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Thursday, October 30, 2008

The centre does not hold

I was looking at the ted spread – the difference between interest rates on LIBOR and t-bills. Yesterday, the fed cut 50 bps. The market has been blistering higher. I was surprised to see that the ted spread hasn't budged much since it's initial decline a couple of weeks ago. And frankly, looking at it, it hasn't really come down at all relative to historical rates. It's basically where it was in earlyish September, when the trouble really began. If we were out of the woods, it would be dramatically lower.

I'm looking at Hartford Financial Services Group (HIG). It's down 50% today. Their credit rating is in jeopardy, their portfolio is very precariously poised here. Essentially a big downdraft in the stock market would wipe them out. They're an insurance company.

Again, I'm struck by the inevitable leaks. As the government tries to plug holes, new ones open up. This problem is systemic and they're trying to fix it company by company. By trying to treat the symptoms and not the problem, they create new symptoms. You cannot fix a leverage problem by offering more leverage. AIG was loaned 80 billion then came back for 40 more. What if they need to come back again? There won't be a choice, will there. What these companies need is risk management, not a continuance. There is too much credit in the system. It will correct over time. Prolonging the inevitable will only prolong the illness. Think about it. The worst managed companies that were unable to survive are being given the most aid. Mismanagement is being rewarded. How is that a good thing?

Anyway, as I was thinking to myself that the market is rallying but the central problem remains, Yeats popped into my head.

Turning and turning in the widening gyre

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.

Surely some revelation is at hand;

Surely the Second Coming is at hand.

The Second Coming! Hardly are those words out

When a vast image out of Spiritus Mundi

Troubles my sight: somewhere in sands of the desert

A shape with lion body and the head of a man,

A gaze blank and pitiless as the sun,

Is moving its slow thighs, while all about it

Reel shadows of the indignant desert birds.

The darkness drops again; but now I know

That twenty centuries of stony sleep

Were vexed to nightmare by a rocking cradle,

And what rough beast, its hour come round at last,

Slouches towards Bethlehem to be born?





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