The really troubling thing, and I think what the market has been digesting beginning since Tuesday's weak Fed rate cut, is that there may not really be all that much the U.S. can do about all this.
It may be that the world is going to continue to go through a pretty severe contraction in liquidity and wealth, which will then hit our shores to a signficant degree. (Not as much as in many places, but a lot more than is priced into our markets yet.)
It's not at all clear that any amount of money the IMF has any chance of raising will stop the contagion from continuing to spread. It's not at all clear that Japan isn't going to really thud when its sour loan heavy banks, unfixed for a decade of great expansion both in Asia ex Japan and the US, now face a slowdown in both places, and a slowdown of exports to both. It's not at all clear that a Fed easing in the U.S. will final demand in our export partners, faced with global overcapacity. We may need to see a lot of capacity destruction. Which is painful, including to us.
There has been an enormous build up paper wealth in the world over the last decade, and it did indeed get overdone. On the surface, the excesses in this country were not too horrendous. Sure the market was overvalued, and by a lot, priced for endlessly continuing excellent times, etc. However, overall around the country real estate prices in most places didn't good too excessively high. Bank lending hasn't been too extended. (Maybe.)
But there is turning out to be a lot more derrivates and overseas related leverged bets than people believed. A lot of that is coming out of the system now.
I'm thinking out loud and searching for the answers. I don't claim to have a lock on them.
Doug |
