Thursday, October 2, 2008

Best of the Net - Thursday October 2, 2008

Today had an eerie feeling of complacency with US markets tumbling another 4% and closing near their Monday lows. Canadians weren't so lucky with their markets blowing past Monday's low. Other foreign ETFs like Japan and Germany indicate they will suffer a similar fate when their markets open tonight. Yet most newscasts are still mesmerized by the allure of political 'debates' scheduled for tonight, the search for Steve Fossett's body, and baseball playoffs. C'mon Angels! It's about time we show those high-pitched Bahstonians how things are done! 2002 Style Baby!

Oh, sorry about that. I got distracted.

The markets seem to agree that none of this crisis has anything to do with the largely irrelevant (other than the dangerous precedent it sets) bailout bill. This is about a secular shift in risk adversity that has gradually destroyed our credit markets for the last 18 months and are now evidently spilling over into the everyday economy. This gradual realization of spillover from the credit markets to the real economy was shockingly easy to predict because the credit markets have been the entire basis of the real economy for nearly four decades now. The only complication is that there is an inevitable lag between credit availability and the time it takes to to put that money to a practical use.

Credit started seizing up in January of '07, 21 months ago. Some people might remember stock markets falling in unison on February 27 of '07. That was the shot over the bow. And about a year later, the real economy started to feel it. Most economists I respect acknowledge that a recession began early this year. And now, our economies appear to be in free fall as the credit market of 12 months ago shows it's colours in today's economy.

This is such a simple concept, yet so few are able to understand it. For most, history begins this morning. No event of the past could possibly have any effect on today. As long as we don't make any mistakes with our actions today, we can sweep all of our past mistakes under the rug. Where things go from there are well documented to end very poorly.

People need to step up to the plate and hit a grand slam off Papelbon to win the game!! Err, sorry, got distracted again.

People need to step up and acknowledge what the problem is; that something needs to be done to ensure it doesn't happen again. People need to understand that trying to patch over a financial system is impossible when the psychological catalyst for that system (risk-taking) is absent and moving in the opposite direction for many reasons that are uncontrollable. People need to understand that the credit markets of today will be reflective of next year's economy, and that preparations need to be made for that slowdown, not wasteful malinvestment in doomed financial institutions.

Until those basic facts are widely understood by the average person and our legislators, we are in for a very long economic depression. And at this point, the financial literacy of the average person and our legislators does nothing to convince me that is about to change any time soon.

People listening to others that have zero understanding of the above and are buying stocks should be very careful at this point. Yes, the market is oversold and the probabilities of a bounce are high. But the structural integrity of the economy is in such shambles that 'probabilities' of the last 60 years of statistics could be rendered as meaningless.

I have very few positions, long or short, right now and am hugging my near term US treasury bills like a toddler's blanket.

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