I try to avoid journalistic hyperbole, and I have disdain for the
pundits who have been yelling "Panic!" for months on end.
However, It appears the financial system has finally entered
panic mode. Interbank lending is actually up a remarkable 12%
yr/yr, but has started dipping here in September. Quality
yield spreads at the short end of the market are now well above
what one might expect during a recession period that also features
mild stress on the financial system. Finally, the Fed is starting to
carry over its large liquidity infusions week to week to sustain
banking system liquidity and capital adequacy ratios. The evidence
of the past two weeks does underscore the sense of fright that
Paulson and Bernanke have been giving off. The apparent
novelty of Paulson's plan reflects the fact that questionable
collateralized loan obligations suffuse the system and cannot be
easily isolated and contained.
Bankers hung in there for quite some time over the past year,
but the recent spate of high profile financial services firm
collapses has left them finally undone here in September. A
financial panic can abate rather quickly if the offending virus
is contained and removed from the system in a timely manner
by resolute action. The Paulson plan for all its manifest faults
would provide the gov. the flexibility to traverse the system
to vacuum up the viral paper. It is far more efficient than
dealing with troubled companies on an ad hoc basis. If toxic
loans are bought in widely, it could foster a conviction among
bankers that risks to the system in toto are being addressed.
But alas, info. on the execution of the plan is so lacking that,
if enacted within the next week or so, we would only know
that the gov. is doing business as usual -- throwing money at
I do not know if a financial panic left unattended would burn out
quickly enough to spare most sectors and leave our political
and economic systems intact. So I can appreciate people wanting
to take "constructive" action on the problem quickly. My plan
as a trader is to make the fewest number of assumptions I can
in the weeks ahead as authorities move to try to contain the
panic. False assumptions are big killers of portfolio value.
Interestingly, when you look at the devastation underway in the
private sector financial and corporate debt markets, the stock
market stands almost alone as an enterprise not engulfed in the
panic. Perhaps the market has more wisdom than one might
have thought. But there could be a fast 15 - 20% down here if
the difficulties in the financial system are not soon contained.
Also of interest, is that my e-mail inbox is filling up with pieces
advocating a big relief rally if some form of rescue is implemented.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!