Now We're In Trouble

by Steven M. Cohen  •  Jan 20, 2008 at 8:29 am

http://www.buyselljump.com/2008/01/now-were-in-trouble

We have not experienced this degree of turmoil in the markets for years, perhaps not since the Russian debt/Long Term Capital meltdown of 1998 (although the tech bubble implosion was no picnic either). The long weekend will provide but a brief respite to the recent gut-wrenching market contortions, giving investors a short period in which to perhaps catch their collective breath.

Blowoffs, panics and meltdowns are part and parcel of all markets, and while the technology of delivering information is constantly changing, the result is the same, no matter whether the subject matter is tulip bulbs, South Seas trading companies, or start-up dotcoms with no earnings: excesses have to be expunged, usually involving massive investor losses.

So the present situation differs little from most previous periodic blowoffs. Here the markets grossly overvalued defective mortgage-realted securities, and investors are all running for the exits at the same time. In fact right now the exit doors are locked, as the market for many of these securities, as a practical matter, is frozen with no thaw in sight.

Yet there have been a few positive signs lately, tiny slivers of sunlight in an otherwise dark and foreboding sky: foreign capital has flooded in to help prop up the balance sheets of companies that are now paying the piper for their lack of foresight and surfeit of unadulterated greed.

This massive bailout has a high price, of course, one that will be borne by the hapless investors in these companies who are not only saddled with broken stock prices but with massive dilution as well. Yet the alternative--no rescue capital flowing in--is far worse.

It goes without saying that the feckless CEOs dismissed in the wake of this disaster will all walk away with tens if not hundreds of millions of dollars. But who said life is always fair?

So as things are proceeding now, events are following a timeless pattern that repeats itself periodically, one that the markets, and investors, will eventually survive. What makes it different, however, is the looming intervention of the government, replete with bizarre "stimulus" packages and laughable rebates. All of this is sure to prolong the misery and probably exacerbate it.

Mischievous government tinkering will be even more of a factor as lawmakers are spurred on by considerations related to the fall elections. Politicians on both sides of the aisle are anxious to "do something," mainly in an effort to make the other side look uncaring and ineffectual. While a lot of noise will be coming out of Congress and even the Administration, which ought to know better, little thought will be given to the wisdom of these programs or the havoc they might wreak.

And that is the great danger here: the politicization of the current market and economic distress. The present panic is a political windfall for politicians, almost too good to be true so close to an election. The temptation to create an illusion of bold, decisive action is just too much for them to resist.

Allowing the Fed to manage monetary policy as best it can under the circumstances is just too boring and will not garner votes. Same for modest measures like encouraging lenders to voluntarily adjust mortage terms to avoid foreclosures. There is just no political bonanza in letting things run their course while staying out of the way.

And that, more than anything else, is why we are in for it this time.

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