bizzXceleration: Performance, Value and Profit

 

We've all, including the experts, been struggling to get a handle on what's going on here. An analogy that occurs to me is to compare the economy to a complex piece of machinery or process manufacturing plant. For example a refinery. Now that machinery is energized and controlled by the credit markets which ship the necessary lubricants from real marekt to real market to keep everything turning over. The relationships between multiple credit markets are usually so stable and predictable that all we need to understand is the distribution of interest rates over time and over risk. The first is otherwise called the yield curve and describes the range of rates from short-term to very long-term. The second is the spread between different markets and instruments and represents the estimated riskiness associated with each instrument and seperate market. When short-term rates rise above long-term ones we have an inverted yield curve indicating that demand for loanable funds will gone down due to economic slowing. A situation we're in now. And when spreads between markets rise as liquidity is pulled out of the system then the relative risk factors are being re-adjusted. Three/four times since last August those spreads have spiked tremendously as people realized they had no clue as to the actual risk and return situation.

BUT....BUT...BUT we're actually had a much more arcane and dangerous situation which is a meltdown in the fundamental functioning of the credit markets. Otherwise describable as not being able to get loans and funds at any price. This is similar to the infamous liquidity trap of macro-theory fame but has taken place in the credit markets. It was created by that Fear Factor and when it's in play traditional monetary policy WILL NOT work - the standard mechanisms of inter-market credit adjustment are broken. Perhaps the best way to continue the analogy is go to back to the plumbing notion. We've got blocked pipes, corroded pipes, broken ones and badly kinked ones. What the Fed is trying to do is repair all that damage and let the normal, and hopefully orderly, processes of a recession work out without subsiding into a major economic collapse. In doing so they've displayed amazing insight and ingenuity and may, with this week's moves have reached a point where they've found the basic toolkit that they can use to manage an orderly downturn without it turning into a disaster. Let's hope so. 

Now we've put up several posts (two in particular) that attempted to take deeper dives into what's broken and how the Fed is going about fixing it. But a very recent CNBC flipchart discussion is about as good, clear and simple on the subject of the new instrument innovations of the Fed as any we've seen and we highly recommend it. Meanwhile after the break you'll find our toolbox neatly laid out with various postings on the Liquidity & Leverage history, the Credit Market breakdown, Fed strategy and tactics (which we'll, ahem, point out has turned out to be pretty accurate) and a listing of the most recent posts that bear directly on these problems.

CREDIT BREAKDOWN TOOLKIT

 

Credit Markets and Liquidties Problems

Topic Posts Comments Liquidity Market Drivers: Liquidity, Liquidity(Buyouts) and Buyouts (Buybacks) Markets Drivers 2 (Buyouts): the Carry to Cash Economy Market Drivers 3 (Buybacks):Investment, Hiring, Nah...Bonus, Bonus, Bonus ! Buybacks, Bounces and Splats: Buying High, Selling Low A major underpinning of the economy and the markets has been “excess” liquidity and leverage. As this corrects all of these factors will start running in reverse and it will take a long-time to unwind. Their importance and role as well as construction and character will be important to understand. More especially as banks accelerate write-downs, restrict credit and pull funds back and hedge funds, et.al. unwind leveraged bets and over-borrowed companies find themselves badly missing what was on their balance sheets. Credit Market Breakdowns More on the Credit Crisis: the Rocks in the Pond "Model" Rocks, Ponds, Perverse Incentives: More on Credit Contagion $Trillion Losses: the Minsky Moment Continues WRFest 1Mar08(Credit Markets): Credit Contagion, the Fed and Outlook Credit Crisis Metastasis: Who's Been Swimming Naked At this point most are aware of the credit market breakdowns but the full scope isn’t broadly acknowledged yet. These are attempts to frame that scope, understand how far it might spread and point to the mechanisms that built this catastrophe. Fed & Credit Crisis Credit Mess and the Fed: Understanding the Strategic Posture The Chairman's Testimonies: Listen to What He Really Said WRFest 1Mar08(Credit Markets): Credit Contagion, the Fed and Outlook Galt vs the Fed II: Credit Disequilibriums, Broken Markets and Economic Implosions The mis-understanding of the Fed’s challenges and it’s efforts is very widespread though it appears to be self-curing in just the last week. Here is an earlier attempt and follow-ons to capture and explain the breakages and what the Fed is doing about it. Recent News WRFest 15Mar08(Markets): Credit Crisis, Contagion & Market Run Away, Run Away: the Seriousness of the Credit Crisis Credit Meltdown, Economy and Consequences: Putting the Pieces Together These are recent news summaries and analysis that bring you up to date with the current status of the credit markets and their breakdowns.