Two Roads Diverged, Welcome to Downgrade Week

I am travelling this week to CA and on holiday the following week, so postings will be in frequent.  I did get an excellent email question about CDN networks on Friday and I will endeavor to post about CDNs in the next several days, expanding on my response to the reader.

I will be curious to see how Asian markets open and how the US markets do tomorrow.  I ended up selling all my long positions on Friday and shorting the Euro.  I think that will be okay; the bad news is I covered my SPX short, because I was stupid enough to look at the TV when Simon Hobbs was screaming “game changer” on CNBC about the Italian fiscal concessions.  I know, I should never let reporters and screaming TV hosts affect my judgment.  This morning I received one email declaring “Bust out the DeLorean, back to the future – destination 2008.”

There a lot of opinions as what matters, what does not matter, what is priced in, what is not priced in, who wins the AL East the Sox or the Yanks (I will be at tonight’s game) and so on.  I count eight afternoon conference calls hosted by various economists and equity strategists on the meaning of the downgrade from the S&P who pretty much missed the entire housing melt down and global credit crisis.  I plan to listen to none of them.  I might be a bit jaded, but I posted my notes from the Friday before BSC went bankrupt and I will say that denial is a powerful state of mind.

As for how the markets are going to respond, I have no idea and anyone who tells you they know, should look up the meaning of hubris.  The SPX chart is really perplexing with last week closing with a Doji and that is fitting.  I think bears and bulls are all fired up and markets need to be pushed around to determine who wins.  I think multiples are too high, so people who scream that equities are cheap must be using 2016 numbers.  When GDP declines; equity multiples will contract.  For all the dividend champions, just remember dividends can be cut at the whim of the BOD and some people have made a career out of calling for a dividend cut.   The result of all the European mess, QE and US downgrade is unpredictability.  Equity investors dislike unpredictable macro events and my supposition is that equities will do worse until the economy improves.

From a near term historical perspective, it will be interesting to compare and contrast the UK and the US.  Both countries voted in new governments post the global credit crisis and for the first time in thirty years the governments have diverged paths in terms of spending versus fiscal prudence.  Prior to Obama and Cameron, the leaders of the US and the UK had been united from an economic policy perspective.  Bush and Blair, Clinton and Major and it all started with Reagan and Thatcher.  Much of what I blog about is networking technology – not economic theory, but the two are tightly woven together.

1984 was the year that AT&T was broken up – but it was also the year that British Telecom (BT) was privatized.  In the U.S. market, AT&T had existed with little meaningful competition until the formation of MCI.  In the UK Market, British Telecom held unchallenged control of the stagnant market for telephony services.  There was no competition in the UK telecom market and BT existed as a classic government managed bureaucracy in which its employees were more concerned with pensions and work hours than customers and services.  As the Conservative Government of Margaret Thatcher took control, they began to mandate new fiscal policies and BT was the first government entity to be targeted for privatization.  Prime Minister Thatcher infused competitive life into the UK telephony market by allowing for the creation of competitors to BT, such as Mercury, and then forced the privatization of BT.  British Telecom was forced to stand on its own as a for profit company – with no government subsidies.  The shifting economic policies of the western nation-states from state ownership to privatization, set in motion the initial inertia that would culminate in a great revolution in the mid to late nineteen nineties.  Revolutions take time and governments that are entrenched in market ownership do not easily relinquish control of economic assets.  BT was not the only major telecom service provider to be privatized.  From the early 1980s through the late 1990s, a wave of telecom privatization in excess of $154 billion dollars as well as market deregulation expanded throughout the industrialized world.

Within the United States, the desire to reform the government came in the form of deregulation.  Momentum in thought leadership was building and a policy shift by western nation-states from economic polices perceived to be routed in Keyes to the adoption of economic policies grounded in Hayak and the Chicago School had rescued the western world from the economic malaise of the 1970s – only to bring about opportunity for great success and great failure.  Prime Minister Margaret Thatcher and President Ronald Reagan had started this process in the 1980s.  By the 1990s, the energy and telecommunications industries were being deregulated or reformed, which opened previously closed markets to competition.  There is no doubt that the reform of government policies played a critical part in laying the foundation for a massive investment in the internet, telecom and technology markets that would explode from 1984 to today.  Today, we are left dealing with the after effect of government spending.  Which path was correctly chosen will be known in time.


* It is all about the network stupid, because it is all about compute. *

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