Today’s pain is a lagging indicator as the economy turns the corner. But fear is still the primary driver of the economy and markets today. The headlines are full of “the sky is falling” reports. And, indeed, we are seeing wrenching layoffs, housing foreclosures, and plummeting retail sales. This first quarter 2009 will surely be ugly, but in all this pain we may be seeing the bottom. Ironically, for all the doomsayers, these signals appear to be on track for the historical average of 16 months for recessions.
I think there are several clues to this bottoming out, and the best signal is the accelerating shift of sentiment from fear back to greed because GREED is what we need to restore confidence in our economy and get people back to work.
Why do I say this?
Bankers Smell Profits. The dressing down of bankers in front of Barney Frank’s committee this week in Congress only reinforces their desire to pay back TARP funds ASAP. I believe most banks that received these funds will do so NOT to avoid these repeated woodshed trips, but because they can now MAKE MONEY as confidence is restored and the market roars back.
Lending is Back. Libor is at very reasonable rates which signal that banks are confident about lending money to each other. Credit default swaps have fallen rapidly signaling the market perception that default risk on corporate debt is returning to normal. Junk bond yields are attractive but falling as investors chase yield.
Putting “Greed” to Work to solve the Problem. Hank Paulson, Ben Bernanke and now Tim Geithner have been alternatively hailed and hammered through this panic. But each was present at creation in crafting strategies to respond to the panic, flood the system with liquidity, and now purge it of poison.
I believe that when this panic passes these guys will justly deserve a Nobel Prize more than a “raspberry” for steering us through this carnage. While Geithner is being panned for this latest—admittedly vague—explanation of the Obama strategy, what seems to be emerging is the market tested concept of a “specialist” who will purge the poison by buying, holding, repackaging and guaranteeing structured transactions over time for these toxic assets.
Like a Resolution Trust Corp on steroids this is a smart, efficient, daring and ruthlessly effective way of engaging the market to solve the problem using the same “greed” that got us into it to create a market frenzy around the millions—make that trillions, to be made from the appreciation in value of all these assets being marked down to market in this recession. That’s why there is such little incentive to change the M2M rules. It protects investors through transparency, punishes the stupid—and occasionally the guilty, and clears the market of weak players and foreclosed assets faster than any other approach—without the risk of “earmarks”, political speeches or campaign contributions.
M2M also enables the survivors to pick up the pieces and the big potential profits from recovery, and restore their market caps—and big paydays.
It just might work!