ON THE EDGE OF THE FINANCIAL ABYSS?

9/1/15

The Dow and the S&P are down about 3% for the day as I write this.   This drop is just the latest leg of a prolonged dive in the markets that has brought that average and that index down 12% and 10% respectively from the all time highs they reached in May.

Most of the experts are telling us not to worry.   Despite

• the problems in China and throughout the developing world,
• tanking commodities markets,
• a domestic economy that is so weak that the market doesn’t seem to think it can sustain even its halting growth if the Fed begins normalizing interest rates, and
• mountains of richly priced debt throughout the world,

there is nothing to worry about, we are told, unless one is a trader.   Why?   Because, unlike in 2007-2009, there is little to no risk of financial contagion arising from the aforementioned.   The banks are far stronger than they were in 2008 primarily due to strict regulation (Dodd-Frank, Volcker Rule, etc., etc.), wise management, and resultant stronger capitalizations.

Yours truly is not so comforted by these anodyne assurances.   

Can we be so sure that the banks are safe and that financial contagion is therefore a remote possibility?   How much exposure do these now super safe institutions have to oil and other producers?   How much exposure do they have, in one form or another, to the high yield market, which we know is heavily exposed to the energy markets?   What are the trading desks of these institutions up to?   How exposed are the other components of these organizations to the activities of those trading desks?   How much different is the current management of these mega-institutions from the 2008 management of said institutions?  If the experts’ answer is “very different,” or even “different,” why are the names of so many of the captains of said institutions the same as they were in 2008?

Yours truly is not saying that we are on the precipice, or in the early stages, of another “big one” a’la 2007-2009.   Since I am no longer in my 20s or 30s, I no longer know everything and am no longer able to make predictions about the financial markets with absolute certainty.  One supposes that if I had somehow finagled my way into a job in which I was paid astronomical sums to appear in the media and make predictions on the unpredictable, I would have retained this ability, but I was never able to obtain such employment.  Perhaps in the next life.  But, for now, the years have taught me to be very circumspect regarding my prognosticatory abilities and to avoid investing based on such talents.  

I am also reminded, as I watch those in the know opine with such great confidence on the inherently unknowable future, of a quote by the late, great Mayor Richard J. Daley, uttered in an admittedly different, yet still quite relevant, context:

“What the hell do the experts know?”

So, no, I’m not predicting that we are looking at a 50%+ drop in the markets.   But I’m not as sure as are most of the experts that we are not facing such a calamity, either.