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Shock & Awe!


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

Before the patient can recover, he must be stabilized. The government initiatives will introduce a plethora of unintended consequences-there are no quick fixes or magic pills-but the best hope, at this stage, is to stop the bleeding before attempting to cure the cancer.

Martial Law for the Markets

Last Friday, the U.S government waved the white flag and surrendered the capital market process when it banned short sales in the financials.

It was a profoundly sad day for the free market system. I felt as if I lost a close friend of seventeen years that I was intimately involved with.

Over the weekend, I discovered there might have been more to that decision than initially met the eye. There was chatter on the beltway that we may have been the victim of economic terrorism, a coordinated short raid that originated in London and Dubai.

While the legitimacy of that remains to be seen, my source is well respected. Further, as the goals of terrorism are economic destruction and social upheaval, it makes intuitive sense. The stock market is the world's largest thermometer and breaking the capital market construct-as some would say they did last week-would effectively achieve both goals.

This is a separate conversation from the financial fabric itself, a monster created through years of experimental engineering. It simply speaks to the fact that we're vulnerable and that weakness may have been exposed from afar.

Whether or not that proves true, I expect a coordinated agenda to emerge from Washington akin to what we saw after September 11th, 2001. During that period, the lines of distinction between bullishness and patriotism blurred and it was considered un-American to be a bear.

I will be very clear. Minyanville is as American as apple pie. We love everything this country is supposed to stand for. We love capitalism. We love small business. We love the notion that you can invest in what you believe in and be rewarded for your efforts.

And we're not bears, per se, we're simply a community that is trying to navigate the cumulative imbalances and find our way to better days.

With that said and respected, a few elements of the proposed bailout seem particularly egregious.

In particular, "Decisions by the Secretary of the Treasury pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Perhaps I'm sleep deprived but that seems to fly in the face of the balance of powers that is the fundamental foundation of the United States of America.

Our Wishbone World

We offered in February as we sat at a historic crossroads that the stakes had never been higher.

The ace up the Federal Reserve's sleeve since the turn of the century had been the U.S dollar. They let the greenback devalue with hopes that a legitimate economic recovery would take the place of the credit expansion that has dominated this decade.

From 2002 to 2007, the world's reserve currency declined 40% while everything measured in dollars appreciated in kind. That passed largely unnoticed by stateside players but it was-and remains-a considerable source of stress for foreign holders of dollar-denominated assets.

We called it "asset class deflation vs. dollar devaluation" and toggled between the two as policy makers pulled strings.

On one side, there was the socialization of markets, nationalization by governments and potential hyperinflation. On the other, there was asset class deflation, risk aversion and the unwinding of the debt bubble.

It was clear that decision makers preferred the first scenario. The "have's" would presumably fare better than the "have not's" and wealth would be retained by a slimming margin of the society. They knew all too well that the devil of deflation knows no friends on an absolute price basis.

While on television Monday, I was asked if the spike in crude was due to confusion regarding the bailout proposal. My response was that, quite the contrary, the eye-popping commodity rally was an unintended consequence of the plan itself.

That brings us full circle in this discussion. All roads ultimately lead to deflation and debt destruction, which was the natural and progressive path that sliced 25% off the commodity index and caused the dollar rally this summer.
No positions in stocks mentioned.
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