Fundamental-less Fundamentals And The Supposed Panic Of 2007 -- Repost For 2008

For those who may not have read the post bearing this title back in August of 2007, I'm going to repost part of it as I believe it is again relevant today as now we hear of the Panic of 2008. Since I penned a post on here less than a month ago that we had the true potential for some type of disaster, an orderly correction has turned into a collapse and the market is down more than 25%. Still, there is no one in control of this market. The market is repricing risk at a dizzying pace. Some of it is unregulated capital unwinding, some of it is not. But, don't assume it is not acting rationally. If one were to wake up and realize the future we have been talking about since starting this blog, they would immediately reprice assets substantially lower. Historically, that has taken a substantial period of time. Today, we have near instantaneous markets. Those who don't appreciate that fact, and that includes most professionals, aren't being given a chance to enter or exit this market at a price they would like. That does not mean the market is acting irrationally. In fact, the market is acting rationally. The future is going to be a very different place. And, it has nothing to do with mortgages either. If you are one of the those still blaming this on Alan Greenspan's low rates in 2001 and subprime mortgages in the U.S., you need to wake up. That dog doesn't hunt anymore. Of course, it never hunted on here. Because it is completely wrong. We don't see the events unfolding globally, all of which were anticipated on here, because Alan Greenspan lowered rates in 2001. In fact, that is completely preposterous. Here are some very timely remarks from that the 2007 post.

The Panic of 2007 is being discussed in nearly every form of media. So, is the recent market action based on panic? Was it a panic in 2000 when the same use of terminology was so prevalent? Is this correction purely technical as leveraged funds unwind? Or is it also based on a rational response to fundamentals? How about a simple "panic" quiz. Do you want to invest in a hedge fund right now? Or buy stock in the nation's largest mortgage company, Countrywide? Is one acting irrationally if the answer is no? Are you logical or panicked by saying no? How about taking a different perspective than I've read anywhere else? Have you ever thought that the market was acting irrationally for much of the past five years with nearly no measurable regard for risk management and now the market is simply starting to act rationally to fundamentals? The media keeps telling us the markets aren't acting rationally to the great global fundamentals. Did all of that money and leverage used to abnormally ram global asset markets like never before really reflect fundamentals? The undisputed facts are some significant number of hedge funds and trading desks at major financial institutions have no clue what they are doing as we are finding out. Because someone can borrow money at an attractive rate and use it to artificially push equities higher with manufactured money does not mean it is either justified or based on fundamentals. Is this really any different than speculation in the real estate markets using borrowed capital? Is Wall Street's patronizing behavior any different that that of the individual real estate speculator? They'd like us to believe they are too sophisticated for such action. Do we need another history lesson as a reminder? And what of emerging markets? Do emerging markets, which typically have little transparency, crude financial infrastructures, weak regulatory controls and immature capitalist and democratic structures really deserve to be fundamentally valued at a premium, comparative or absolute, to U.S., Japanese and European equities, real estate, bonds, debt, currencies and other assets? (Remember those posts as well?)

Is this really about subprime debt instruments? Or is that simply the exogenous shock which wakes the world to very heightened risks across a multitude of areas? Are the global fundamentals really supportive of what is the most expensive market in history by many measurements? And, is a ten percent correction enough to bring valuations back in line so that we can start another bull market? For those of you who have been with me since I started this blog, you know the answer. If fundamentals and quantitative analysis are any indication, and in my world they are the only things that matter, the answer is clearly and emphatically no.