I have been emailing friends asking their thoughts on the markets and below is a very thoughtful response. The writer is a great guy, a smart and experienced guy, who has worked in the bond business for over 20 years. More then a few people I have spoken to are pointing the finger at Greenspan. He talked early on about “Irrational exuberance” but did little about it! ……………….. enjoy the read.
“I remain in the camp that on a valuation basis many stocks are probably cheap. That said, I do think, and have since early summer, that there remains at least some chance of financial Armageddon. The press and most experts really missed the subprime/real estate debacle. The fact that CNBC, or anyone for that matter, would care what some chief economist from the national association of realtors thinks of real estate values or trends in silly. Almost everyone missed the problems on MBIA and AMBAC and these guys have analysts from everywhere following them. In the Greenspan era, when he was flooding the markets with money, banking examiners and regulators turned a blind eye to the raping and pillaging going on in anything mortgage related. When the final book is written on Greenspan, his image will be torn to shreds and we will all come to understand how disastrous his bubble causing policies were. Unfortunately Bernanke gets the short term heat. He is way over his head and if he was smart he might open up his private phone lines to people who know something about capital markets. Might I suggest he dial 1-800-GOLDMAN for some smart advice?Clearly the capital markets are frozen. The leveraged loan market remains a huge problem. Not for just bank’s balance sheets, but for any new deals. Without a functioning secondary market, the new issue machine will remain dormant. The bond insurers’ situation remains our biggest short term threat. How they solve that I have no idea. Buffett taking over the muni side will help the muni market, but in-turn deprives the insurers of their best business. The business they should have never ventured from.Like I said, I think a complete meltdown is way less than likely. But it remains the threat, that should it occur will change all of our lives. Not very comforting to me is the fact that I place my hope in this event not happening largely because; well, “they” can’t let it happen. We deserve it to happen for sure. Living way beyond our means, pursuing a weak dollar policy while telling the world we have a strong dollar policy, fighting a very unpopular war while creating enemies in all corners, under-educating our children in the sciences and math, etc will ultimately hasten our decline as the world’s greatest nation. But in my heart of hearts I do believe that the sovereign wealth funds and all the trading partners with huge dollar reserves will somehow not let us completely fail.My hope is that we can solve some of these problems with good fiscal and monetary policies. The fact that we are in an election year should be a positive. Given the dollar and the easing, gold is probably worth owning as we inflate our problems away. Given the slowing of our economy and therefore the world’s, oil should probably move lower eventually (not withstanding that bum Chavez). Your protection on private equity holdings was choosing good managers and companies in the first place. The leveraged loan market problems should push any exit strategy out on the time line for sure. But the deal guys are hugely incentivized to create profits for you. Over time the good deals will succeed.”
… and that is all he has to say about that. Thanks Buddy.