Whistling past the graveyard
The markets continue to whistle past the graveyard. Most commentators are in fact suggesting that the worst is behind us and that the Fed’s rescue actions have saved the day yet again.
We couldn’t disagree more.
In her seminal work “On Death and Dying” Swiss Doctor Elizabeth Kübler Ross postulated that there were seven stages of coming to terms with reaity upon being told that one has a terminal illness. Denial is but the second stage following Shock. There are four more stages before Acceptance is reached and the stricken individual can again find his or her forward. We are obviously past the Shock stage. We suggest that markets are now experiencing Denial.
Anger and Depression lie ahead for investors who do not yet understand that the Bull is DYING and will soon be DEAD.
No single statistic better describes the cancer that has metastased through the US financial system than the level of non-borrowed reserves. In the entire history of the Federal Reserve system, dating back almost 100 years, banks have always maintained adequate levels of reserves. Yet since December 2007, the Fed has effectively used its balance sheet to support.
ALL banking activity in the US. Apart from the as yet unasked questions regarding the legality or advisability of what the Fed has wrought, this “backdoor nationalization” of the entire banking system by the US central bank is suggestive of a deep seated malaise in the markets that goes beyond mere liquidity problems. The re-entry issues associated with this state of affairs may even be worse that the present sickness itself.
Look for further financial company failures in the months ahead, rapidly rising numbers of commercial defaults and consolidation of weaker institutions as the markets come to terms with the reality of “life after leverage”.
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