Friday, July 27, 2007


That Charles Gave (senior doyen of GaveKal) is both clever and successful is true beyond a doubt. He's been at it forty years. But that doesn't make him always right. Nor does it make him a good speller (francophones never remember their "S's, not that Cassandra can criticize this given her own appalling revision and editorial skills). So while I do admire his long view, not to mention his multiple commercial successes, I do not share his politics, nor his sanguine view of "risk" pricing.

Ever-bullish and optimistic, the premise of his latest piece is: The CDO subprime implosion is (1) the fault of Government (and probably closet Commies, socialists, or socialist sympathisers); and (2) bullish for equity. He believes the crisis is the fault of government(s) because virtually everything in the world that is wrong, broken, bad or evil stems from this fount. And he believes it is bullish for equities because he subscribes to the benign view of the savings glut hypothesis, and that since the products were created in response to "the glut", and the "the glut" must go somewhere, ergo, it will go into equities.

While not denying the possibility of such an outcome, I tend to subscribe to the view that a moderation in the prime enabler of liquidity creation - i.e., the risk-appetite of institutions that lend thereby conjuring greater amounts of liquidity from the pixie dust of fiscal deficits - has, for the moment, been satiated, as a result of increasing doubts regarding, and the abject failure of, the future to evolve as planned. This of course is mostly the result of asset collateral and projects backing such liquidity creation being found insufficient to make the lender whole. Such a realization is sobering for anyone (let alone a financial institution) who at 10 to 12x++ leverage, has but a thin veneer of capital that in times of great volatility and crisis is not dissimilar from "wet bog roll" in relation to the torrent of the potential call upon assets by ones liabilities.

My different view from the esteemed Mr Gave doesn't make what we are witnessing "the end of the world", nor even the end of growth in the world, nor the end of anything (though it will almost certainly temper the unabashed enthusiasm to lend to the marginally more absurd and less-than credit-worthy undertaking). For in Mr Gave's time-frame, the optimists may well continue to triumph. It does however, have dramatically different implications for risk-asset pricing between "now" and "then". Yesterday IS likely "a dip" in a topping process, ultimately caused by tepid US real PCE, and asset appreciations that have in aggregate, got reasonably ahead of themselves. It may be hastened by looming trade conflict, and systemic instability and costs from war. But I remain dubious that financial institutions eschewing one type of credit risk, will, so quickly abandon caution for the immediate sake of equity risk. No. de-leveraging is a necessary intermediate step in modern financial institutions to the process of allocating to more sober, long-term risk-vs-reward propositions.

1 comment:

Anonymous said...

You know, this points out just how few souls out there who can detatch themselves from the action in prices and the action everywhere else. The Gene Kellys of the world have really seen their script play out, that is, except for the price of risky assets (of course, until just recently). While the Gaves of the world have had projection after projection come a cropper, that is, except for price.
Which can be quite dangerous, as it leaves one constructing a view b/c of price, and when it turns, outlandish proclamations are a given, well...b/c it's just too damned difficult to turn the intellectual ship around.
Granthems latest seems apt, that of the equity boys running around with heads cut off, proud and boisterous to still be running.