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Best of the Exchange: Crisis of the Real, Bank Reserves and Economic Fear


Highlights of Minyan commentary on a volatile week!

With the launch of The Exchange, Minyans now have a forum in which to express their viewpoints, comment on articles and meet other like-minded financial souls. Minyanville publishes a "A Best of the Exchange" each Friday to highlight the many insightful posts and discussions going on behind the scenes.

Become part of The Exchange and let your voice be heard!

(Editor's Note: Some of the following posts have been modified slightly from their original form.)

Pep delved into the realm of metaphysics and those of us who went with him came out better for it on the other side. The Crisis of the Real has been the most actively discussed article on the Exchange thus far. Be forewarned that it will bend your mind!

Minyan James:

Imaginary gains like imaginary fears are easily confused with actuality it.

Deception is natural, like a bird with a simulated broken wing is real. Protecting her nest is natural and paramount even if it is empty and in hock.

It is difficult to walk away effectively from an empty nest if one still thinks it has some value for which one is obligated to protect. However, when one realizes there is no value there, one reconsiders there.

The global economy is reconsidering "there" and where there is no "there" where is it? "There" is becoming more local and less global even as the world is become more in tune with doing business locally.

Value has finally become sensible which may be a poor man's definition of deflation.

Every time the market goes up these days I see a simulated broken winged bird. Once the value of the nest is exposed the wizard is without a hiding place.

Economics is now becoming interesting, exciting, something sensible to talking about and not merely spun hype.

There's nothing deep here Kevin, it's just your natural bend towards sensibility and awareness of actuality.

Minyan Eddie:

There will be massive implications to the social and business worlds when people realize that the only real value in a brand name is that which they assign to it. What happens then to companies that demand ridiculous multiples based entirely on such perceptions?

Eventually people will see through the subtle and not so subtle manipulations of politicians and central bankers. What becomes of the institutions they represent?

One day Sally Smith in Iowa realizes that not only does her idol Britney not love her back, but Brit's just like her *gasp* In fact, she's the worst of her! Then what becomes of Hollywood and trash journalism and celebrity endorsements?

It's no wonder the Wizard of Oz resonates so well decades later; time to pull back the curtain and get on with the real.

Thanks for the inspiration. It's always good to know I'm not alone in my wildly divergent thinking. Someone much wiser was thinking about all this stuff long before my noodle latched on! At least I'm in good company.

Pep responds:

It's not about gloom and doom. It's simply a very bizarre transition we are living through.

I think we will see over the next decade reactionary events, phases where people will violently oppose what they perceive to be the threat of something foreign, whether it's the displacement of reality by avatars, social networks conducted entirely online, alternate realities experienced through media.

Much of that i think will be exacerbated by the demographics. There's the old joke about how every generation has a "those dang kids" moment. Interestingly, older Americans will in a decade be the largest social group in the U.S., and consequently their attitudes about consumption, savings, technology will go a long way toward shaping both cultural and governmental responses to this transition ... for better or worse.

Professor Shedlock discovered that Bank Reserves Have Gone Negative, and days after his piece ran, the we began to see rumblings of this data in the mainstream media.

Minyan Scott:

Mish - I've followed you for some time and your track record has me reading this piece and thinking "Oh (fill in your favorite expletive)."

The Fed's race to cut the funds rate in the context of this makes a heck of a lot of sense. Mauldin pointed out that it is a means of trying to help banks generate net income to shore up capital. The question is do you think there is time for it to help much?

Minyan Tony:

Scott - Like you, I've followed Mish's blog for a while. My two cents: I don't think it's going to make one lick of difference. The lags inherent in rate cuts and rate increases mean it will be between 6 and 12 months (although I wonder if it isn't longer) before any effects are felt. There are a lot of banks out there who don't have that kind of time. They needed that money at least 6 months ago and they didn't provision it, allocate the capital for it, or keep their balance sheets liquid enough all along.

On top of that, even if they can buy time until the rate cuts start to move through the system, who are they going to lend to? No leveraged deals can get done, anybody who can get a mortgage probably doesn't want one, and credit cards? Fuhgeddaboutit!

And losses are going to continue eating up provision and capital at the same time...

Minyan Alex:

The graph on net reserves is very telling and obviously cause for concern. I only wonder if, since we have not slipped net negative since the 80s, if it woldn't be more accurate if it was inflation adjusted. My guess is, if that was done, the spike down in the early to mid 70s may look much closer to the current situation (still worse obviously!) than it appears, maybe approaching $10 bln in today's monopoloy money.

Just trying to get a feel for whether we've been here before or if it's off the charts by a magnitude of 10. And I'd use an inflation rate more reasonable than what we've been fed (no pun intended!) over the past decade.

Professor Stephanie Pomboy posted her fears for the economy on the Buzz and Banter and Minyans requested more thoughts on Economic Fear Taking Hold.

Minyan Charles:

It seems to me we are already at negative interest rates factoring in true inflation ... and if it is this bad already? How much worse will it get? Maybe the Fed's exponential growth curve for inflation has been a flawed model from go?

Minyan Kevin:

I'm not at all sure I can agree with your assessment of the actions of the ECB.

First, I'm not at all sure that European banks have all that much exposure to the housing bubble. Yes, Spain is a mess. Yes, the U.K. as well. However, if the overall EEC doesn't have that much of a bubble then going the route of Bernanke by dropping rates drastically when inflation is an issue seems imprudent.

Will U.S. economic woes infect Europe? Without a doubt. However, Europe might be better served by steering a stable and sane course rather than the cheap-and-easy-credit-bubble method the Fed seems to like. Short term they may not get stellar results, but long term it may just be a winner.

Disclaimer: I'm putting my money where my mouth is and betting the ECB has a saner approach than the FED. Even if the European markets go down with the U.S., I'm betting on the drop in interest rates here will make up for any "losses" in Europe as the dollar drops vs. the Euro. I'm currently 2/3 in European equities and 1/3 U.S.


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