Napoleon is alleged to have said, "Never get in the way of any enemy, who is destroying himself'." In the 'great deleveraging battle' of this post-turn-of-the-century 'reflation' fight, the antagonists came to greater loggerheads than monetarists thought likely, partially because rules changed mid-way during the game. It became a very challenging confrontation with (as forecast) the housing bubble bust a microcosm of bigger issues, as assessed over two years ago.
If I may omit humility for a moment, one of the least noticed of our calls was the most important: that in 2006-'07, early-on, money would first slosh over to Wall Street from Main Street's housing bust, before those boys -buoyed by far fatter wallets- would feel the pinch (from housing derivatives in particular). However, they would.
It was this concept of rotational money seeking a place to go, that restrained caution towards the market during 2005-2006. This happened because we thought bears seeking immediate follow-through of housing by stocks, were premature, simply ignoring money's rotation and fluidity. Just for a while.
Almost no one gave credence (they were too busy enjoying the party even if they knew it was late), instead the were confused by belligerent proclamations of 'permanent prosperity plateaus,' in a new world order, and 'free market capitalism' (which it actually wasn't since having no policy and oversight is neither free, market-oriented, nor fair - just complacent and detached, or flat-out ignorant). I got feisty about making our case, in order to be of help. (Though semi-retired, we ramped up our own audio-video plus text coverage in the belief that we were facing the most challenging forthcoming distribution in my humble career. Others see that now, but we said it then, and it's not over yet.)
Unlike Napoleon, we tried to offer a 'force majeure' (well it is French, why should I say 'truce') to our perm bull adversary, in order to save their blood that we were convinced was about to be spilled. And, it was spilled, even more than the Indexes.
Quantitative analysts replaced field marshals and generals. This is always a mistake in warfare, and trading is warfare. The mind must control movement of troops (money), and in that regard mathematical algorithms had already (remember Long Term Capital Mgt.) been previously-discredited because they can't fully factor-in emotion, contagion and that other aspect carefully being reassembled, which happens to be one word: 'trust.'
On the road to 'Wall Street's Waterloo,' the Gilded Age elite partied like no tomorrow. In 1814 and 1815 there were two sieges of Paris, and in 2007 and 2008, so far, there have been two sieges of New York (and now one in Chicago's commodity pits). We're more stable as we identified several days ago to ingerletter.com members, because pieces of the puzzle for stabilization, if not recovery (which must by definition come later), are at least being implemented. Throughout all of this, it has been our consistent belief (unlike whiners and moaners), that the Fed was studiously studying the battlefield. We believe they were neither ignorant of risks, nor complacent. (We proved also proved this via the Reg W waiver discovery, and we'll update the derivatives levels pre-Bear Stearns (NYSE:BSC) in the days ahead.)
Bernanke is our Napoleon, and he won't be relegated to ignominious defeat. He let the enemy of the proletariat (who thought they were his constituents, throwing out beads to the masses from time-to-time while preaching trickle-down, as if a permanent Mardi Gras parade, and storming the gates of Paris (in this case Main Street driveways) before revealing his position. Better financial military strategy doesn't exist when preceding commanders (Greenspan and Congress) have allowed skirmishes to proceed without being engaged (they certainly turned the other cheek as it was very prosperous for them, even though brokers, bankers, and builders, knew it could not possibly be a permanently sustainable state of affairs).
By the time that extraordinary phase of European history wound-down, the very backbone of Europe had changed. Political frontiers were revised. Italy and Belgium suffered war, as baroque Vienna eyed an international Congress. Before the current phase of the housing (core issue of which even the SIV's are mercenaries fighting on behalf of the power brokers) morass is escaped from (recovery), not only the face of real estate, but also the enforcement of oversight hegemony will also be seen. This type of governance will last for years - decades actually, and that's just how it goes. It really doesn't matter whether or not you like, or approve of what Congressman Franks proposes (actually, we concur with most of his points). A vanquishing army determines its benevolence.
Napoleon Bernanke has to look at the forest in order to engage the enemy at opportune if not certain, points, with the best chance to score decisive victory. He has done that, and almost all he can without other agencies (and he's commandeering them for the fight too) being drafted to the cause 'for the greater good.' These past two weeks conditions were favorable, for our forecast of irregular rebound starts.
However, these epic struggles by America, Great Britain, and the French Republic against an assortment of interlopers with moneybags filled by the largesse of faded empires has not ended. Translation (if needed): We are at war, the battle lines are drawn and the enemy is at or inside the gates (For those of us in our houses, literally, and the outcome remains fluid for the short-term. However the building blocks of solution are increasingly visible, and while the timeframe for resolution is absolutely not going to be instantaneous (our members know the timetable call), at least transparent evidence is coming together (coalescing) to suggest conceptual 'gelling.'
As we are suspecting a bearish counterattack soon, it will be crucial to study market behavior associated with that skirmish, in order to ascertain what lurks ahead. Think in terms of periods of further testing and battles, or months of an investment version of a 'siege,' where the outcomes will be fluid, but the duration of struggle, is subject to revision. This is because quick reaction or 'surges' don't always set the future pace. This flanking maneuver by the Fed is like the surge in Iraq because it buys time to assess strategy, but doesn't yet tell you if the counterparties will use that time sufficiently wisely.
Having argued for the better part of a year that false bullish bravado by analysts, or pundits, or global fanatics was aimed at buying time for industry deleveraging, it is our view that the easy money on the downside (It is never easy, but we mean majority in the race to 'zero') is behind. By no means is the downtrend completed and tested, and this is the reason that combat duration assessments remain open-ended. If that means we argue that the recent two-weeks pre-Expiration and Triple Witching pre-Easter upward affair, projected to be irregular but occur, has not affirmed a sustainable low - then so be it.