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The Cody Blog: I Say I Want a Revolution

Tuesday, December 20, 2005

I Say I Want a Revolution

Reprinted from part of my last day in the diary on RealMoney.com this year:

From a broader (and more important in the long term) level, I want to use this as my parting shot from the diary for 2005.

I spend a lot of time and energy trying to blow apart conventional wisdom. Doing so isn't just for entertainment purposes. Rather, I think one of the most important keys to getting things right on Wall Street (and in business in general) is to, first and foremost, question everything.

I very much want to question the "consumer is about to collapse" thesis. I question how much the Fed matters. I doubt that Sirius and Apple compete. I ask out loud about macroeconomic indicators and whether our bureaucratic measurement systems make any sense at all. I clearly rail against taking those systems and applying the concept of being "better than" or "worse than" polled expectations.

I question all of my own theses. Perhaps the explosion of new distribution channels is actually the best thing that ever happened to the content owners such as Warner Music Group.

I know I upset a lot of conventions when I write about these topics. Isn't that what we should be doing, though? Isn't the only way to be anything other than average to strive to be different from convention?

Think about the topics we're forced to digest every day on the Street, from Treasury rates to CPI to battery life and usability of the latest Palm Treo. Oooh, don't Apple's iPods scratch too easily? (Remember that one?)

The fact is that Wall Street and conventional wisdom spend way too much time looking at worthless inputs. Junk in, junk out, you know? So, yeah, let's question everything. Let's look for revolutions. That's what Apple and Google have done. They've revolutionized things. And it's not a coincidence that those two stocks have been just about the best-performing large caps on the planet.

And with that, I'm going to do very little writing starting later this week. That fin you see in the water is Rev Shark, and he'll be back tomorrow. Thanks for reading.

And seriously, question everything. Flip it, indeed.


Net long AAPL, GOOG; Net short WMG

3 Comments:

Blogger poster918 said...

Cody,

I like your thoughts and agree with some of them, such as Google and Apple and the unobserved risks of oversaving and overdiversifying.

However, your overall bullishness on the long term prospects for the US consumer seem pretty out of touch with reality. That view is also by no means unconventional either. Most people think consumers are doing just fine.

The reality is that most Americans are literally hanging on by their fingernails. They are buried in debt, have no savings, and are seeing the cost of living rise without a similar rise in their incomes. The only way things haven't turned ugly yet for the consumer is that lenders figured out they could keep the boom going forever if they just keep extending credit to people regardless of their ability to repay the debt.

Let me repeat that so my point is clear. Most Americans will never, ever, ever be able to repay the money that they have borrowed and lenders know this. The only way to avoid a collapse of the financial system is to keep extending credit and delay the day of reckoning. The only problem is that at some point borrowers figure out that there is no risk to borrowing and spending and no benefit to saving.

At that point you enter a classic cycle of credit driven inflation leading to a hyperinflationary collapse of the economy. History is full of exactly this happening. Why people think it will be different this time is beyond me. Although economics is not physics, there are certain laws.

The most basic law of monetary economics is that if you print too much money, you get inflation and, at some point, hyperinflation. No economy can withstand excessive credit creation forever. Just because we haven't collapsed so far doesn't mean this time will be different. Sorry.

12/20/2005 02:56:00 PM  
Blogger Cody Willard said...

Au contraire, I agree with a lot of what you say.

And I've written before saying so. And expecting to see the collapse of our fiat currency and place in global history somewhere in about 2050 or so.

Hope I'm still alive then.

In the meantime...well, the consumer's still running despite having heard rumors to the contrary since I was in 8th grade economics class.

12/20/2005 03:35:00 PM  
Blogger poster918 said...

Cody,

Ok. I'm intrigued by your perspective. You agree with the outcome, but you think it will take another 45 years. How did arrive at that figure? I haven't seen any of your writings on this before.

FYI, there are websites out there that can show you how long it usually takes (historically) from the start of an excessive credit creation period to a major correction, or if it goes on too long, a collapse. Historically, a major correction occurs within about 10 years. If there is no major correction, a collapse usually occurs within about 20 years.

I don't know exactly when you were in 8th grade, but this cycle of excess credit creation didn't begin until 1996. I think you are older than 23. If you're referring to what happened during the 1980's, perhaps you missed the major consumer recession of the early 1990's. That was the major correction for the previous cycle. For this cycle, we are right at the edge of the 10 years for a major correction, or, if we don't get a major correction soon, a collapse by no later than 2015.

Greenspan's departure and replacement by Ben "printing press" Bernanke sets the stage quite nicely. Even if Bernanke weren't a known inflationist and clueless academic, every new Fed Chairman of the past 50 years had to deal with a major financial crisis, and there is no reason to believe this time will be different. But who knows, he may get lucky.

If Bernanke does get lucky and delay the reckoning, it just so happens that 2015 roughly corresponds to when the baby boomers start to draw heavily out of Medicare and Social Security, which will obviously add stress to an already way overextended and shaky financial system.

How you think we can limp along until 2050 is still beyond me, but I would love to hear the rationale. I'm all ears.

12/20/2005 06:38:00 PM  

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