Can the Masses be Right?

One thing that has bugged the heck out of me is how many people are expecting a recession and how many people are talking about financial calamity. In August I was the one of the few who thought a recession had become inevitable. Now it is like every one and their dog is expecting a recession. Yes, many official forecasts are like 50% or something but most talking heads think a recession is coming and the ones who do have a 50% recession number out there, if you needle them, it sure sounds like they really think a recession is coming and they are just playing up their companies official forecast. It makes me really uncomfortable for this many people to agree with me like this. I am not really used to it. So does that mean a recession is not coming or is it going to be really really bad? I thought housing was going to blow up and it was not until it already happened that people admitted that it happened. Same thing with the sub prime blowup and alt a blow up and mortgage insurance blow up and rating agency blow up. Nobody (the mass I mean) would say it was going to happen until it already happened.

Now we have everyone (for the most part) saying we are heading for some sort of a recession??? I have been agonizing over this and it has literally kept me awake. It does not makes sense. Can the masses call for a recession and one actually come?? Or does this mean a doozie of a recession is coming? Something does not jive. Equities are cheap. Dirt cheap, there is no denying that. So it is hard to get uber aggressive on shorting. At the same time I am starting to lean towards a massive recession that will blow what people think is coming away. I just can't believe the masses can get it right now when they have gotten it wrong the wholeeeee way. Maybe though. I was reading through the House of Morgan by Ron Chernow and the chapter on the 1907 panic starts out.

"The folk wisdom of Wall Street says that if a crash is widely expected, it won't occur, for a saving fear will filter through the marketplace. This was refuted in 1907, when Wall Street spent a cliff-hanging year awaiting the crash that came."

Hmmm. I found that really interesting in lite of losing sleep over my ponderings. The rest of the chapter goes on describing the events of 1907, which of all the crashes I have looked at, looks like the greatest comparison to what is happening now except on a smaller scale (that is another topic). Maybe it is possible. If we are only heading into a 2001 type slowdown you should be buying the heck out of equities. I would almost say you should be borrowing money to buy equities.

What I think this really hinges on (things are simple in life, people make them complicated) is the mortgage insurers MBIA and Ambac. If those two blow up, if that insurance becomes non existent, watch out. The truth is I believe Ambac and MBIA are almost insolvent now. The rating agencies know it but can they really downgrade them? That makes them insolvent overnight if they are not now. The longer they wait the longer there is a glimmer of hope. If one of those two firms get downgraded you are going to have mass money market funds break the buck. This will be the last straw. I don't think the U.S. government can let these two firms go belly up. Right now most of the losses for these two are paper losses. It will take 9 months or so for the real losses to really pick up steam in mass where they are having to make massive payments. The rating agencies (with probably quite a bit of behind the scenes pressure) can wait and wait and stomp up and down huffing and puffing acting like they are doing something but in the end they are desperately trying to buy time for the whole system. Maybe it will work, maybe it won't, but that I truly believe what the next 2 to 3 years hinge on. I have flipped through 6 money market annual reports holdings trying to find a safe money market fund to park cash. It doesn't exist, everything is insured by these two. One of those two don't make it and the chain reaction will be harsh and severe. They make it and this is a great time to be buying equities.

Maybe that is oversimplifying it but that is the way I see it.