The "business cycle" occurs mostly due to mistakes by people in overinvesting sectors - such as overbuilding plants, facilities, or even inventory. It's not a foregone event caused by some "god of business" sending a few bolts down to shake things up. People get group delusions about profits in a few sectors and ignore the actions of themselves creating correcting feedback. Eventually, due to time lagged responses, the sector finds itself in serious problems from overcapacity and drastic cuts are made, creating a "cycle" downturn.
So for this "cycle", one obvious overbuilt sector was residential housing in many regional markets. What other sectors are "overbuilt"?
First, the housing related sectors such as home mortgage lending and home mortgage brokerage and banking clearly had grossly excess capacity for a stable environment.
Second, I say the hedge fund industry had grossly excess capacity. Rich people greedy for "more" flocked like lemmings to the hedge funds. The industry provided a siren's song to entice them so the fund manager's could get a piece of those fat fees. Stories of trading funds with great profits, or "stable", "absolute" returns were the pitch by the flim-flam men.
So huge sums were invested in beefer trading funds, quant funds, and all sorts of hedge funds that invested in slices of mortgage and debt securities [CDO/CLO/CBOs]. Like fools, they leveraged those illiquid securities, "trusting" the big Street firms that "the markets are liquid". But that "liquidity" was from ... other hedge funds.
Like any "greater fool theory" asset bubble, eventually there aren't any more buyers. Or something occurs to make some question the value of the assets. That was the connection to the subprime loan markets. That caused all complex securities to be questioned. Now most are good paper. But in an "overbuilt" market, that didn't matter. The unwinding was vicious.
The Street firms provided no liquidity and the piranhas at GS and probably other firms shorted paper they had readily sold to their hedge fund clients. And they probably gave them margin calls, too. hence the asset-backed securities market collapse.
Too bad. That paper is "mostly" very high quality paper, but in a panic, rationality takes quite awhile to return.
A flow of funds pulled from trading hedge funds and pyramid leveraged debt funds into truly productive investments could really help the stock market get to much higher levels that are justified from corporate earnings.
PS: use of words like "cycle" are metaphors for events and changes in human society. A fine book I read in the 1970s and am currently re-reading, "Social Change and History", by Robert Nisbet, carefully elucidates the use of biological metaphors, such as "growth" and "cycle" in description of human society over its history beginning with the Greeks and to the modern era. I recommend it if you're interested in scholarly books. It's available on used book sites.
PPS: Not much going on so far - the charts are bullish. Dollar is down, gold is up. We''ll see if the UAW fools cause a strike at GM.
P^3S: I wonder if there's a contagious mental virus going around that drives women to blab on cell phones all the time? I drove to the post office on a little country road. Fresh air and beautiful scenery abounded. And a lady is walking her dog ... blabbing on a cell phone. At the post office, another lady is blabbing in her SUV parked out front. Amazing. What did they do before cell phones?
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21 comments:
Bunkerman you have referred to the
"business cycle" in a your last few posts, and mentioned that you were reading a book on cycles...care to release the title so this common man may have a read...thanks...
all the panic...for what?...the Mets will be fine..
wel, I mentioned I was reading a book about the metaphors used to descibe cycles and growth their their history - that's the book in the PS. Its' not about business cycles, but how human society change has been described in history.
For real background on actual business cycles, I think Milton Friedman and Anna Schwartz, "Monetary History of the United States" is the place to start. After that, I've read many individaul books on particular cycles: the Panic of 1819, etc. on and on. Laissezz Faire Press sold me a lot in the 1980s - I don't know if they are still available.
Yes you have referred to Friedman's book on several occasions...I'll have to give that a read...
Miners are strong. BHP has the gold mine news; not sure what's moving the others.
gmen, no need to hang young manning....yet....gold domers, powder puff playoff potential.
Bunkerman, now that you have taken some hard earned profits, why not hedge the alpha fund a little while your dip develops.
I worked on hedges quite a bit over the past couple years and they just don't work very well for me. They time up a huge amount of capital and often simply don't work. Since the Alpha Fund has such concentrated potitions, I can used futures which are very efficiant use of capital. I suppose shorting XLE, XLF and some miner index and maybe some QQQQ might do it. But since I'm about 150% long, that would be a partical hedge anyway. Since I'll waiting to buy a dip, a hedge will just distract me.
I think a dip will be short and I don't have many positons coming up that will flip to LT gains from ST until November.
If I thought we might be heading to a more prolonged downturn, I'd defintily short the heck out of those ETFs.
I meant, I cannot use futures to hedge the Alpha Fund.
nice catch on DUG heffernan there Frosty...
MLF ty but that wasn't me...that was my broker at Wu Tang Financial...they are the best.
another way to say it re hedging, frosty, is that my old brain is not as nimblee as your young trader brains ;-))
old and stupid...I resemble that comment...but you....lol... I think a monkey just flew out my ass.
GM strike...Ben should cut another 100 bps my noon...the common man needs a hand. Bunerkman, nice call....thinking you can muster the grey matter to put out a little something...that VIX retraced 50%, so you could even go with a litte nothing.
WU TANG would leave some room to the next fib level.
XLF...should get at least a small coat of paint should the bull desire to claim the week...lagging large cap tech like HALO 3 get the attention....select small caps are attracting fake buyers.
B'man do you have any direct exposure to China?
Bud where is the list.
none direct, mfl. Just indiect through the resource companies.
oops, I do have EDU a great stock.
GM that 30.50 gap...Spin would be all over that if he wasn't hung like a dirty shirt post a gmen victory drunk...he trades much better when the gmen dump.
SKF a little darkside here with some room...rotation paint play...is that in the beefer dictionary Bunkreman.
Like SKF crossover frostman
good one frosty. It is now hehe ;-)
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