The Battle Royale

By Todd Harrison  SEP 06, 2007 8:01 AM

At stake is the claim to fame and newfound riches as we unwind the twisted tale of our interwoven, derivative-laden, debt-dependent, finance-based market machination.


“Out here in the fields, I fight for my meals. I get my back into my living.”
--The Who

Do you remember watching professional wrestling as a kid? They used to stage these steel cage matches, locking two behemoths in the squared circle.

Two men enter. One man leaves.

Such is the case in the modern day financial fray as the 800-lb gorilla that is the credit crunch battles it out with elephants in the room that are global central banks.

At stake is the claim to fame and newfound riches as we unwind the twisted tale of our interwoven, derivative-laden, debt-dependent, finance-based market machination.

There are indeed two sides to this trade and each offers vastly different accounts of the current state of affairs.

Over the weekend, Deutsche Bank (DB) CEO Joseph Ackerman offered that “there have been signs that the markets began to stabilize and liquidity is returning a bit but, without a doubt, some ‘blocked’ transactions will take some time to work through.”

At the same time across town, Axel Weber, president of the Bundesbank, said "the current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside of the traditional banking sector."

Was ist das? Variant views from in-the-know folks hailing from the same region of the world? That’s not drastically different from what we’ve seen in the states although the timing of the perception disparities seems to be narrowing. (See The Credit Card)

It’s like thunder. Or contractions during child labor. As the pace quickens and our heartbeats race, you sorta get the sense that something big is in the works.

From our perch, the former storm and the latter matter may not be mutually exclusive. The Federal Reserve effectively changed the rules in the middle of the game when it began accepting riskier collateral at the discount window. That threw a wrench in the timing of the bear case and continued the cumulative pressure weighing on the backs of the bulls.

The Fed has been pushing water with a fork for some time now, trying to appease foreign holders of dollar-denominated securities with higher rates while attempting to spark consumption (and stem credit contagion) through lower rates.

More likely than not, the ultimate question is one of timing and severity rather than binary consequence. In a finance-based economy, a wide swath of corporate America - from Target (TGT) to General Electric (GE) to General Motors (GM) - derive a chunk of their earnings through financial operations.

That has yet to appear front and center on the collective radar but it’s only a few derivative dominos away. While the current conundrum is focused on the “elite collateral crunch,” as highlighted by the savvy strategist Jeff Saut at Raymond James (RJ), the “other side” of zero percent financing and adjustable rate mortgages looms large on the horizon.

Be that as it may—and with a conscious nod that central banks may have bought the market valuable time and pushed risk further out on the curve —the more intuitive and less time sensitive question is this:

If recessions are part of the business cycle, the very same one that we learned in college was a natural economic progression, why is the Federal Reserve trying so hard to avoid one? Isn’t that the very same behavior that brought the credit bubble to bear in the first place?

I learned a long time ago that it’s best not to fool with Mother Nature.

That applies to the weather, procreation and yes, even business cycles.

Random Thoughts


No positions in stocks mentioned.