Tuesday, November 25, 2008

Blind Man's Bluff

I don't know what's going to happen to the stock or financial markets, only that when they go up, they're more likely to go up, vice-versa, and they have short-term and long-term reactions to central policy.

The Soros concept of reflexivity posits that because of human psychology, metric trendlines begin to self-amplify, and the more they diverge from the mean, the more they behave as a dominant fundamental factor. Any trader knows this intrinsically ("the Trend is your Friend"), but as a proof to his theorem, the only reason I've worked up enough courage to write this post is the Dow has closed up for three straight sessions for the first time since August of this year.

Above is a chart comparing stock market performance of the Dot Com Crash of 2000, the Oil Shock of '73, the Great Crash of '29, and the Cluster**** to the Poorhouse of '08. As far as they go, the angles of declension look remarkably similar.

Comrade Secretary Paulson changes his mind every two days over half a trillion dollars here or there, and because going to face a snarky Congress again would involve travel and thus increase his exposure to sniper fire, he just flat-out walked down some marble steps today and announced we're on the hook for another $600 billion, for a total of $4.3 Trillion and counting. There's ample evidence that I, most any accountant, a housewife who runs a business or a teenager who keeps an accurate checkbook has as good a chance at fixing the economy.

The people who are supposed to know, they don't know. The people in the driver's seat, they suck at driving. The people who are respected, they're playing Pin the Tail on the Orifice. So I'll just note this. There is no structural difference from the stock (and bond) market from that of 2000. The share of financial services as a percentage went up slightly, yes, but the markets were as leveraged in 2000 as now, hedge funds ran as rampant, derivatives were as reliant on the stressed individual blocks at the bottom of the inverted pyramid. And the dot-com sector is much more established and profitable.

To re-leverage these markets means stabilizing their base. That's much cheaper to do than directly stabilizing the arcane instruments on top, an extraordinarily complex, unprecedented if not impossible task. The $600 new billion that Paulson declared as spent today to guarantee all those casino chips would, if wedged into the bottom instead, back-stop all the troubled mortgages. It would in turn stimulate commodity & food spending and greatly increase the share of auto loans and credit cards paid. Maybe, just maybe, someone important will notice.


Still Life Living said...

The biggest problem with the 4.6 trillion or whatever is that almost no structural reforms have taken place. In other words, Paulson is giving them money in the belief that we can releverage ourselves to solvency.

But what he doesn't understand is that the fulcrum of trust has cracked and is crumbling. The veil has been torn asunder, and the only thing they have to go on is 1) a hail mary pass to Obama, and/or 2) Christmas, that time of year where we celebrate being fat, dumb, and happy.

MarcLord said...

Reforms are the only thing that will re-establish trust, and reforms mean kicking banker-ass. Paulson can't do that. Volcker can.

Meantime, what's the basis of all that leverage? $250 billion to keep the mortgages above water would've softened the landing of everything else.