Too Big To Fail

It’s tempting to get sucked into writing about today’s sharp decline in the Shanghai Composite (pictured below) and what it might mean for developed markets. The problem is that at this juncture, Macro Man isn’t sure that it means much at all. In both 2008 and 2009, the r^2 between the ‘Comp and the SPX has been zero; in illiquid markets two days before Thanksgiving, it’s not at all clear that that’s about to change.

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Instead, Macro Man would like to touch briefly on a couple of bigger issues surrounding the “once in a lifetime” crisis that we’ve all lived through over the past couple of years. Your author has recently opened a personal “time capsule” of sorts. When he left the US in May 1994, he had little clue that he’d not return save for a 3-month soujorn in the summer of ’95. So he bunged most of his worldly goods into storage….where they remained for the better part of a decade and a half.

Finally, upon the insistence of the divine Mrs. M, Macro Man had these goods shipped to the UK to put an end to the dreary (and expensive) routine of paying quarterly storage fees. Opening the boxes provided a glimpse into his life in his early 20’s. Clothing of dubious quality and appalling style brought gales of laughter from Mrs. Macro. A television dating from roughly 1980 served as something of a museum piece for the Macro Boys (“Daddy, what are these big circles on the TV? And where is the remote?”) And boxes of books provided an insight into Macro Man’s reading habits in the early 90’s.

One volume in particular caught Macro Man’s eye: Den of Thieves, by James. B. Stewart, which explores some of the insider trading scandals of the 1980’s. Over the weekend, Macro Man picked it up and started reading. While it is tempting to think that our current crisis is the result of unrivaled cupidity and stupidity, even the first few chapters of Den suggests that Ecclesiastes 1:9 was correct: there is nothing new under the sun.

From the buffoonish Dennis Levine to the utterly corrupt Ivan Boesky, the cast of characters could easily have been taken from the murky underworld of subprime and structured credit. While it’s true that the government wasn’t a direct participant in the insider scams, as they are today, from Macro Man’s perch that’s merely a question of scale. And it’s refreshing to see that some things haven’t changed; an episode early in the book describes how Marty Siegel of Kidder Peabody wins some banking business because he pitched to the client’s need, whereas “Goldman just spoke about how great Goldman is”.

Switching topics, Macro Man has always been an enthusiastic proponent and participant in sports. Not only does a healthy body produce a healthy mind, but sports forces one to deal with winning and losing, teaches something about teamwork, and enforces a discipline that practice and hard work are required to improve. These are hardly startling insights, but they nevertheless provide a gentle introduction to the real world to minds as callow as the Macro Boys’ (aged 7 and 6.)

And so the recent France-Ireland World Cup qualifier is apposite. The matchup was part of a process that sought to identify four teams to qualify for the World Cup from the eight second-place finishers in the European group stages. Once it became apparent that France was going to enter the play-off process, rather than qualify by winning its group, FIFA decided, ex-post, to seed the playoffs, ensuring that the “big” teams would have a relatively easy path to the WC.

This inherently put the “small” teams, such as Ireland, at a disadvantage by robbing them of the chance to be randomly paired against a fellow minnow. It seemed particularly hard luck on the Paddies, who’d already had to confront the other World Cup finalist, Italy, in the group stages.

Of course, when France snatched a 0-1 victory at Croke Park in Dublin, the result looked like a foregone conclusion. Yet the plucky Irish went to the Stade de France and outplayed their hosts, leading 0-1 after ninety minutes and sending the fixture into extra time. This naturally skewed the tie in favor of the home side, who would be playing the critical half-hour at…err…home.

In any case, ten minutes or so into extra time, Franced snatched the winning goal through the most famous hand-ball since Maradona’s:

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Note the immediate, frenzied reaction of the Irish to Thierry Henry’s blatant controlling of the ball with his hand. The referee and linesmen missed the call, but it’s abundantly clear on television replay. Surely such technology is available to correct a blatant violation of the laws of the game?

Sadly, no. For reasons best known to himself, FIFA supremo Sepp Blatter has seen fit to ignore the desires of most fans and many participants and refused to sanction the usage of any technology in officiating the game. The result is a series of increasingly shambolic decisions from referees in high-profile matches.

The Irish, understandably irate, requested a replay from both FIFA and the French Federation. They were unsurprisingly refused, despite a precedent for ordering a replay on a refereeing error. Of course, that was between two insignificant teams, Bahrain and Uzbekistan, not a big team like France.

When Macro Man and the missus showed the video of the French “goal” to the Macro Boys the next day, they irately shouted “that’s not fair! Henry cheated!” Nevertheless, despite close to universal derision, even in France, Les Bleus are going to the World Cup.

Yep, sports can definitely teach valuable life lessons to youngsters. And the lesson, in this case, is that there’s definitely such a thing as “Too Big To Fail.”

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