Doug Kass
"I have recently written that before we write Dubai off as a unique situation, there is never one cockroach as the egregious use of debt over the last decade has a long tail to it. I remain skeptical of the consensus view that Dubai is a one-off, unique situation that resembles nothing else in the world. Dubai is not sui generis. Last week I wrote that Austria's Credit Anstalt failed in 1931 and that it, too, was initially ignored. History steadily provides us with examples that contagions can begin in the most remote of places. When I wrote about the meaning of the Dubai credit mess last week, I specifically highlighted the problems in Greece: 'Investors are ignoring some of those nasty critters in Spain and Greece, and don't forget the typical bedbugs in Latvia and in the Ukraine.'"I have expressed my doubts that the domestic economy began a normal cyclical expansion in the spring of 2009 that is capable of matching past recoveries of over 40 months in duration. I strongly disagree with this conclusion as the past cycle was not a traditional cycle. Rather it was an unprecedented credit-driven cycle characterized by an excessive and abusive use of debt/leverage at nearly every level of the private and public sectors. Following the artificiality and unusual nature of the last ("free") credit cycle, the current expansion, which is now deprived of much of the steroids that formed the foundation of that growth, seems likely to disappoint an increasingly confident cabal of forecasters who project a smooth and self-sustaining recovery.-- Doug Kass, "A Couple of Concerns" (Dec. 9, 2009)
Moreover, I have submitted that the credit aftershock of the last cycle would have a long tail and would likely continue to haunt the economy and limit economic growth. For example, state and local governments and even countries outside the U.S. should no longer be steady contributors to growth as they have been in prior recoveries. Instead they face the dual challenges of extended balance sheets and an imbalance between receipts/expenses and imports/exports.
As well, I have argued that the securitization markets and the shadow-banking industry, omnipresent in the last cycle, would not be the same driver to growth going forward. Not only will housing, the consumer and small businesses suffer from less available credit, but so will large companies that had previously relied on the (healthy) securitization markets to finance their own growth by laying off receivables to others.
Back in December, I turned my pen to concerns about country risk (above) and the risk of contagion -- the cockroach theory was readily dismissed by many as world equity prices continued to advance amid signs of a statistical economic recovery, but in Thursday's trading, sovereign risk (especially of a Greek kind) was front and center.
Make no mistake, the problems are real, and they will be felt by the inhabitants of the exposed countries and by the holders of their debt. How the drama unfolds and whether the European Monetary Union will halt the potential contagion by issuing an E.U. debt guarantee, providing loans or easing collateral rules remains to be seen.
Nevertheless, the size of the problems in Greece, Portugal and the other nasty critters must be put in perspective. Greek's GDP, at only $343 billion, is roughly equivalent to the GDP of the state of Washington in the U.S. The GDP of Portugal is even smaller; at $223 billion, it is equivalent to the GDP of the state of Louisiana. According to Mike O'Rourke, Greece's total stock market valuation is "slightly more than Citigroup's (C Quote)." And, if you add the GDP of Greece and Portugal together, "they will equal the size of one large systemic institution in the United States."
For these reasons and others, I view the yesterday's panic as a likely nearing of the end to the market's correction rather than the beginning of a much larger selloff or bear market.
It will soon be time to be greedy when others are fearful.
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