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Monday Morning Quarterback: Printing Press vs. Credit Stress


If credit were the sole culprit of the financial crisis, Hoofy would close his eyes and buy 'em for the melt-up into year-end.


On Friday, as I pulled together thoughts for my syndicated column, I pinged Scott Reamer to ask him a question. He informed me global central banks and government agencies have thrown upwards of $30 trillion dollars at the crisis through direct lending and indirect backstops, with roughly 65% of that coming from stateside sources.

That begged the natural question: is the needle pointing towards hyperinflation?

"Not necessarily," he said, "If they were creating currency, that would clearly be the most probable path and I would be long any physical asset I could get my hands on. But since they're creating credit, it's a whole different analysis regarding how other countries are likely to respond."

That fits with our view that we're sitting at a critical crossroads. The path to the left is socialization of markets, bearded nationalization of troubled institutions, and potential inflation through a lower dollar. The scenario to the right is orderly debt destruction and an eventual outside-in recovery that paves to the way towards true globalization; this outcome would likely include a higher dollar and lower asset classes.

Deflation in a fractional reserve banking system means policy makers have, for all intents and purposes, lost control of the economy. It would also impact the top tier of our societal structure tied to the marketplace, which would be problematic for politicians and the constituencies that bankroll them.

That, as much as anything else, is currently dictating policy.

Awesome, eh?

Some Random Thoughts:

  • I've been having a lot of currency conversations lately, which would jibe with "the crisis hasn't disappeared, it simply changed shape." While that's probably not 2009 business, I recently revisited the North American Currency conversation we had in January and felt it was worth sharing.

  • Liu Mingkang, chairman of the China Banking Regulatory Commission, and Don Tsang, Chief Executive of Hong Kong, share some thoughts consistent with the path to the left discussed above.

  • The Mother of All Pennants is upon us, with the downtrend from the October, 2007 top on a collision course with the uptrend from the March 2009 low. Technical analysis is but one of four primary metrics but as this is on a lot of trading radars, we wanted to make sure it's on yours.

  • Yahoo (YHOO), MSN (MSFT), and AOL (TWX) are the ABC (DIS), NBC (GE), and CBS (CBS) of the digital media landscape.

  • We understood frozen credit markets served as the downside catalyst heading into September 2008-we know this, as we proactively foresaw it-and appreciate that those same credit barometers are now pointing to higher equity levels after the multi-trillion dollar government thaw. We respect that perception is reality in the financial realm; we simply believe that unintended consequences can manifest in many ways.

  • If credit were the sole culprit of the financial crisis, Hoofy would close his eyes and buy 'em for the melt-up into year-end. While that could happen, financial markets are multi-linear and there's no such thing as a definitive "if/then." If there were, everyone would blindly bet on it and we would call this business "winning" not "trading."

  • Case in point the dollar, which is down 16% since the March equity lows (not a coincidence) and 38% since 2002 on the heels of the crash (also not a coincidence).

  • While "asset class deflation vs. dollar devaluation" has been our mainstay mantra for many years, we must again remind Minyans that a grubby greenback is a necessary precursor to-but no guarantor of-higher asset classes. In other words, a declining dollar isn't an all-clear to buy equities.

  • We don't "do" acrimony in the 'Ville so I'll ask as simple question. How many economists or strategists foresaw the financial crisis or fathomed that the S&P would trade with a six-handle this year? If you answered "the same economists who predicted unemployment would peak at 6% and now foresee $80/share earnings for the S&P," you would be correct. As Minyans, don't just ask what, ask "why?"

  • Festivus is eighteen days away and consistent with the typical pattern, registrations have picked up in pace. As we expect our annual soiree to benefit the kids to again sell out, we encourage ye faithful to lock their spot for the critter trot. It's a rocking good time for a tremendous cause as we do our part to give back and enjoy the journey!

  • Austan Goolsbee, a White House economic advisor, said he doesn't believe that the repeal of the 1933 Glass-Steagall Act was a primary cause of the financial crisis. I agree there were a multitude of causes-and culpability extends from the over-indebted consumers to institutions that engineered the market to policymakers complicit by acceptance to the CEO of the United States –but I would argue that the contagion would have been more "containable" if the financial world wasn't so interwoven.

  • The banks continue to migrate around the all-important BKX 43.5 level. They'll be the key today-keep an eye on Goldman (GS) and Bank America (BAC) as the key tells in that arena.

  • Speaking of which, between the bonuses, kittens and the ban holiday parties, Granny Goldman is everyone's favorite target these days. How that translates to the stock remains to be seen but she recently put in a lower high directly at the 50-day moving average.

  • If you're a fan of Minyanville, be a Facebook fan of Minyanville!

  • "Turtling"--Really?

  • Good luck Minyans; let's do this!


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