I realize this title might be a little off-putting, but just bear with me.
Tiger Woods, more than any other athlete in recent memory (with perhaps the exception of Michael Jordan) was steeped in the mythos of the uber-professional. In plain terms, the aura of Tiger Woods was one of near superhuman focus, drive, and non-stop devotion to his craft.
This mythos lasted for well over a decade. And the whole world bought into it. And yet the entire thing was an enormous façade. Like any well-polished veneer used to cover up a rotten core, it held up until you start to notice the cracks in it and poke it with your finger. At that point the entire thing crumbles revealing the rot underneath.
The whole situation is actually quite reminiscent of Bernie Madoff, another “mythical” figure whose mythos lasted for years and then came unraveled in a matter of days. Woods, of course, had a genuine talent. Madoff’s primary skill lay in hiding his lack of talent. But both were masters at cultivating a public image that was nothing like their real persons.
Like everyone else, I find Woods and Madoff’s conduct to be appalling. However, there is something else about them and their respective facades that bothers me almost as much as their deeds. And that is the fact that somehow everyone bought into these facades hook, line and sinker.
Let’s take Woods first. I realize that adultery has unfortunately become quite common today. However, I don’t for one minute believe that even your average no name adulterer (a guy who is not famous or easily recognizable) could get away with 10+ affairs without someone catching on.
In plain terms, no one has the energy, time and focus required to maintain that level of deceit. To get away with it you need plenty of folks who are willing to pretend they don’t see it or who ignore the obvious signs. This is ten times as true if the adulterer is a world-famous celebrity athlete like Woods.
The same goes for Bernie Madoff. I don’t care what anyone else has to say, moving around $50 billion requires a lot of help. Eliot Spitzer raised red flags simply for wiring $5K around. But $50 billion? Give me a break. Unless you’re the Federal Reserve, you’ve got to have plenty of folks willing to look the other way or ignore the obvious to pull this off.
Which brings me to my final point. The world in general, but especially the investment world, is steeped in mythos, or various beliefs that are often times misguided. These illusory facades can maintain themselves for quite some time based on sentiment alone. But when the illusion is broken, the disillusionment that follows is both severe and rapid.
Consider the Tech Bubble. The NASDAQ rose more than 400% from 1995-2000, based on the mythos that the US stock market had become the fastest, easiest means of generating a fortune. Everyone bought into this idea hook, line and sinker. And before the party broke up, Wall Street was taking tech companies public that had never produced a cent in sales or profit and that were based on business models that were outright insane.
When this illusion broke, the market gave up roughly half of these gains in less than a year. Of course if you invested in some of the sketchier tech start-ups you lost everything. Add another year and a half and stocks were back to 1996 levels.
The same goes for the Housing Bubble. Housing replaced stocks as the financial speculative asset of choice for 2002-2007. Things got so out of hand that a guy who worked at Wal-Mart (NYSE:WMT) could buy a $500K mansion with no money down. We are all currently in the disillusionment process for that mania with the US government back-stopping the entire mortgage market (we’re going to be paying that one off for years if not decades).
And of course there is today’s market.
Most, if not all, of the rally that has occurred since March ’09 has been based on the mythos that the world’s central bankers (especially the US Federal Reserve) have fixed the financial system. One only needs to remember that the Fed not only failed to see the Crisis coming but has essentially made up its policies on the fly to quickly realize that this mythos (the Fed can save the market) is no more real than the Tech Bubble or Housing Bubble before.
Indeed, I fully believe we are currently in a Fed bubble: the investment in this case being that of faith and goodwill in the US government and its Central Bank’s ability to handle this Crisis. With investor sentiment back to 2007 levels despite the worst Financial Crisis in 80+ years being less than a year old it isn’t difficult to see that today’s market is in a form of mania all to its own.
Granted we may not be at bubble levels in nominal terms (stocks are down 60% from their inflation adjusted highs in 2000), but we most certainly are at bubble levels relative to the economic realities of the US as well as the Fed’s real ability to handle the Crisis.
This mania, like all others, will end. Only this time, when it does, the results will be far worse than any bubble bursting we’ve seen in the last 30 years. The reason for this is that when this bubble bursts (it is not a question of if), investors will have lost faith in the US’s central bank as a whole, not merely a single asset class (tech stocks, housing, etc).
Indeed, it is plain as day to anyone that the Fed and the US Government are both insolvent, much as any number of people probably identified Tiger Woods’ infidelities or Bernie Madoff’s fraud well before the general public caught on. It is now merely a matter of time before this notion (that the Fed simply cannot solve this Crisis using any of their current policies) reaches a tipping point.
It could be next week, next month, or next year. But when it does happen, the results will make 2008 look like a picnic. Beliefs die in only one way: hard. And beliefs in a broken system die hardest of all.