It’s been a long week, and as I write this there’s another day left in it. The way big surprises come on weekends, you’d think that Friday will be a day when everyone smart wants to be very sure that their portfolio doesn’t contain anything that could get hit while you sleep. When do we get out of this mess and back to a normal life? When do we have a Recovery?
So far, I’ve been right on the big issues and wrong on the small ones. The DJIA didn’t fall over 1100 points on Monday to trip the circuit breakers, but it did fall 800 by Wednesday; the news is still very slow to sink in. I underestimated the role that denial plays in this drama, even though it was one of the key criteria for finding the Dead Men Walking.
What has become clear is that the Fed will step in, even if they don’t want to, and the bloodletting will continue. For the first time in its history, the Fed has equity (stocks) on its balance sheet, as collateral, putting the Fed’s solvency at the whim of Wall Street. Thursday saw the market cheering the creation of a Federal Bad debt shelter, which is a fancy way of saying it’s the Fed but it’s not. This new institution will still be only as good as their ability to raise money to support it.
The Treasury has sold off $100 Billion in bonds for the Fed to help them raise money to meet the obligations they have so far. These include bailing out re-insurer AIG with a loan they said they wouldn’t make as recently as Sunday. The $100B raised is just under $1,000 for every household in the US, putting the $700 “stimulus checks” into perspective.
Meanwhile, Morgan Stanley is in their last attempts to save the firm, discussing a buyout from the Chinese government owned China Investment Corp. I seem to remember that just before 9/11 that same government shot down a US spy plane and was regarded as an enemy. This happened after a proposed merger with Wachovia was laughed at as something akin to the dead writing a eulogy for the dying. Washington Mutual is looking to be bought by JP Morgan, a firm that has suspiciously escaped being tagged as in trouble.
The reason we have this constant dribble of bad news is that these firms are behaving more like addicts than venerable institutions: they only admit they have a problem when they have hit rock bottom. It’s good that we’re flushing all of this out, but we only hear about it once it’s too late. That’s why the level of risk in the market is utterly unacceptable right now – we don’t know what’s going on. Nothing denominated in US Dollars can be considered safe until President Bush or, more likely, President Obama comes up with a systematic and systemic plan for a kind of Truth and Reconciliation on Wall Street. Since we can’t know our future, the best we can do is to understand what’s already happened and try to draw a straight line. A future with a Recovery demands honesty first, followed by hard analysis.
That’s where the news reports have been failing us. How many times have we all heard this described as nothing more than fallout from the housing crisis? That suggests that not only is the failure of LTCM in 1998 a historical anomaly, but it takes all of the various investment bubbles from the Tech Bubble to the Commodities Bubble out of the picture. The mortgage problem was one domino in the whole chain – if the overall market was healthy, would it really cause this much chaos?
The next problem will be related to the bursting of the Commodities Bubble, which is to say all the people who put money into oil futures along with everything from steel to potash this summer. Oil is now at 90 $/Bbl, which sounds great as long as you are a consumer and not a long-term contractor. That bubble now appears to be the last wash of the great wave of money created during the 1990s, taking a solid 15 years to work its way out of the system. It’s all one been big Ponzi Scam, and something tells me that Charles Ponzi just fled Boston.
When will this end? It ends when we’re all honest. My name is Erik, and I’ve been addicted to cheap credit and the promise of a 6% return on stocks forever. This is where you say, “Hi, Erik, welcome to our group.” Once 300 million of us are able to do that, we have a chance at Recovery.