It's Not Just A River In Egypt

June 25, 2007

An atheist friend of mine once had a long-term relationship with a Muslim. A nine-year relationship. Though doomed to end (she would never become a Muslim and he would never end up with someone who wasn't), these two people were somehow able to ignore the relationship's destiny and spend nearly a decade together.

When my friend finally ended things and was later aghast at how they'd been able to circumvent the truth, I told her not to feel so bad, it could happen to anyone. "Denial is not just a river in Egypt," I said.

"You are like the fifth person who has said that to me," she said.

(The fact that her would-be ex actually was Egyptian may not have any philosophical bearing on the story, but it clearly can't go without saying.)

A recent article by Sharon Begley in Newsweek magazine got me thinking about denial. It argued that President Bush was plagued with a severe case of it with regard to progress (or not) in Iraq. "The tip-off for denial is perpetual optimism, a pathological certainty that things are going well," Begley wrote.

This being a publication that covers the leveraged finance markets, you probably see where I'm going with all of this. Every pundit in town has accused high yield bond and loan investors of having their proverbial heads in the sand when it comes to risk and the thunderous boom sure to come. We've printed countless opinions on the subject on our pages. And just last week The Wall Street Journal ran an editorial by Steven Rattner of Quadrangle Group, which called the financial community "blissfully oblivious."

So is the market really in denial? Everyone says they know the downturn will eventually come; you would be hard pressed to find someone who'd disagree with that. So it's not as if this "truth" is being denied. What some investors may be in denial about is the extent of the damage. Maybe that's part of the reason they are willing to dive ever deeper into the pool of risk. Clearly, investing is about how much you are willing to risk. And when it comes to evaluating how hard the leverage finance markets will hit, maybe the current pool of risk is being fed by a river in Egypt.

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