Thursday, November 13, 2008

Phase Change

As vapor, water and ice, the H2O molecule behaves differently and is subject to different rules.

For the last few years, the global economy has been in a phase change. The biggest theme has been the tilt East and South, or at least East. While that theme is investible (recently taking a strong stomach for the volatility), of more immediate importance has been the efforts of the developed West to carry on at ever increasing levels of prosperity, and the recent unravelling of that effort.

Unfortunately, our mojo is no mo'. Well-intentioned efforts to recapture the way were we, or keep us out of the ditch, are premised on the ditch running parallel alongside the road, and not cutting across it. Sometimes I feel that all the efforts to date of all the governments that have made an effort make one big bridge to nowhere. We are in a mess, and it's not really investible.

If we are in a phase change, it stands to reason that the old rules are shifting, so the old relationships between policies and results are called into question. This is not an excuse to do nothing. It is a caution not to be particularly confident about the outcome of any particular initiative. In that respect, Paulson is right to pull the plug on TARP's original approach.

In any event, the glaring problem with the original approach was that a market price (even one elevated by favoritism) would have completed those who did not sell their positions to the U.S. Treasury to mark the value of the holdings to that market price, with a resulting dramatic impairment of capital. Transparency is all well and good, but a little bit of mark to model for the next few quarters is just what the doctor ordered. So, unless TARP was going to cover the whole mess, the awful markdowns on the stuff left out in the cold would probably have sufficed to swamp quite a few currently listing financial battleships.

A spot of good luck sure would be useful right about now.

Wednesday, November 12, 2008

Right twice

People who are right once, particularly on a big call, get a lot of attention, rightly or wrongly.

So Prof. Rubini is currently Central Casting's wet dream for Dr. Doom.

When not bed wrestling with her pro, Meredith Whitney has the financial services sector nailed.

But the guy to note is the nasal Yalie. Robert Shiller has been right on the big call twice. He nailed the Dow 36000 nonsense a decade ago, and called the dotcom bubble. Then he turned around and did it again, with residential housing.

It's awful to hear him say he wish he could be more optimistic, but . . .


Sunday, November 9, 2008

Capitulation of the American Consumer

Where are All the Shoppers?

My daughter was in town this weekend, home from college, and we took her shopping for all the various stuff college kids expect their parents to fork over for. It was pleasant and lowkey and we were, ah, rather alone in our purchases of winter clothes, laser printers, kitchen staples and the like. Then I went to Home Depot to buy a grate for the fireplace (that time of year) and I'd guess that the clerk to customer ratio was around two clerks to a customer.

Mind you, this was not recreational shopping. This was all Man on a Mission type errands. But it is November. It should take a few minutes for the credit card to clear, because the system is taxed to capacity by transaction volumes. That was not a problem on this, the first weekend in November.

Combine this kind of annecdotal experience with the hard numbers that are beginning to come in, and a pattern emerges. Between the retail numbers being reported (which in a sense are annecdotal, as they relate to specific chains, or whatever) and the macro statistics that are beginning to come out, and the Capitulation of the American Consumer can safely be called.