The first was to spur stocks higher—not because equities are the biggest thermometer of social mood, but because they needed to open a window for corporate America to issue stock secondaries and reverse the horrific credit trends (which is the backbone of our finance based economy)

The second part of their plan was to get crude to $100 by the election with hopes of alleviating socioeconomic angst (remember, crude was much higher in July). I continue to feel that absent an unforeseen geopolitical catalyst, crude will trade lower but psychology will eventually shift from that being a positive (tax-cut) to a negative (endemic of slowing global growth).

So we’re very much on the same page with regard to what they’re trying to do. The trillion dollar question, quite literally, is whether they’ll be able to do it. Remember, Fannie Mae (FNM) and Freddie Mac (FRE) have roughly $230 trillion of debt coming due by the end of the quarter and financial institutions as a whole have $870 billion in credit that needs to be rolled into year-end.

The appetite for credit in general—and the September credit issuance in particular—should set the tone into year-end. That, more than anything, is why I’m viewing the “election rally” that I spoke of on July 16th as having a very tight window to climb through.

Toni: I am less sure than you that the Three Stooges of Twentieth Century Capitalism—those at the helm of the Administration, Treasury and Federal Reserve—have the ability or the ammunition to control the price of US equities or the price of crude oil.

As I mentioned in our previous conversation—your conspiratorial side reminds me of The Bearded Prophet of the Apocalypse who agrees with you on the "engineering" you speak of. Stated simply, market forces (especially of a credit-kind), from my perch, much like Hurricane Gustav, will overwhelm what they "want" the markets to do.

Much of our last two conversations, Nick, have centered about the near term but a conversation regarding the intermediate term describing our market thoughts over the next 12-18 months might be instructive to the Minyans in the ‘Ville and my subscribers of Real Moolah.

Nick: I can’t help but smile when you reference my “conspiratorial” side. For years, the mere mention of “The Plunge Protection Team” conjured images of grassy knolls and tin foil hats. However, wisdom is bred as a function of experience and we now know that The Working Group on Financial Markets is an accepted policy tool.

I, like you, firmly believe that nobody is bigger than the market. Therein lies the subtle yet important distinction between giving the patient medicine with hopes of masking the underlying disease (socialization efforts) and letting the market take it’s medicine as a function of time and price.

As painful as the current phases of this credit crisis are, it’s the only solution that will inevitably cure what truly ails us—overcapacity, credit dependency and the MIA business cycle that has somehow managed to remove “recession” (or something worse) from the mainstream lexicon.

Your question regarding what the next 12-18 months holds is a tricky one that is dependent on an ever-fragile social mood, declining risk appetite and the actions and reactions to our policies from abroad.

Toni: I can readily accept the three factors you just cited as molding the intermediate term market outlook although I might prefer the Gnocchi at the real Nick and Toni's instead!

That said, I—much as you have written in the past—am reasonably upbeat regarding the period leading up to election but i am even more convicted on how the next 12-18 months will pan out.

The outlook for domestic economic growth remains the same: A period of lumpy and uneven economic growth that both corporate managers and investment managers will find difficult to navigate seems to be in the offing over the next two years.

I expect that at times, in 2008-09, the economy (as well as the stock market's technical pattern) will appear strong and at times it will appear weak.

When things look healthy, word of a new bull market or economic recovery by the Polyannas will echo on CNBC and on the pages of Wall Street research.

When the economy stumbles and stock charts weaken, the Cassandras will proclaim that the sky is falling.

If my base case of confusion, inconsistency and trendlessness comes to pass, it is not likely to be associated with investor confidence and a sustainable bull market but rather a sustained period of substandard market returns with limited upside potential. In other words, Nicky, tough times are ahead.

Nick: Well, the big picture is made up of many smaller pictures. I had a strong sense that we would see a rally attempt into the election when we spoke on July 16th. At that time, I layered into upside exposure as a function of price and continued to add into weakness.

Once that sharp, mean-reverting rally occurred, I shifted my style to a “hit it to quit it” approach, one where my risk has been defined before exposure is initiated and my positioning is two-sided (long and short, depending on the set-up).

While the potential for continued strength remains viable, I’ve cooled considerably on the risk-reward of that scenario due largely to looming September credit comeuppance. I offered metaphorical imagery late last year that we’re playing a dangerous game of chicken, with cumulative imbalances on one side and coordinated agendas on the other.

That analogy remains very much in play.

In short, it remains my view that the powers that be will try to spur the herd higher into the election by hook or by crook. Given the sheer magnitude of credit issuance on the horizon, however, the risk to blind ambition has perhaps never been more acute.

Capital preservation, debt reduction, financial intelligence and calculated, defined bets remain my core tenets for the foreseeable future.

R.P.