Tuesday, September 9, 2008

"All Roads Lead to Deflation"


Stocks plunged today as investors quickly realized the bailout does not mean the end of the financial crisis. It was really ugly all over today, especially in the financial sector where Lehman Brothers' shares nose-dived 45% today, spreading contagion fear throughout that sector (see my last entry on CDS triggers to understand the ripple effect).

(Even solar shares got whacked today but I see this as a huge buying opportunity for the long-run as I believe this sector is totally manipulated by hedge funds.)

Todd Harrison, CEO of Minyanville.com was interviewed on Tech Ticker today. Mr. Harrison says it's impossible to argue the Federal government isn't playing a crucial and growing role in the financial markets.

"Call it socialism, manipulation, intervention, [or] desperation. Call it what you will but don't underestimate the mandate." "The agenda [of policymakers] is very clear," he continues. "They need to stabilize the system [to] avoid the unthinkable -- a crash that's going to suck global capital markets in the abyss."

Certainly there's an economic benefit to avoiding a global financial market collapse. But Harrison has long argued policymakers had two major goals ahead of the election they are still pursuing: lower oil prices to $100 or below, and get equity prices higher.

Given all that's transpired in the past year, from the bailout of Bear Stearns to the Fed's special financial vehicles for Wall Street to this weekend's intervention, one thing is clear: The "invisible hand" in the markets these days belongs to Uncle Sam.

Moreover, Mr. Harrison correctly states that "all roads lead to deflation". (Remember, he sees the drop in oil prices as a reflection of a weakening global economy).

Importantly, the financial crisis is far from over. Moreover, policymakers are just now waking up to this ugly reality but they do not have any solutions to this global crisis.

I highly recommend my blog readers take the time to watch this excellent interview that was on the Charlie Rose show yesterday (click hyperlink to view it).

Rose assembled an excellent panel: Floyd Norris, Mohamed El-Erian, Gretchen Morgenson, and Nouriel Roubini, to discuss the state of current affairs.

The person who I paid the most attention to was Nouriel Roubini. He predicted this financial crisis a long time ago and continues to write about it on his RGE Monitor website. He sees the BIG PICTURE better than anyone on Wall Street and he understands why this crisis is far from over.

Interestingly, on China, he sees a risk of a hard landing. Mohamed El-Erian does not see a Chinese hard landing as a baseline right now, but even he acknowledges that the risk is there.

Finally, on who is to blame, Ms. Morgenson blames the regulators "who were sitting on their hands".

Mr. Norris blames the senior managers of banks who relied on the models put together by "financial whizzes" who said that they did not have any "value at risk". "In a lot of cases they thought they were making money but they really weren't."

I think many pension fund managers will quickly realize the same thing with their investments in illiquid asset classes and illiquid securities like CDS or CMBS.

It's quite frightening that at a time when all roads lead to deflation, most pension funds are ill-prepared for the crisis that will hit them hard on the asset and liability front.

Scary thought indeed!!!

No comments:

Post a Comment