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Three Cheers For Deflation


Better late than never.


Come out to view
the truth of flowers blooming
in poverty
- Basho

Francis Bacon once wrote that imagination was given to man to compensate him for what he is not and a sense of humor to console him for what he is.

The pursuit of investment riches is a veritable study of the full spectrum of human imagination: bookended by the red of Moody's (MCO) AAA RMBS credit analysis on one side and the purple of Tim Geithner's congressional testimony regarding the Bear Stearns (BSC) take-under on the other. Thank goodness for the consolation of humor because if this is the highest level of imagination supposed arbiters like Moody's and the NY Federal Reserve can muster, we're going to need it.

Ignore for the minute the fact that risk premia have gotten crushed since March 17th, that CDS spreads have collapsed to October-like levels, that high yield spreads would need 10X leverage just to generate enough coupon to pay for rice and that implied volatilities are wearing a size 0 just in time for summer. While those tidbits get a lot of mention over the IM transom, few have really noted just how far we've come from the credit salad days of Memorial Day '07 from a social standpoint.

Far fewer conversations at the beach house this Memorial Day weekend will be centered on which patina of Le Creuset pots are hot this summer, there will be no arguments over travertine or limestone, and blissful silence on weighty matters like Balenciaga vs. Jil Sander. No matter what you might think about the price trajectory of a barrel of oil, this long weekend you can bet that ne'r-do-well cousin of yours almost certainly won't be hamming it up about how he's been killing it turning mortgage pools into Treasuries down at ABC hedge fund.

Is there another Bear Stearns out there?
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You can thank your lucky stars (and the Austrian Business Cycle theory) for that. While that particular fixed income swap has been handed off from investment and commercial banks to the good (always-ahead-of-the-market) folks at the New York Federal Reserve Bank (and is thus still clogging up the nation's financial arteries to the tune of $17 billion last week alone), at least the summer won't constantly remind us that there actually was something akin to "money for nothing" in the United States in the year 2007.

So while the actual trade might still be with us (and by ''us'' I mean American taxpayers), at least the more seemly side of that great credit alchemy will rest in peace in this summer's heat. No more wanton spending, no more diamond-encrusted skull artwork, no more promiscuous consumerism (other types of promiscuity I encourage). We've turned the corner on excess, and excesses' gout prevents it from keeping up with us.

What this means is that the great credit unwind that the many good folks at Minyanville HQ have been talking about since 2004 has finally gotten in gear. Let the economists debate about the exact timing of the recession; let the traders debate about vols, skew, and gamma; let the analysts debate whose topline is defensible and whose isn't. The part that isn't any longer up for debate is that the cleansing process has started, the economic healing has begun, and poverty's flowers are ever so slowly starting to bud.

Raise a Pabst Blue Ribbon this Memorial Day weekend to a deflationary process long delayed but much needed, in markets as much as in conversations.

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