Bathos Number 4: Market Call

Date: Fri, 21 Sep 2001
Status:   

*market calls:

1.  Inflation will revert to 1% and soon we will begin debating the
liquidity trap problem.

2.  Japan is going to finally blow, bereft of US export markets and charged
substantial fees for its cost in the terrorist wars, Japanese banks finally
are foreclosed.  It is amazing that the market finds any approach to
resolution of the "bad loans" in Japan  a rally situation, for the
resolutions of the bad loans ins indisputably the  the bankruptcy of the
banking system in one for or another.  It is only a lack of courage of most
to add up the big numbers which prevent all from seeing the obvious.  The
Nikkei trades 2/3 of the Dow and Japanese bonds inflate to 5%.  Yen goes to
160 or more.

3.  The long bond is under pressure from Japanese and European flight
wrongly going to the "safer" climes of Europe and Japan - both which are
about to become , especially Europe, the front line staging effort for the
war with borders and access to the US dramatically closed.  Safety will
always lie in the US.

4.  Canada's game of kicking the giant, poking fun at the US ends with sever
misfortune with either the demise of Chretian and an end with the Europhile
in Canada, or the joining of Canada to Europe's demise as border are closed
with the US.

5.  The US stock market goes through a final end game, with a long drawn out
malaise as there is a total abandonment to the idea that there is an all
encompassing "big move" either down or up, the babbling about  the
"concession sell-off, or the big "rebound 3 months before the end of the
recession" disappears.  For neither can occur until no one believes in the
concept, that is the rub.  And you are one of them.  This is, after one
sorts out the  fancy gild work and with the chatter stripped away, is the
core discipline of most hedge funds now - they propose they will avoid or
prosper in the concession rally and they will get the big rebound.   Seeing
as this is a guaranteed un-fulfilling prophecy by definition, all hedge
funds who have this as their true core discipline will disappear.  The
unwind of this balance sheet will not be small. This likely means another
20% or so downside with a long drawn out backing and filling.  It also means
volatility will be the key to when the rally will start, as SPX vol drops to
about a 12% vol as the great game ends.  The truly wonderful opportunity for
al of us under 50 where the power of compounding can still work magic is we
wil have a once in lifetime opportunity to lay stock in in the manner of
Buffet and Graham Dodd.

6.  The long bond is suffering form some strange selling, totally at odds
with the above, which seems flow based.  Ridiculous spiels are chasing the
market, the most basic being the old "deficits cause higher yields in
treasuries" despite the fact that this has cost everyone who has made this
their mantra there job since 1979.  It usually follows a brief semblance of
success as it is used like shamans to explain weird bond moves, but then it
always fails miserably for the adherents to this chant.  It is impossible to
produce one regression over the last 200 years which demonstrates this, and
in fact if there is any causality it is the opposite, with higher deficits
co-inciding with decreases in bond yields.  In fact the largest decrease in
bond yields in the 80s took place in the realm of one of the largest
increases in the deficit.  The long bond seems to be suffering from foreign
flight as Minskian imbalances are finally being resolved and , I suspect,
insurance company selling as the fight for liquidity and life in the face of
what will likely be a 50 to 60 billion insurance claim.  Remember Buffet
buying all those Ps this summer?  Well I am sure he is very very relieved he
did.   In all, the bond has never been n more ripe for a series of up limit
days.

7.  The airlines, the bond market, the stocks - much of the last two weeks
trading is not new developments but that the crisis has uncovered problems
and valuations which can no longer hide or which we can no longer afford
them to hide.  Of course the obvious response is that it is all due to WTC,
as to argue against that is now un-patriotic.  But almost all of it was
pre-WTC in the making.  The airlines being the most obvious roach scrambling
as the kitchen lights are turned on.  Perhaps the biggest problem of  this
nature will be the final correct valuation of FNM.  During a war it is
necessary for the Fed to control not only monetary policy for the short end,
but also for all maturities, so the FNM role of setting the 5 year and
longer rate structure will be taken Away and returned to the Fed.

8.  The war itself, using Bush's war plan given last night, sounds  right in
in line with a hegemonist sloppy power tightening up and providing its own
security in an imperial oversight role.  I have mentioned what that change
will result in prior bathos.