C.M.O. 3.23.2009

Credit Market Overview
March 23, 2009

David C. McCullough said “History is a guide to navigation in perilous times” and there are few who would not call these times perilous. A month or so ago comparison’s between the present and the Great Depression were every where and none of them encouraging. The volatility of daily market moves, the percentages lost by the indexes over various time periods as well as the number of unemployed and the rate at which their ranks were growing were the stuff of headlines and bylines.

The comparisons to history continue but there is an interesting twist as of late and it is shedding light on what, for most of us, was considered a very dark time. Paul Kasriel, director of economic research at Northern Trust and Michael Darda, chief economist at MKM Partners point out in this weeks Barron’s that the economy did quite well between 1933 and 1937 with GDP expanding at 9.5%/yr during the five year period. The key it seems was the government’s purchases of its own paper starting in 1932. Equities, always wanting to be where the action is, rose four-fold during the same quinquennis.

Aldous Huxley also thought there were things to learn from history but to AH the “enigmatic lesson of history” was “that from age to age nothing changes and yet everything is completely different”. Having all lived through the latest bubble, some of us a few more than that, hearing that “things are different this time around” produces that same queasy feeling you get between the time you hear the horn blow and tires squeal and then metal crunch and glass shatter.

Now, too, there are many disbelievers. John Gray of the London School of Economics reviews Globalization and Its Enemies a book by Daniel Cohen in the current “The New York Review of Books”. His comments include his opinion of quantitative easing which he sees as a way to “re-energize the economic activity so that society can borrow itself out of debt.” The possibilities for droll clichés here are endless so I will say nothing.

Peter Schiff of Euro-Pacific Capital who recently penned The Little Book of Bull Moves in Bear Markets is in the same boat with Mr. Gray stating recently, “The Federal Reserve finally made clear what should have been obvious for some: The only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted inflation”.

People with skin in the game a.k.a the “buy-side’ are not convinced the Fed’s latest moves work either as a recent poll by the “sell-side” found 20% or respondents über bearish seeing the low in the SPX in the 400-500 range, 30% thinking we revisit the 600-700 area with the remaining half thinking the low is in.

We could argue the semantics of which half carries more weight given that the 30% that sees another trip down to “6” handle land could prove to be right without disproving the 50% that think the low is in but the point here is that when asked “How are things in Glocca Morra?” it would not appear the answer is all “Sunshine and Buttercups”.

Enjoy the weekend.

Jim Delaney