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Five Things You Need to Know: It Was Fun While It Lasted

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The demise of Lehman creates a cruel guessing game.

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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

The Hideous Stripper Cruise Ship Disaster... What Does It All Mean?... A Cruel Guessing Game... Just When We Thought It Was Over... "Stagflation is now a dwindling threat"...

We were strolling along the beach about halfway to the first jetty when I realized something was slightly off, like the jangling of nerves only moments before a horrible accident... when the danger is felt not seen.

Minyanville's Why Wall Street Will Never Be the SameIt was approaching low tide and the waves were coming in rough and lumpy, breaking with a weird, deadened flop. No, this is wrong, I thought. This is not happening. Not in front of my son. He's only twelve!

Each time a wave rolled in, it carried with it dozens of hideous gelatinous blobs, spitting them up onto the beach as if the ocean itself was choking on its own vomit.

Tristan suddenly bolted ahead and picked up one of the jiggling, spherical blobs, examining it with wide-eyed wonderment and awe the way only a twelve-year-old can. "Creeping Jesus!" I yelled. "Put that filthy thing down, you don't know where it's been."

It must be the storm, I thought. Yes, the storm. Clearly, a cruise ship of strippers must have capsized in the storm, and after the shark attacks all that was left were these silicone breast implants washing up everywhere. There were thousands of them. It was a tragedy beyond comprehension and explanation, especially to a twelve-year-old boy. He'd have to come to understand it on his own terms.

"Here, dad" he said, casually tossing the breast implant, which I made out to be about a size C, at me. "It's a dead jellyfish," he said with a shrug. And so it was. Quod erat demonstrandum.

You may be wondering what this has to do with Lehman Brothers (LEH), or Merrill Lynch (MER), or American International Group (AIG). At first, I was too. But the sea is a magnet for portentous signs, and thousands of dead jellyfish washed up on the shore of a beach in New Jersey is perhaps the perfect symbol of where we are in this credit cycle.

What Does It All Mean?

Jellyfish are simple and dumb. They lack basic sensory organs and instead rely on a primitive nervous system structure to perceive stimuli. They are carnivores, but they are also passive by design, and so ultimately they are no match for the strong ocean currents that can define their lifespan.

In other words, the meaning of thousands of dead jellyfish washing up on a beach is simply this: sometimes the dumb get caught in a storm, and when they do, punishing them is nature's way. There's nothing remarkable about that insight, except that punishing the dumb is sometimes a deeply disturbing and unpleasant spectacle.

This is true whether we're watching dead jellyfish wash ashore in New Jersey or dead investment banks soil the streets of Manhattan.

A Cruel Guessing Game

There's nothing fun about watching ham-eyed television broadcasters and reporters try and make sense of financial disasters. Sunday night when the special programming began I knew there was very little time to compose my thoughts before they became polluted with nonsense and gibberish. There is only one thing you need keep in mind when breaking financial disasters take place, and that is you can pretty much do the opposite of everything you see and hear on television and come out ahead within three months.

It's not a matter of intelligence. Hell, look at me. I'm a product of a Kentucky public school system that during my day consistently battled with Mississippi for title of Worst School System in the Northern Hemisphere. No, television broadcasters aren't any dumber than the rest of us. It's just the fact they have the unenviable task of being forced to formulate a thought about something before it's even finished happening. It must be like waking up every day and going to a job where you're supposed to appear in front of a large crowd and guess the age and weight of a number between A and G. It's a cruel game. Nothing but the act of guessing itself makes any sense.

Just When We Thought It Was Over...

But enough of that. The reason we are here is to judge the awful train wreck unfolding in the economy, of which the failure of a big Wall Street bank is just one bent rail in the whole twisted mess. Just when we thought it was over, it's really only beginning.

The most important thing for stock market investors and traders to keep in mind today is that this debt destruction will be an ongoing process. It is tempting to see the Lehman (LEH) bankruptcy, the Bank of America (BAC) and Merrill (MER) deal, as signposts marking the culmination of a financial stress event. They are not. They are merely symptoms of an ongoing debt crisis.

By allowing Lehman to fail, the Federal Reserve has, perhaps inadvertently, embraced debt deflation. Now they are contributing to it. The net result of the failure of Lehman will be still more credit contraction and debt destruction.

Some will argue that by adding $25 billion to the now $200 billion Treasury lending facility, accepting equities as collateral and by cutting short term interest rates, which the FOMC will almost certainly do September 16, the Fed is making more credit available, but that credit is being absorbed by the financial system so quickly that the net result is a still ongoing credit contraction.

But that's only half the story. The other half is about the debt destruction responsible for making both dollars and treasuries dear.

"Stagflation is now a dwindling threat..."

Indeed. The Financial Times ran an op-ed this morning discussing this "dwindling threat," and noting, correctly, that "unless core inflation rates start to jump or the falls in commodity prices to reverse, central bankers can shift attention from inflation."

The reality is that this debt destruction and revulsion, which began more than a year ago in a small corner of Wall Street responsible for packaging and trading obscure products built around subprime mortgages, has transmogrified into a full scale debt deflation.

The jellyfish on Wall Street are washing ashore. The stinging tentacles of credit have now dissolved. All that's left are gelatinous globs that resemble artificial breast implants in both shape and symmetry. And if you think about it, that's how it should be; the striking resemblance between a dead jellyfish and a silicone breast implant. An empire built on inflated credit. Yes, I like that. It perfectly captures the artifice of synthetic growth... an empire built for nothing but the sake of appearance and purposeless pleasure. But hot damn, it was fun while it lasted.

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