Sunday, August 12, 2007

Reminded of Jazzfest

This week reminded me of one of those special moments at Jazzfest in the 90's. Michelle Shocked and an electric folkie band were ripping into an Irish jig, an instrumental that went on and on, highs and lows, great music, and everyone in the crowd near the front of the stage was dancing wildly with people they'd never met before and would never meet again. The music was loud, intense. It stopped abruptly, silence, and then she and her band mates slowly and clearly sang out, "It don't hurt when you're fallin', it hurts when you hit the ground". Silence. Then the music suddenly hit its manic stride again, and the momentarily stunned crowd was still flatfooted.

It's highly unlikely that this traditional Irish lyric was referring to the financial markets, but as a warning this week why not. While the equity markets for the week were flat, it definitely did not feel right. Those equity markets were volatile to the extreme, the credit markets were in turmoil, and central banks were huddling to determine how bad things really are and what to do about it. There were widespread reports of the inability of the market to price asset backed securities, speculation about an emergency Fed rate cut, talk of risky asset-backs even embedded in money market funds, China's comments on their possible response to the protectionist rhetoric of Clinton and Obama, anticipated further dollar weakness, the troubling rise in credit card debt in recent months as the mortgage market is shut down, big losses at quant driven market "neutral" funds, and the constant questions about CDO's and CLO's of "who has this stuff" and in some cases "do they even know they have it".

That's what was happening last week, and in markets that are essentially based on trading paper and contracts backed by the imprimatur of governments, confidence, or maybe faith, is what holds it all together in the short term. While equilibrium will inevitably be reached, if it takes panic to get there it can be a destructive process. And now I hear in the background "the phenomenal" Ruthie Foster crooning "getting back up is harder than the fall".

Ok enough. I'll end this with a quote from Ben Stein's comment in the NYT today. He wrote, "...the market reactions are wildly out of proportion to the real problems that have been revealed...This economy is extremely strong. Profits are superb. The world economy is exploding with growth. To be sure, terrible problems lurk in the future: a slow-motion dollar crisis, huge Medicare deficits and energy shortages. But for now, the sell-off seems extreme, not to say nutty".

I'd prefer to sleep on that, and at least be rested for whatever tomorrow brings.

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