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Five Things You Need to Know: Too Much Debt, Too Many Insolvent Debtors


Stock investors may soon discover that arcane credit market terms are merely symptoms of a larger disease.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Corkscrew Haircut
2. Improving Credit?
3. Symptoms Quiet Even as Disease Rages
4. Bread & Circus Maximus
5. The Return

The Corkscrew Haircut

"Every day I come home and look at the Dow, and I didn't used to be that kind of person."
- Petra Masson, Starbucks employee, quoted in New York Magazine

So, finally, this is what it's come to; normal, innocent people reduced to rampaging like herds of investment bankers, tearing at their hair and bursting into spontaneous tears or manic laughter with each tick of the Dow Jones Industrial Average.

Who can blame them? The feeling on Main Street, especially among those Baby Boomers staring down the barrel of a 65 caliber Golden Years retirement special, is that there must be something horribly, tragically wrong with the stock market. Which is true - why else would it lurch erratically, day in, day out, in wheezy 5% clips - but beside the point.

Things are now so far off the rails, things have gone so far past any decent person's sense of normalcy, what's one more bizarre datapoint in the mix? The professional traveler understands that when you discover a golden retriever is driving the train, the point where panic is an appropriate response has long since passed. When the conductor offers you a parachute, does that make the weirdness any more or less real?

There is a point to all this, and it's related to the latest acronym coming from the Federal Reserve, the MMIFF, or Money Market Investor Funding Facility. I would ordinarily spend the next 100 words or so going over exactly what this means, but I get the sense you won't be needing a parachute on this train:

"Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors."

Ye Gods, that doesn't even make it up to the level of pure gibberish. To even think of a sentence like that requires someone with a head so twisted their barber has no choice but to cut their hair with a corkscrew.

What that sentence basically says is this:

"Under the power vested in us by the authority vested in us, we have authorized ourselves to provide credit of unassailable credit quality to a series of unknown (by you) entities to help bank-supported bank initiatives to help banks finance their purchases of financial assets deemed worthy, at our discretion, from people deemed worthy, at our discretion, by virtue of the power vested in us by us."

Improving Credit?

"After weeks of extraordinary efforts by the world's governments and central banks, the frozen flow of credit began to thaw on Monday."
- New York Times, Oct. 20, 2008, "Signs of Easing Credit and Stimulus Talk Lift Wall Street"

The Times article continued, "a benchmark borrowing rate among banks, known as Libor, dropped on Monday by the largest amount in nine months, an indication of growing confidence in the financial system."

And CNN even dug up a positive nugget on the "TED Spread," a phrase 99.9% of God-fearing Americans have long prayed, most without even fully realizing it, that they would never ever encounter from any respectable news source. "The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 2.63% from 2.97% late Monday."

Symptoms Quiet Even as Disease Rages

The problem with these arcane credit market readings is that they are just symptoms of the larger disease, which is too much debt and too many insolvent debtors. If you lose your arm in a meat grinder, successfully stopping the bleeding doesn't mean you're going to get your arm back.

For a nation nurtured by forever-happy endings and conditioned to force movie directors to recut the final three minutes of their films for the purpose of appeasing happy-ending focus group, this will doubtless come as a vicious shock. Yes, the symptoms have quieted, but the disease rages on.

Bread & Circus Maximus

"The time for honoring yourself will soon be at an end."
- George W. Bush, President of the United States of America

Frequently, on Sunday nights, I find myself sitting in the Paris Cafe Bar on South Street handicapping which demographic group is going to be pilloried and, ultimately, jailed by The People when the gig is finally up. I always choose Fans of the New England Patriots, while most of my competitors choose the Baby Boomers, and judging from newspaper op-eds like this one from the Wall Street Journal today, it's not hard to see why:

"Generalizations about the 79 million people born between 1946 and 1964 are overdone and easy to debunk. Boomers went to Woodstock, voted for George McGovern and, so the thinking goes, cared deeply about the Rolling Stones. Boomers also helped put Ronald Reagan and fellow Boomer George W. Bush in the White House and turned Nashville into a cultural capital. But what Baby Boomers of all persuasions have done, without dispute and to an unprecedented degree, is spend money instead of saving it."
- Wall Street Journal,
Oct. 21, 2008, "Boomer Bust: How Will the Economy Rebound Without Post-War Babies Financing Their Harleys?"

The Return

"The expensive stores along Bond Street and Sloane Street have fallen eerily quiet, as have the cheaper ones scattered all over town. Britons are coming down from their huge spending spree, and alarm about the future is coursing through the nation like an electric current, as it is everywhere. But there is a parallel thought in the air: perhaps the downturn, however painful, will lead to a return to the values of the past. Perhaps the last 15 years or so will be considered a sort of madness, an anomaly, a strange dream."
- New York Times, Oct. 21, 2008, "Dear Prudence: Recession May Bring Return of Traditional Values"

In the end, economic downturns, sometimes euphemistically referred to as "Corrections," do, in fact, correct something that is askew. Because we live in the skew, and come to view and accept it as normal... no matter how weird it gets... it's therefore very hard to imagine what, if anything, there may be Out There to correct. That may be why the transition from a consumer culture to a savings cultures seems so unimaginable.. even now.

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