There is growing evidence that the greatest fraud foisted upon the world's unsuspecting (or just delusional) investors and the working class is now being exposed. The fabric that once made up the cloak that once hid the visage of this scurrilous perpetrator is slowly being dissolved. The fallacy that debt is wealth is only now being discovered by Wall Street, pols, regulators, business people, supply-side economists, the nouveau riche, the middle-class, the working class, and unfortunately, the desperate poor. I'm afraid that we are now entering the third stage of the credit crisis. Whatever you want to call it, this is the stage after first recognizing that there is a problem, but in denial as to its severity. We are now entering that stage where denial is going to give way to "fear and distrust". Fear that things are indeed worse than previously told and what we are experiencing is not your normal run of the mill economic contraction. Couple this with distrust of those people and institutions that covered-up the reasons for and severity of problems while also propping-up assets and those institutions most responsible for the economic pain now being felt (i.e. Bear Stearns and its ilk).
The situation appears bleak. Although a contrarian by nature, the logic against a painless resolution of the of situation is so incredibly impaired, as it concerns how entrapped the world's financial system appears to be in, that even with a 20% drop in the Dow Industrials since reaching its all-time high last October, the level of fear does not appear to be analogous with the severity of the situation. The U.S. federal Reserve is nearly out of bullets. With inflation now exerting its own stranglehold on world economies and the all-important U.S. consumer, the folks at the Fed are almost totally trapped. Even as the more serious issue remains to be the unwinding credit bubble, the Fed no longer possesses political cover to run an overtly loose monetary policy. Its printing presses will have to run exclusively veiled by empty promises to be alert to any further inflationary pressures. Temporary auction facilities and exerting its will on those in Washington as it continues to grab more power from from the SEC and the SROS will be its modus operandi. It will push for looser regulation within the shadow banking sector in hopes that the less regulated shadow banking system will give the Fed more room to maneuver and intervene.
But I don't see a way out. Ponder the depths of the problem. Not only has the Federal Reserve used up a substantial portion of its own balance sheet via its Temporary Auction Facilities, but those institutions it hoped to save continue to deteriorate. Perhaps Countrywide Financial (CFC) is now just a problem for Bank of America (BAC), but who save General Motors (GM), Ford Motors (F) and Chrysler LLC and their respective lending businesses--GMAC & Ford Credit? These are not insignificant businesses. These companies no longer exist for the purpose of making automobiles. These companies are among the largest issuers of debt instruments and preferred stocks perhaps second only to Fannie Mae (FNM) and Freddie Mac (FRE). Which brings me to my next series of questions. Who save Fannie Mae and Freddie Mac? Their eventual demise seems to be off the table still, but I'm not so sure. Credit spreads have widened again and given how leveraged these company's balances sheets are, I'm not convinced these companies aren't already effectively insolvent. Then there is the ongoing issue of the monoline insurers, MBIA (MBI) and Ambac (ABK) and the dominos that will fall as they fall? Markets convulsed this spring over their impending downgrade by S&P and Moody's. Can the Fed save all of these and perhaps more importantly, all of their counterparties? Then there is the issue surrounding the deteriorating situation at Washington Mutual (WM), the largest U.S. Savings and Loan. Also, what about the U.S. regional banks like Fifth Third (FITB) and National City (NCC) and Keycorp (KEY)? Of course, the situation surrounding Wall Street and Lehman Brothers (LEH) and perhaps many other dire issues goes unresolved. I don't even have to discuss the centerpiece of all of these problems, the ongoing crash of the U.S. housing market and the now severely crippled U.S. consumer. Additionally, it appears that the entire U.S. airline indusrty is also on the verge of extinction from the double-whammy of weakening consumer and business demand and cripling jet fuel costs. And problems aren't just isolated to the U.S. Here in London, we've have caught the contagion. Once deemed immune to the problems in the U.S., emerging stock markets are now down considerably. China's Shanghai Index is now down over 50% from its all-time high. India's Bombay Sensex is down by roughly 1/3rd from its all-time high set last year. Clearly, another fallacy propagated by the bulls, "decoupling" has decoupled with nearly every other one of their flawed theories.
The situation appears bleak. Although a contrarian by nature, the logic against a painless resolution of the of situation is so incredibly impaired, as it concerns how entrapped the world's financial system appears to be in, that even with a 20% drop in the Dow Industrials since reaching its all-time high last October, the level of fear does not appear to be analogous with the severity of the situation. The U.S. federal Reserve is nearly out of bullets. With inflation now exerting its own stranglehold on world economies and the all-important U.S. consumer, the folks at the Fed are almost totally trapped. Even as the more serious issue remains to be the unwinding credit bubble, the Fed no longer possesses political cover to run an overtly loose monetary policy. Its printing presses will have to run exclusively veiled by empty promises to be alert to any further inflationary pressures. Temporary auction facilities and exerting its will on those in Washington as it continues to grab more power from from the SEC and the SROS will be its modus operandi. It will push for looser regulation within the shadow banking sector in hopes that the less regulated shadow banking system will give the Fed more room to maneuver and intervene.
But I don't see a way out. Ponder the depths of the problem. Not only has the Federal Reserve used up a substantial portion of its own balance sheet via its Temporary Auction Facilities, but those institutions it hoped to save continue to deteriorate. Perhaps Countrywide Financial (CFC) is now just a problem for Bank of America (BAC), but who save General Motors (GM), Ford Motors (F) and Chrysler LLC and their respective lending businesses--GMAC & Ford Credit? These are not insignificant businesses. These companies no longer exist for the purpose of making automobiles. These companies are among the largest issuers of debt instruments and preferred stocks perhaps second only to Fannie Mae (FNM) and Freddie Mac (FRE). Which brings me to my next series of questions. Who save Fannie Mae and Freddie Mac? Their eventual demise seems to be off the table still, but I'm not so sure. Credit spreads have widened again and given how leveraged these company's balances sheets are, I'm not convinced these companies aren't already effectively insolvent. Then there is the ongoing issue of the monoline insurers, MBIA (MBI) and Ambac (ABK) and the dominos that will fall as they fall? Markets convulsed this spring over their impending downgrade by S&P and Moody's. Can the Fed save all of these and perhaps more importantly, all of their counterparties? Then there is the issue surrounding the deteriorating situation at Washington Mutual (WM), the largest U.S. Savings and Loan. Also, what about the U.S. regional banks like Fifth Third (FITB) and National City (NCC) and Keycorp (KEY)? Of course, the situation surrounding Wall Street and Lehman Brothers (LEH) and perhaps many other dire issues goes unresolved. I don't even have to discuss the centerpiece of all of these problems, the ongoing crash of the U.S. housing market and the now severely crippled U.S. consumer. Additionally, it appears that the entire U.S. airline indusrty is also on the verge of extinction from the double-whammy of weakening consumer and business demand and cripling jet fuel costs. And problems aren't just isolated to the U.S. Here in London, we've have caught the contagion. Once deemed immune to the problems in the U.S., emerging stock markets are now down considerably. China's Shanghai Index is now down over 50% from its all-time high. India's Bombay Sensex is down by roughly 1/3rd from its all-time high set last year. Clearly, another fallacy propagated by the bulls, "decoupling" has decoupled with nearly every other one of their flawed theories.
