Vic Socotra

07 October 2008

Just Like That

European Central Bank Chiefs Meet in London, Oct 2008

I was awake in the night. Not unpleasant, this aging thing. Just a few more chores to take care of in the silence, and time to go over things, roll them around in the brain.

I was going to try to construct a tale about the kinds of money that the smart guys have imagined- what the economists call M1-M4. It accounts for every financial instrument, from what is in your wallet in folding green to the credit cards to the mystery credit instruments. The Fed stopped trying to account for M3 a few years ago; too hard, they announced, and it turned out they were right.

I have friends who do that for a living, thought, so what’s the point. I should stick with what I really know. My specialty was the application of knowledge to the use of force, though I am getting rusty. If anyone in Big Pink needed an air strike on a financial institution, I would be just the guy to come to.

The unintended consequences of this melt-down haven’t yet begun to play out, since much of the world government does not yet realize that the underpinnings of all government discretionary funding are being undermined.

The waters off Somalia apparently belong to pirates- pirates- and while the Americans and Russians are swarming, there is a curious tentativeness about the response that is unchar acteristic of a century that began with such confidence and swagger. I suspect we will be seeing a lot more of things like this, the world order starting to unravel. Just like that.

It is much easier to think of sports. The Chicago kids are out of baseball for this season. So startling, when just a week or so ago it looked like the Windy City might be able to hold the World Series as an all home-field event. Now the Cubs and Sox are home for the brutal winter. It is the upstart Rays and the hardy BoSox for the AL championship.

Just like that.

Having given away all my stock market holdings last month, the plunge in the Dow Jones that lit up my computer screen left me unmoved when the alert arrived. “Down 800 Points!” screamed the headlines. It was not that bad at the end of the day, less than half of that, but if it was my money I would have been freaking but good.

Rolling under the comforter in the darkness, I tried to find a comfortable place where sleep would come again. The windows were open and the night air cool. No dogs were barking, but the brain kept sparking.
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I have a little pot of money left in the market, the emergency fund, and I had kept it in European stocks to avoid what I thought was coming here. Not so smart, as it turns out. By the time I got home and the skies cleared enough to make the evening walk pleasant, the reports on the world markets were already on the radio.

The Russian stock market dropped twenty percent before trading was suspended. It was the single steepest decline since the end of Communism, and will have to give Mr. Putin pause. The weakness of the European Union is being exposed as well, as the old nation states are seizing banks and rushing in to prop up national institutions in a hodge-podge of unconnected activity. The exchanges in London and Frankfurt lost more than seven percent, while Paris was down almost ten.

In diversification is disaster, at least as far as my feeble planning went.

The smart guys who bailed into oil speculation were burned, too, and we should all have a little schadenfreude at the decline of oil prices to less than $90 bucks a barrel.

The thing to remember in all this is that the Great Crash of th e market in 1929 took place over three brutal trading days in October of that year, but we tend to forget that it took almost three more years for prices to hit bedrock. The market in that time was down almost 90% of the 1928 value.

There are some milestones coming up that are troubling, too. Another reason is that certain ominous dates are fast approaching. One is Oct. 23, just a wink of an eye away. That is when the auction to settle the credit-default swaps relating to the Lehman Brothers bankruptcy will occur. I remember a time not so long ago in which I was blissfully unaware of the entire concept of credit-default swaps.

I am not sure that I do now, and accept as truth what the smart guys say. The amount of cash the note-holders will owe each other could be as much as $400 billion, which they’ll want to collect from the firms who bankrolled the insurance. Naturally, that is going to catch them a little short, and that is going to keep going down the line.

Investors in hedge funds are losing confidence in their managers, and are pulling out, leaving everyone short. There will be repercussions- big ones- by the end of the year. Senator Obama is already calling for another bail-out, and you can imagine the sorts of things that will happen after he is elected with a solid, panicked majority in both houses of the Congress.

The ponderous motion of the government to disburse the seven-hundred billion bail-out money may be startling in terms of Federal agility, but it is painfully slow in comparison with the interlinked global market. It will always be behind what has happened. Still, you have to do something to clean up after all the smart guys, I suppose.

I remember when most of a trillion dollars seemed like a lot of money. It is funny how things change, just like that.

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