanding common shares, this 3.5% sets the price for all common shares. The presidential election will be decided by less than 6% of possible voters. In finances and politics the decision is made by the margins. The unimportant and trivial dominates over the important and worthy.
I am aware that I suffer this same delusional dysmorphic decision making process. Like a soldier in his foxhole all I can see is the small area I inhabit. Isolated and scared I still have to make decisions. Should I buy stocks or bonds, or sell everything and hold cash? Listening to the mass media inevitably misinforms, remembering the media’s advice before the dotcom crash or the subprime debacle the media was the worst source of information. Recently we have had the LIBOR fixing, the crash of MF Global and the failure of Knight Capital. I am in my foxhole without food, the ammunition is running low and the 4 Star General in charge has left for vacation.
I still have to play the cards that get dealt; I have to show up every day. If I can discern the larger trend maybe I can survive, maybe even thrive.
I’m on the bow wave of the baby boomer super tanker and see ice bergs dead ahead. We created a debt crisis by buying stuff we didn’t need with money we didn’t have, borrowing from the Chinese to buy Chinese goods. Now we have to pay down the debt, deleveraging in the popular parlance. The general population, most governments and the financial sector owe vast sums. The financial sector transferred their debt to the government and the government sent me the bill. We are in the age of deleveraging due to a debt crisis. This debt crisis created a recession deeper, longer and more painful than anything my generation has experienced. As a bonus we got this just in time for our collective retirement. Historically debt induced recessions last about 10 years, for Japan it has been 20 years. Our political class is being typically political by not wasting a crisis, using this crisis to convince me of the perfect purity of their political doctrine. They will push the fiscal cliff pass the edge without regard for the middle-class, instead preferring their personal political power plays.
Does any of this offer me some investing ideas? Should I short the Dow Industrials and the NASDAQ, maybe move to Germany or Norway? For now I’ll lie in my hammock and think about it.