Why did Greece's brush with default seem to catch so many investors off guard? With stocks ping-ponging six ways from Sunday over the past two weeks, you'd think people hadn't seen this coming. Except that they did. Even if the country did default, we should have been ready for it. But the "market"—whoever that is—can't seem to keep more than one thing in its head at once.
If Nike (NKE) reports better than expected earnings, it seems to forget about Greece for a day. And then it remembers. Am I the only one who sees the ridiculousness of this tendency? Quarterly reports come and go, but Greece will never repay these debts. So it really doesn't matter if the panicked European heads of state put off their day of reckoning or not. My finance professors always told me the market "priced" things like this in. I don't buy it anymore. I'm starting to think that global investors are clueless.
Yes, I know it's hard to be a professional investor and to keep your eyes on the ball. How can you when there are important things to know, like who killed Caylee Anthony? Plus, it's summer, and the beach beckons. But that doesn't mean the "market" has any right to be ignorant of events that are barreling down the pike toward it. Greece's near default is only the latest example of such. The kick-off of QE2 in November 2010 was another. The Federal Reserve practically sent up smoke signals on that one and people still responded as if had only been announced that morning.
Here's the bad news. I asked Pip Coburn of Coburn Ventures, one of the more insightful thinkers out there, whether he thought investors would ever wake up to the larger patterns around their own micro decisions. Short answer: No. "I think the root issue is that 'investors' live in survival mode and rarely work to observe (en masse) their own patterns and are instead sucked into the stuff of the day," he says. "I don't see that ending whatsoever unless suddenly 60% or more of market participants decide to pursue investing seriously as opposed to just randomly voting without increasing levels of thought."
So fine, I'll do their job for them. For this week's column, I set out to find a few insightful folks who think they see another Greece coming on. No, I don't mean a looming default by a sovereign nation that has all of Europe scared. That one is almost too obvious. It's Portugal. I mean Italy. Or maybe Spain? Instead, I'm talking about a handful of inevitables that people have yet to fully process, for one reason or another. Okay, so maybe they're not inevitable, or, in the case of #4, they're already happening. But can we not agree to be aware of the possibilities? Can we discuss these things so that markets don't faint at the very mention of them sometime down the road?
1. A major U.S. bank will need to be recapitalized. Candidate numero uno: Bank of America (BAC). Christopher Whalen, the always-pointed analyst in charge of Institutional Risk Analytics, offered this one. This week's $8.5 billion mortgage settlement ($14 billion with add-ons) makes that even more likely. Will bank investors be surprised? Of course they will.
2. A municipal debt crisis in the U.S. There has been much ink spilled of late over the fact that star analyst Meredith Whitney predicted a rash of municipal defaults and they haven't happened yet. She still maintains that the state of state and local finances are a looming crisis. She's in good company: Warren Buffett has predicted similar things. And anyone who thinks we're not about to see some Greek-style anger at public officials in this country hasn't noticed that their garbage only gets picked up one day a week these days instead of two. Perhaps too many municipal analysts live in Manhattan to even know about garbage truck schedules. (I'm talking to you, Alexandra Lebenthal.) Please do not tell me you didn't see this one coming when it happens.
3. The Chinese economic engine is going to have a backfire, and we'll all feel it. The inimitable James Grant, of Grant's Interest Rate Observer, would like to remind us all that the state of Chinese banks is a perilous one. You know, that whole thing about growing their loan books too quickly, having directed lending, some to government itself, and an abnormally high percentage of non-performing loans? Evan Lorenz, an analyst at Grant's, puts it succinctly: "The so-called Asian development model of state-directed fixed asset investment always leads to massive misallocation and mispriced debt. We've seen this before—in the Soviet Union in the 1970s and South Korea in the 1990s. It works well until it doesn't, and then it crashes."
4. Speaking of China, Mark Anderson of Strategic News Service says that the 30-year effort by the Chinese of "obtaining" intellectual property from other nations is coming to a head. Remember the Aurora attack on Google (GOOG), Juniper Networks, Morgan Stanley (MS), and Adobe (ADBE)? Apparently, and this just emerged at Anderson's latest conference, Intel (INTC) was a target too. Forget low-cost Chinese labor.
5. Lest we forget, there's the whole debt ceiling issue. I know this has gone all partisan in Washington, although for what reason, I cannot comprehend, as the sanctity of the nation's credit rating should be a bipartisan issue. Republicans daring the President to a game of chicken over this show a profound lack of awareness beyond their own short-term poll numbers. (Which, sadly, is a corollary to the whole investors not paying attention to the big picture issue. Is it just human nature not to step back and think about context? It's just not a partisan issue, folks.) Matt Zames, head of fixed income at JP Morgan, wrote to Tim Geithner in April that if we blow this one, we're going to lose foreign investors, risk a downgrade of our long-cherished risk-free rating, trigger a run on money market funds, raise interest rates, and imperil the economy. So no big deal, really. Let's get back to scoring soundbites on Fox News. That's what really matters.
Always optimistic here, people. Just want to get it all out on the table.
