Few commentators understand the manner in which 2008 changed everything, and I mean EVERYTHING about the investing world. This was no mere Financial crisis or deflationary collapse… this was THE game changer, the event that altered the entire investing landscape so that virtually every and all relationships between various investment classes was thrown out the window.
For most of the 20th century, investments were categorized by very distinct levels of risk. Because the US was the largest, strongest economy in the world, (and had a printing press), US debt was considered the only truly “risk free” investment on the planet. The returns generated by lending your money to Uncle Sam was the golden standard by which all other investment classes were judged.
You could attain higher gains with stocks than these gains, but they came with greater perceived risk (of corporate default, mismanagement, or other issues). The same goes for commodities, though the various risks were related more to weather patterns, price of feed or production, etc.
The Financial Crisis in 2008 changed ALL of this. As everyone knows by now, the central issue for the crisis stemmed from too much junk debt, specifically derivatives which had grown into a $1.4 QUADRILLION (that’s 1,000 trillions) monster.
The central bankers’ response to this crisis (particularly Ben Bernanke) was to transfer this garbage debt ONTO sovereign balance sheets. Many commentators have tried to justify this policy as saving the financial system. It did no such thing. What it DID do was transfer the very garbage (junk debt, opaque accounting standards, outright fraud in the form of mark to model valuations) from Wall Street to Uncle Sam.
The implications of this are so vast that few people have realized them yet. By shifting garbage debt like this, Bernanke, almost overnight, changed US Treasuries from AAA-rated, “risk free” investments to junk bonds (I realize the US already had major debt problems before this, I am merely trying to stress the fact that this transfer in garbage debt was what pushed us clearly over the edge).
Bernanke literally “bet the farm” that the investment world could swallow the idea that somehow the very garbage that took down virtually every Wall Street bank could be transferred to the US’s balance sheet WITHOUT damaging the US’s reputation / rating. Doing this was the equivalent of moving radioactive waste from a landfill to a formerly lush meadow… all it does is spread the damage and wreck the balance in the ecosystem.
The damage done to the investment ecosystem is now clear in several ways, They are:
- China and Japan paring their US debt holdings
- From a “risk” perspective, the market indicates it is now safer to lend money to Warren Buffett than the US
- Stocks continue to hold up, despite an obvious and historic disconnect from economic realities.
This final point only just struck me the other day when I was talking with Bill King, a top financial researcher. With US Treasuries now “compromised”, investors HAVE TO begin looking for safety (from a balance sheet perspective) in new places. Consider, if you had a choice to put $1 million in US Treasuries today or in some large low debt, high profit multinational (say Exxon (XOM) or Microsoft (MSFT))… which would you choose?
This is (partially) why stocks continue to hold ground: because with US debt’s “risk” status compromised, stocks are now more appealing from a “risk” perspective. It also brings up the most critical rule for investing going forward: finding safety.
The world remains awash with bad debt. The US has to roll over trillions in debt, and at the same time it must issue trillions more to cover its deficit balance. Stocks are extremely overbought, completely disconnected from economic realities and over-valued by most historic metrics. Commodities are also disconnected from economic realities, rallying largely on a flight from paper money. And now that the Sovereign Debt Crisis is taking hold, currencies are beginning to flash major red flags as well.
You can see now what I mean by saying that 2008 was a “game changer.” Under normal circumstances, US Treasuries would be rallying right now, as investors sought safety from the obvious systemic risk permeating throughout the markets. However, with Treasuries “risk status” compromised, this is no longer the most sensible option which is why, in some ways, stocks are more appealing as a “safe haven.”
Please understand, I do NOT like stocks at these levels and am firmly in the bear camp. But from a “big picture” perspective, some stocks offer a strange new form of value in the sense that they have decent balance sheets and will likely STILL EXIST in the future (I’m talking about the Exxon Mobils, Johnson & Johnsons, Beer Companies, etc). Five years from now, people are still going to using energy, drugs, and alcohol.
I’m not so sure the same thing can be said about US Treasuries, the big banks, and much of the rest of the financial world.
Disclosure: No positions
Similar Posts:
- How Much Savings Is Enough?
- Who benefits from quantitative easing?
- Stating the Obvious About European Debt
- More on the Ratings Agency Scam
- European Debt Crisis Intensifies
