Debtor’s Equity

With all the fussing about Greek debt, Goldman’s deals, and the equity markets, it’s important to remember a few fundamentals.

First, remember that every asset is someone else’s liability. If you own a bond, someone else issued debt. If you own stock, somebody raised equity.

This may seem trite, but it has significant implications. The world is 100% long itself. In the end, there is no net hedging. If Goldman made money when housing crashed, someone else lost more. That happened because Goldman made a good bet on housing prices. There’s nothing illegal, unethical, or immoral about that.

When the world goes gaga over a new investment idea, it’s likely that we’ll get overcapacity and subsequent collapse. That’s because all that money can’t go to work profitably in the same place at the same time. It doesn’t really matter if it’s debt or equity: the dot-com bubble was an equity bubble; the sub-prime bubble was a debt bubble. The new idea may seem inevitable, but too many cooks spoil the broth.

If you want to spot the next bubble, follow the money. Who is raising funds today? Need you ask? Banking crises are often followed by government crises. With Greece, we’re seeing one now.

Douglas R. Tengdin, CFA
Chief Investment Officer
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