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Aug. 10, 2011, 12:00 a.m. EDT
By Todd Harrison
"Outside in the cold distance, a wildcat did growl. Two riders were approaching and the wind began to howl." --Bob Dylan
NEW YORK (MarketWatch) "” It's easy to finger the bears as a cabal of pessimistic pundits who root against the world but following the worst decade in financial market history, they've earned the benefit of their own market doubt.
As negative headlines abound and social mood sours, some might view the mounting malaise as a contrary indicator. One could argue that the prolonged period of substandard performance is on the margin constructive; that a regression to the historical mean would suggest double-digit returns for the foreseeable future.
I would agree, if not for the fragility of the global market construct and the magnitude of the economic condition.
We often discuss the current crossroads; government drugs that mask the symptoms after years of societal largesse versus medicine that cures the disease in the form of asset class deflation and debt destruction and restructuring. We repeat this often for good reason: it's true. Read Economic Issues Remain.
I may be off base "” I've learned to stay humble or the market will do it for me "” but a single word continues to resonate in my mind's eye as we edge our way through this historic juncture. That word is "cumulative."
As offered at the Minyanville retreat in Ojai in 2005, "The problem that comes from engaging in high-risk behavior for which the consequences are absent, even if only temporarily, is that such high-risk behavior begins to appear normal and the entire scale of risk gets adjusted and pushed out." Read Keynote From Ojai.
SmartMoney.com's Jack Hough joins the News Hub panel to discuss investment strategies during unsettled times, and reminds viewers not to overlook cash. Photo: STRDEL/AFP/Getty Images
Therein lies the fatal flaw of our current conundrum. We've been pushing risk further out on the time continuum for such a long time that it's become an accepted "” dare I say normalized "” pattern that interconnects the world through a tangled web of derivatives.
Last year, I wrote that we were in the eye of the financial storm, a relative calm between the first phase of the financial crisis and a sovereign sequel that'll flush "” and perhaps reset "” the system.
As we navigate that near-term reality, one thing is clear: this decade will require steadfast stamina and proactive patience. While the first half will be focused on preservation and perseverance, the back nine will be ripe with rewards.
Some may view the above-mentioned vibe as overtly negative but I'll offer a different take. I shared the following thoughts in September 2008 and they're equally apt today as the second side of the storm gains steam. Read The Great Expression.
There are many ways to view this seismic shift: anger (as expressed by Main Street), sadness (as savings are destroyed), fear (as reality bites), and confusion (as folks try to understand how this could ever happen).
And there's anticipation, as we cast an eye forward and look for the phoenix that will eventually arise from the scorched earth.
The unfortunate capital market destruction is an inevitable comeuppance, the cumulative result of risk gone awry. It's been percolating under the seemingly calm surface for years, magnified by financial engineering and consumed by an immediate gratification society.
The socioeconomic consequences will be pervasive as Mother Nature unleashes her pent-up wrath and explores the other side of the business cycle that politicians and policy makers have tried so hard to avoid. It's certainly scary, as new beginnings typically are; therein lies the opportunity.
The media portrays the Great Depression as one where everyone in America stood on street corners or waited in a bread line. A closer look shows that, similar to our current situation, economic hardship for the middle class began well before 1929.
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Crude futures up $2.46 to $81.76 a barrel
December gold futures up $20.60 to $1,763.80/oz
S&P 500 futures down 13.80 points to 1,157.90
Dow futures down 136 points to 11,058
Asian stocks bounce to pare recent losses
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European markets jump in wake of U.S. rebound
Volkswagen jumps 8% in early trading
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German DAX 30 index up 2.2% to 6,043.27
Nestle shares up 3.9% after results
Spain IBEX 35 index up 2.1% to 8,607.20
France CAC 40 index up 1.6% to 3,225.57
Stoxx Europe 600 index up 1.6% to 235.99
FTSE 100 index up 1.8% to 5,261.08
Nestle profit falls 14%; upbeat on growth
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