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How I Learned to Stop Worrying and Love a Credit Crunch


In the last generation, since 1982, recessions have been infrequent and rather tame by historical standards.


Jokerman dance to the nightengale tune,
Bird fly high by the light of the moon
Jokerman (Bob Dylan)

I am too pure for you or anyone.
Your body hurts me as the world hurts God
I am a lantern--- My head a moon
Of Japanese paper, my gold beaten skin
Infinitely delicate and infinitely expensive.
Does not my heat astound you. And my light.
All by myself I am a huge camelia
Glowing and coming and going, flush on flush.
-Sylvia Plath (Fever 103)

"Gentlemen, you can't fight in here! This is the War Room!"
-President Merkin Muffley (Dr. Strangelove)

How bad are things? Usually credit revulsions, where creditors panic and will not make new loans occur after, not before, a recession knocks on the door.

But, then again, the U.S. hasn't seen a real honest to goodness price deflation since the 1930's.

In the last generation, since 1982, recessions have been infrequent and rather tame by historical standards. Shall we say that the Greenspan Put is becoming the Bernanke Put-Put? We'll have to see how this boat floats.

Then again, it's been a long time since we had the likes of a Volcker, someone with a backbone unwilling to cavort with cronyism and willing to wring the excesses out of the excesses – wherever the cards may fall, no matter how many jokers are in the deck.

Now it seems the financial market's playing field is a landmine of marked decks. When the jokers are wild they just get shuffled to the bottom of that deck.

The real joker in the deck this time, especially for the scholar preeminent of the Great Depression, Bernanke, may be in fact that this time is different.

Why? From my perch is seems perilously possible that we're living in a parallel universe where credit is simply not bank-originated but where credit has been fostered by and facilitated by fancy pants: financiers peddling Slim Jims as pork chops, pigs in a poke as porterhouse and financial fricassee as filet mignon. In a word it's all borscht.

In other words, it's a Dagwood corned beef sandwich of the growth of hedge funds, the peppering of money supply, and the free money mayo of sashimi Yen Carry and the collapse of the equity soufflé in 2000 and the subsequent real estate sub prime rib.

Simply put, this combo of hedge funds with correlated strategies in a syrup of easy money skewed by a side of investment bank sausages hiding the salami leaves everyone at the last supper of leverage, hungry again in an hour. It's a rock lobster at market prices but everyone's left wondering just what the market price actually is. I'll take a half pound of CDO's sliced extra thin - hold the pickle please.

Yeah, that's the ticket. Facilitating the growth of hedge funds by fostering leverage on the back of cheap money bed rocked by the greatest collateral under the big tent: U.S. real estate. Yes, after the technology boondoggle, what better place to hide a bone but in the back yard? Hey, we just might just strike some oil or even gold when we bury that bone.

How this is all going to play out, of course, no one knows. Don't let that stop the sentiment from getting frothy again just because the last time the Fed changed course in 2001 it made nary a difference, sending the market down 45% eventually from that point.

Is the market making a grand test of its July high or is a brand new world of borscht beginning anew?

It is ironic that on the autumnal equinox the position of the market is at a point of possible recovery to new all-time highs, just as the market was in a similar pretty position at this spring solstice this year. That was just after spring break. Are the markets ready once again to roll out the barrels, pop open the keg, embrace the trading party animals and speculators gone crazy?

Click here to enlarge.

A) Spring Break
B) Is the current pattern a fractal of (A) ? Watch the first pullback: A pullback below 1500 and then the 50 dma suggest the market is diverging from how things played-out earlier this year.

Perhaps. But, I am reminded by the skeletons in my closet that 20 years ago after a 3% up day in early October 1987, when the Street was convinced that it was out of the woods and the market looked remarkably and eerily similar to the pattern that had been traced out that spring, that Mr. Market had a few tricks up its sleeve, a few jokes for Hoofy.

Click here to enlarge.
After a 3% up day in early October, the pattern resembled the price action from the spring.

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we have launched Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander for more details and how to sign up.

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No positions in stocks mentioned.

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