At August 2007 arrived the evidence that the dysfunction had occurred and the causes were beginning to be explained in an understandable way for the majority who were still living in a fantasy world. Some hysterical voices were proclaiming the end of the world, whilst others of us tried to keep calm in the face of events that, even back then, seemed to us like a black swan with its feet and beak covered in soot. In October 2007 we all already had the details of what was happening and we were aware of the pathological nature of a system that was already a far cry from Wonderland, even though politicians and the public continued to use euphemisms, whether consciously or not. The stock markets remained largely oblivious to the underlying problem, but the feeling For some, it was already a matter of living through something unprecedented and, at the very least, comparable to the crash of '29.
Fasten your seatbelts was the title we used when we published in September 2007 the sudden realisation that some (still only a few) had when they realised that something serious and far-reaching was happening to the economy: «…The global economy is going through a period of turmoil, much like the passengers on a plane when the pilots detect problems mid-flight. The calm of a journey where comfort had made the passengers and crew forget they were at an altitude of 10,000 metres, travelling at a speed of 950 km/h and with an outside temperature of minus 25 degrees, has suddenly been abandoned…»
As early as the the first few days of 2008, our feeling was from a clear and imminent perfect storm meticulously and menacingly orchestrated. We immediately saw a mini stock market crash, which we described at the time as Coitus interruptus, as our feeling The view was that the stock market should have fallen much further than it actually did at the time.
In the month of April 2008 The divergence between bond spreads and equity markets that remain sky-high led us to write: The Unstable Chemistry of the Economic Molecule, which showed that this instability would soon have to find a balance. At that point, our feeling y hope was that the RF would stabilise in favour of maintaining equity market levels, although we noted that the opposite movement was, unfortunately, the alternative. It was clear that the situation at the time was unstable and needed to find its equilibrium quickly. Just six months on, the stock market has plummeted and we still have no indication of when it will bottom out.
At this stage, we can say that the balance between debt spreads and stock markets has been restored. We can also say that the most serious social consequences of this global multi-crash are only just beginning to emerge. That the political decisions to save the System and the global banking sector are firm. That the schedule of meetings designed to lay the foundations and regulations for the future of capitalism has already been set in motion, etc. In other words, we have the diagnosis (which remains Forecast: Undecided), the global policy decision has been made, and despite the fact that the recession is already affecting more than 40 countries and the social outlook is extremely bleak, we are beginning to see the feeling that the mistrust it may start to ease off slightly shortly.
We must not confuse an incipient easing of mistrust with an improvement in the situation, or even with a brighter outlook for the future. The road ahead remains bleak, and the macroeconomic figures and the worsening situation are far from having bottomed out. But the mistrust seems to have been largely priced in by now. If this feeling we have turns out to be true, how will it play out and how can we capitalise on it? We come, as usual, to the million-dollar question.
The situation, akin to a house of cards collapsing, is so serious and widespread that it is difficult to predict where we might capitalise on even the slightest easing of mistrust. Perhaps the extremely high volatility near a floor will create a mirage which, between technical indicators and fundamental analysis, will lead us to enter an equity market that is doomed to a flat line for many years of recession. Something akin to what is known as stagflation, but with the concepts of stagnation and volatility: Stagnation, volatility? On the other hand, perhaps a slight recovery in corporate debt liquidity will leave us in the hands of giant companies with a future built on shaky foundations. The much-heralded «credit revival»—perhaps necessary for the survival of the system and of millions of people and businesses—may lead us to mirages in fixed income and equities, fuelled by a slight recovery in confidence. But we must not forget that the fundamentals of this The Great Depression: The Big One There are more films than ever before.
Despite everything, our gut feeling is that mistrust is set to ease, the effects of which could be highly beneficial, but also highly dangerous. We have spent so many months with the ground constantly shifting beneath our feet that we will be inclined to cast aside our mistrust at the slightest sign of improvement. We will therefore be overreacting positively just as we head straight into the eye of the storm. But even as we head into the heart of the storm, doing so with greater confidence provides a great deal of stability. Especially for the financial system, at least as we know it so far.
Our most significant thoughts are those that contradict our feelings.