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U.S. markets were closed Monday, but global action
in some of the E-Mini futures contracts suggests that a significant number of
traders may have spent the holiday weekend sniffing glue. How else to explain
the 17-point rally that seized the E-Mini S&P (see chart below) in
off-hours trading Sunday night and early Monday morning? That’s
equivalent to about 130 Dow points, and Tuesday’s opening could pump
even more hot air into the buying binge if the short-squeeze driving
electronic markets takes hold of the NYSE and Nasdaq.
 
This egregious disconnect from reality is bound to
seem even crazier to anyone who caught up on Wall Street Journals
over the weekend. I spent the holiday skiing in Vail with a friend from New
Jersey and his daughter, but I also imbibed the contents of a pile of
newspapers that had accumulated to a disconcerting height, as newspapers
often do. Two stories in particular left me feeling less than ebullient about
the stock market. One concerned what Ahead
of the Tape columnist Scott Patterson referred to as the housing
sector’s ‘negative equity problem.’ Patterson’s belated
epiphany is a good six months behind unmistakable manifestations of the
problem itself, but his analysis at least puts the Journal on record as
understanding the crux of the problem: ‘Amid the hand-wringing about
complicated credit turmoil lately,’ he wrote, ‘the
economy’s fate still hangs largely on something simple and
understandable: the value of your home’
Alas, No Panic
Just so. But how long will it take now for the Journal’s editors to glimpse
the speeding locomotive at the end of the tunnel? Will it be another six
months before they acknowledge on the op-ed
page that the mere easing of administered interest rates has not transformed
the most dismal housing market since the Great Depression into
the widely hoped-for buying panic?
The other Journal
story that might, but for lack of enough readers, have tempered Sunday
night’s brainless buying spree ran under the headline ‘Where Will
the Crunch Hit Next?’ According to Heard
on the Street columnists Liam Plevens and James R Hagerty, the
mortgage insurers will be the next to get slammed. But this is old news,
really, and these guys, like Patterson, are months behind the curve. For, the
big crunch is coming not in mortgage insurance, but in the $45 trillion
market for credit default swaps. Mish Shedlock has written insightfully on
this gathering tsunami, and I have linked a recent article by him in the Intraday Notes section of Rick’s
Picks.
Just Chicken Little?
Meanwhile, even as signs of financial collapse
continue to mount by the day, some otherwise astute observers seem to think
Chicken Little has merely raised the shrillness of his warnings. Closely
capturing the current nuance of such skepticism is the most recent exchange
between me and my pen-pal Fred Hapgood, who ought to know better, He writes as follows:
‘You have to understand that you have a very
serious wolf problem here. I have been being lectured about the imminent
collapse of the economy for the better part of fifty years, often by smart
people who had woven together what seemed like a pretty convincing argument
from the materials of the time. This experience has left its imprint:
statistically speaking, it is undeniable that when a smart person tells you
the economy is about to collapse, even when he can offer a very convincing
piece of reasoning to back up his prediction, the chance that anything like
that will actually happen is close enough to zero as makes no
difference.’
My reply:
‘Your own, straightforward observations should
have convinced you by now that the global financial system is indeed at risk.
And I am hardly speculating to say so, since the day’s headlines are in
fact increasingly concerned with the unmistakable events of an actual and
ongoing financial collapse.
‘All along, you have been dismissive of my
arguments merely because economic doomsdayers have been ‘wrong’
for so long. At this point, though, to protect yourself from the consequences
of a potentially very severe economic dislocation, mightn’t it be more
useful to consider the evidence, and to give the doomsayers their due, than
to obsess over such niggling details as might falsify their arguments?
‘Concerning the black hole-like, $45 trillion
credit-swap market, if you have reasons for optimism, I’d like to hear
them. Perhaps you are in the too-big-to-fail camp? But that argument has lost
all credibility with the knowledge that the mortgage exposure alone of quite
a few banking giants greatly exceeds their capitalization. (Incidentally, B
of A is a not very surprising newcomer to the list of problem banks. It had
somehow dodged the bullet on mortgage exposure, but if you read the story I
linked earlier, you’ll know that its credit-swap risk is
enormous.)’
Rick Ackerman
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by Rick Ackerman
Rick Ackerman is the editor of Rick’s Picks, a daily trading
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