This blog post originally appeared on
on Feb. 16 at 8:19 a.m. EST.
More than any other time in history, we exist in a global platform that has permitted more people to plug and play, collaborate and compete, share knowledge and share work. But, the hidden hand and interlinked nature of the markets and economies almost never work without a hidden fist. A world as one has an upside and a potential downside as we have witnessed throughout the recession and most recently concerning Greece's sovereign debt issue.
"If you don't visit the bad neighborhoods, the bad neighborhoods are going to visit you." -- Thomas Friedman
Back in 2005, Thomas Friedman wrote the international bestselling book,
, which analyzed the trend in globalization in the early twenty-first century. The title was a metaphor for viewing the world as a level playing field in terms of commerce, where all competitors have an equal opportunity. The title also alludes to the perceptual shift required for countries, companies and individuals to remain competitive in a global market where historical and geographical divisions are becoming increasingly irrelevant.
It is abundantly clear that, over time, the world's markets and businesses have become increasingly connected and interdependent. With advances in telecommunications infrastructure and the rise of the Internet, the process has been accelerating rather dramatically over the past 15 years as technological and financial innovations make it much easier for people around the globe to communicate, to travel and to participate in international commerce.
"No man is an island, entire of itself ... any man's death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee." -- John Donne
Interconnectivity in a linked world is not a novel concept. For example, from your high school days, you might recall the quotation above from late-sixteenth / early-seventeenth century English poet John Donne.
With the world growing smaller (and flatter!), U.S. financial institutions have been especially active in smelling opportunities outside our country. Whether, as
New York Times
and other investment banks have exported the problems associated with financial derivatives or it was a byproduct of the search for yield as interest rates dropped to historic lows, the fact remains that the proliferation of unwieldy and unregulated financial derivatives around the world deepened the economic downturn, and it continues to produce financial aftershocks with unknown consequences.
I believe that Greece will be resolved and, in all likelihood, the solution will not be terribly disruptive to our markets. The situation is manageable and should be put into perspective. (John Mauldin has some
in his commentary this week.) The fiscal problems facing Greece will likely be bandaged over the next few months and, hopefully, will be resolved in the fullness of time through financial assistance, austerity and, ultimately, a more disciplined fiscal policy. Also, I believe that China's tightening was preemptive.
Nevertheless, we cannot paint over the far reach and potential problems associated with financial interconnectivity. My general feeling has been that many strategists are paying far too much attention to previous economic cycles (and traditional economic series) without fully recognizing the many new and nontraditional challenges to growth.
As Thomas Friedman wrote, most of our political elite don't understand that the world is flat, so the chances of policy mistakes loom larger.
Though our domestic fiscal problems are shallower than the problems over there, they still run deep. Contrary to the traditional view that gridlock is good for stocks, equities have been on the descent since Scott Brown's surprise Massachusetts Senate win.
The reasons for the weakness are multiple:
- the likelihood that continued gridlock would fail to address our fiscal problems;
- the lack of patience on the part of both Americans and our legislators/administration to do the right thing; and
- that the odds favor inappropriate policy or weak policy to confront so many structural (nontraditional) imbalances and a number of other issues.
It remains different this time as over here and over there become interchangeable. Austerity, from the states of California and New York to the countries of Greece and Spain, remains a common theme that will detract from growth.
I emphatically reject the notion of those who see the current cycle as no different than the previous ones -- one that is and capable of dependable, smooth, self-sustaining and enduring growth (similar to the average of over 40 months). By contrast, I have argued (and continue to argue) that the aftershocks and deleveraging from the last steroid-aided credit cycle will have a long tail and will be with us for some time. The aftershocks will appear in numerous corners that will not only stunt economic growth but could produce headwinds to the benign consensus view of a shallow economic recovery. Under these circumstances, a lid is likely placed on P/E multiples.
In summary, we now must add the uncertainty of global connectivity (and the pesky critters that reside in dark and unknown corners) as a new influential factor to an already crowded list of unusual aftershocks that are byproducts of the earlier easy money credit cycle:
- a multimillion phantom inventory of homes (over 7 million) that will disrupt the housing cycle over the next several years;
- less credit available as the shadow-banking industry remains adrift and the securitization market is quiescent;
- corporate profitability and the pattern of domestic economic will be more unpredictable and inconsistent;
- disappointing organic sales growth;
- with limited upside to stock and home prices, the aspirational consumer of the past few decades will demonstrate a renewed conservatism in spending and in savings;
- a retrenchment in services and an increase in taxes at the state and local levels; and
- confidence will remain subdued and, as a corollary, so will capital expenditures and employment growth be weak by historic standards.
While investors should continue to assign the highest probability to a benign and durable economic advance, a fine balance will be required to thread the needle and produce a smooth and self-sustaining world economic recovery. The foundation of growth remains shaky, and the risks of continued aftershocks and economically deflating policies (both in the U.S. and abroad) in a world so interconnected are simply too high to support a heavy commitment or above-average weighting to equities in 2010.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.