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Shock & Awe!


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

The bailout proposal reversed that course in one fell swoop and reintroduced the specter of hyperinflation. That will work until it doesn't, which is to say that the patience and appetite of foreign holders of deteriorating dollar-denominated assets is extremely strained.

If they scream "Uncle Sam" and debase our currency, the caveats of a fiat currency will hit home in a hurry. If they don't, the dollar will rally and asset classes of all shapes and sizes will deflate in kind.

Societal Acrimony

Social mood and risk appetites shape the tape and we've drawn analogies to periods past. The stock market crash of 1929 didn't cause The Great Depression, for example, the Great Depression caused the stock market to crash.

Despite numerous discussions on this topic, there is a profound difference between written words and life experience. This presented itself in real-time last week when The Reserve Primary Fund broke the buck, halted redemptions and denied people access to what they believed were liquid and safe capital conduits.

On the other side of the societal spectrum, a different scenario has taken shape. Between the Lehman Brothers toe tag, a shotgun wedding between Bank America (BAC) and Merrill Lynch (MER) and the dressing down at Goldman Sachs (GS) and Morgan Stanley (MS), the crisis arrived for the precious few still in a position to spend.

These seemingly separate situations introduce two very important dynamics: voluntary and involuntary thrift. The former involves people who have savings but choose not to (or can't) spend it while the latter describes people who can't afford to fill up their car and take the family to Applebee's.

Both processes are currently in play. As folks digest personal issues, it stands to reason that social tension manifests as a whole. That curbs risk appetites, which reduces spending habits, harms the economy and drives us deeper into recession. It's a vicious circle, akin almost to a bubble in reverse.

We flagged this unfortunate theme at the beginning of the year but again, living through it is an entirely different dilemma. The angst is palpable and tension is high as we edge towards what promises to be a very tenuous election.

Indeed, anticipation of social unrest may be the catalyst for the decision to transfer troops back to the States. Beginning October 1st, a military army brigade will be an "on-call federal response force for natural or manmade emergencies and disasters," the first time an active unit has been given a dedicated assignment of this kind.

Clarity Now

This is far from fun and anything but easy, but in order to get through it, we must go through it.

On the other side of the prolonged period of socioeconomic malaise, an "outside-in" global recovery awaits that will reward those who have preserved capital, reduced debt and armed themselves with financial intelligence.

While opportunities will certainly present themselves, proactive preparation and lucid awareness are far more important than the next best trade.

It's about building a future so our children will have a stable home.

It's about winning the war, both in a literal and figurative sense.

It's about seeing all sides as we edge through historic times.

Identify an appropriate horizon and sync your risk accordingly.

Understand that opportunities are made up easier than losses and the ability not to trade is as important as trading ability.

Remember that risk management trumps reward chasing and profiting is a privilege rather than a right.

Most importantly, take the time to be mindful of the little things in life, situations that you may have once taken for granted.

It should never take something bad to make you realize you've got it good.

No matter where you are, it's never too late to start.

No positions in stocks mentioned.
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