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Friday, November 21, 2008

Irrational exuberance

I was just watching Bloomberg TV and they showed a chart of the S&P and had the "irrational exuberance" speech noted on the chart. It was in 1996. The S&P was 744 at the time. Last sale on the S&P is 755. And that's the problem with a bottom here. From 1929-1932 the Dow retreated 90%. I don't know if that's what we're looking at but I do know that this is an almost unprecedented bear market. Frankly, 1929 is the only precedent I have that has any parallels to what's happening now.


Anyway, the last week or so... specifically since Paulson told us he's not going to buy bad paper with the TARP funds (which is what they were for - way to inspire confidence, guy), the commercial mortgage backed securities market has imploded. Credit risk spreads have exploded higher as investors have concluded the bailout will not spare them. Consequently, as credit default swaps have become the tell for stocks, the reit index has gotten demolished.

This goes back to my point about hand-picked bailouts. If the system is broken, you have to fix the system, not the worst examples of it. As a result of saving AIG, hundreds of lesser companies that won't get anywhere near the TARP funds will die. Ultimately, they can't stop the unwinding process and by interfering, they merely shift the consequences to other entities. The plugs will just force new leaks. The insurance companies have been cut in half as the S&P broke 900 -- all of their annuity portfolios are pegged to 900 apparently and the liability becomes open ended as the market goes lower.

Regardless of the government's efforts to constrain and contain it, the market wants to be free and will liberate itself to the downside until it gets its due. Sadly, we will all pay for the risk transgressions of the last several decades.

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