Friday, August 03, 2007
Jim Cramer calls for more alcohol
I can't say he is wrong in a hair of the dog sort of way. Overindulgence in easy credit left us with a financial hangover so a little easy credit might ease the pain. The trouble is knowing when to stop so that you don't end up feeling worse the next day. Which causes me to wonder, if the Fed follows the Greenspan model and immediately slashes interest rates when the credit crunch seriously threatens the capital markets then will we just postpone the pain for another 4 to 6 years? At some point you are going to have to suffer if you overindulge. The only question is when. For one possible answer to that question I turn to the incomparable Bill Fleckenstein:
As to why the unwinding has taken so long to commence, only recently has the cause become clear: the mark-to-model fantasy employed by those who have bought the sliced-and-diced mortgage paper.
But the fantasy is unraveling as these structured-credit products are now slowly being marked to market. Just as virtually every subprime-mortgage lender has blown up, Alt-A lenders (the next rung up the ladder creditwise) will blow up -- and, ultimately, many hedge funds will blow up, though we're in the early days of that process.
In the years since our equity bubble peaked, trillions of dollars' worth of debt have piled up throughout corporate America. So now, as we enter recession, we will experience not just a weak economy, real-estate market and stock market, but the exacerbating effect of a mountain of bad debt, completing the analogy to Japan of the 1990s.