Monday Morning Quarterback: Mickey Mantle Won't Pay Our Rent
Stay tough through this crisis.
"I will never forget the look on their faces. All eight of them. Their faces dropped. All their courage and strength was drained right from their bodies. They had a reputation for breaking up bars, but they knew in that instant, they'd made a fatal mistake. This time they walked into the wrong bar."
--Calogero "C" Anello, A
Pop Quiz: Why does Chazz Palminteri encapsulate this financial juncture better than any other actor of our generation?
To wit, we've long offered there was an invisible hand in the marketplace. We summed up our stance a year ago when we mused in Unusual Suspects that the greatest trick the devil ever pulled was convincing the world he didn't exist.
As the devil is in the details, we now find ourselves in a situation where the lesser of two presumable evils has been enacted, a $700 billion bailout bill that masks the symptoms but doesn't cure the disease.
The government is attempting to "buy the cancer and sell the car crash." While the latter matter is still possible, the former storm will cycle through stages until such a time that we rid ourselves of the underlying illness.
That's right-now we's can't leave.
Our task at hand is to identify the unavoidable journey towards an unenviable destination-debt destruction-while respecting the manifestation of unintended consequences along the way.
At the top of the list are social mood and risk appetite, which shape the tape and determine price action.
The Age of Austerity is upon us.
It's a theme that both Pepe and I highlighted in January but writing it and living it are entirely different dynamics.
The process of price discovery continues as we edge our way through these historically significant times. That is a two-sided proposition, although as I wrote on Friday, the path of maximum frustration is that we just spent hundreds of billions in taxpayer money, politicians voted against the wishes of their constituency and the markets continue lower in kind.
Conventional wisdom dictates that at the very least, the passage of the rescue package would trigger a sharp upside rally. The fly in that try was-and is-the frozen credit markets.
Stocks are the world's biggest thermometers but credit is the backbone. While you can jog with a fever, you can't run without vertebrae. That remains the single greatest caveat for markets as a whole. You can lead a bank to liquidity but you can't make them lend.
As Sonny would say if he was still here, "Spoken like a gentleman-now give 'em a few beers."
The Saddest Thing in Life is Wasted Talent
Over the years, Minyanville has written about The Anatomy of This Recession and the potential for a "prolonged period of socioeconomic malaise more depressing than a recession."
As that point of recognition arrives, we're carefully conscious of all sides of the current environment. In March, we wrote Chasing Liberty and offered that once the government nationalized Fannie Mae (FNM) and Freddie Mac (FRE), one of three scenarios would likely unfold:
The system will repair itself as real estate rebounds and the underlying collateral starts to appreciate.That preferred path would allow the Fed to transition assets back to the balance sheets of the banks and unwind the most recent round of intervention.
Foreign holders of dollar denominated assets would finally balk, an alternative many nations would have already opted for if they could do so without disrupting their own financial fate.
If the economy continues to deteriorate, the Federal Reserve would effectively and eventually become insolvent. It wouldn't go bankrupt, it will simply print more currency and further dilute the value of the dollar (and bring us back to the second scenario).
To be sure, the economy doesn't appear to be improving. While the market is a leading indicator and news is always worst at the bottom, we can easily extrapolate a scenario that includes rising unemployment, further mortgage deterioration, slowing global growth and the introduction of Herstatt (international settlement) Risk.
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 email@example.com.
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