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Shock & Awe!


Now that the system is broken, what do we do?


"You're gonna need a bigger boat."
--Police Chief Brody, Jaws

Sir Isaac Newton offered that for every action, there is an equal and opposite reaction. His laws were clearly created before the advent of derivatives.

The free market system officially broke last week and the ramifications are profound. A new world order is upon us, one that will forever change the construct of capitalism.

We often say that to appreciate where we are, we must understand how we got here. That isn't a quick conversation or a sound bite; it's an educational evolution we must all take responsibility for.

That is why we provided a contextual backdrop last week and it's precisely the reason we created Minyanville.

Discussing the fragility of the financial fabric is a moot point. While the blame game percolates in political circles, the rest of us are left to stress through the mess.

There will be massive opportunities on the other side of this ride. Our goal is to persevere this process of price discovery and be in a position to prosper when the eventual recovery arrives.

As many issues vie for our collective mindshare, we'll break them down into five things you need to know about our current state of affairs.

Will The Government Bailout Work?

We've long offered that the only true solution for what ails the market is debt destruction and opined that this dynamic would come to a head in September when corporate credit came due.

While that ultimate destination is unavoidable, the path we take to get there remains an open question. There are two alternative scenarios, neither of which is particularly pleasant to ponder.

The first is credit cancer that eats its way through various sectors until the body rids itself of disease. This has been in play for years and has spread from homebuilders to banks to technology, retail and other industry segments within our finance-based economy.

The other is a car crash that causes credit to freeze as capital markets seize, price discovery permeates and social mood shifts as the magnitude and consequences of the new world order manifests throughout the financial and societal structure.

The critical diagnosis was evident for years but few policy makers paid attention until after the patient was rushed into the emergency room.

After administering ad hoc drugs with hopes of masking the disease, the government is now attempting to buy the cancer and sell the car crash. If they didn't implement a comprehensive overhaul, global equity markets-tied together with $500 trillion of derivatives- would have experienced a cataclysmic crash.

That outcome remains within the probability spectrum-they may have been too late-but the likelihood has been reduced, albeit not without profound cost. Government officials are attempting to buy time, snuff out the fuse and stem contagion that has spread like the plague to every corner of the earth.

Price discovery is a process rather than a point and a multitude of factors will affect the ultimate outcome. While we can debate the merits of the proposed plan, we must remember that it introduces the possibility of regulated containment that didn't otherwise exist.

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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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