Paulson Performing Pavlovian Experiment At Cliff Edge ~ The Risk Averse Alert

Thursday, September 18, 2008

Paulson Performing Pavlovian Experiment At Cliff Edge

Bottom to the S&P 100's decline since 8.11.08 apparently is in. Some might be greatly relieved by this, but their joy could be fleeting. Whatever scheme government authorities cook up, chances have grown astronomically complacency — something, indeed, bordering on euphoria — soon might be crushed like a bug at a picnic.

The panic in Washington D.C. is quite startling. Yet, judging by the faces, Paulson's dogs gave little hint of salivating at the prospect of a treat served up in the form of a federal revitalization project targeting Hank's old neighborhood. Congressional leaders appeared none too thrilled with Pinky, the monetarist monkey, and his sidekick Benny.

Friends, this thing could turn ugly fast ... even if everyone lives and the election goes off without a hitch.


Judging by the huge, positive bid on overnight index futures, today's big "outside day" might just turn into a massive "outside week." This might bode well for a move up to the 200-day moving average possibly by next week ... and bring us right to the edge of disaster much sooner than I thought likely ... even as recently as yesterday.

Failing to legislate confidence — failing to address the true cause of growing financial turmoil: an economic breakdown crisis — and coming on the heals of this week's stunning moves to the exits, something precipitating a selling avalanche might be days from bursting onto the scene.


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Greg said...

Tom, You've hit the nail on the head. Greenspan only thought he had seen irrational exuberance!

SDMikeV said...


Great commentary as always. Any thoughts on a good short entry point for UYG? I nibbled very cautiously at 23. SKF looks like a disaster, so I'm not touching that, but I simply can't believe that this bandaid really changes anything in the long term outlook for the financials.


TC said...


I concur. The most fundamental fact we have to consider is the crisis of confidence in credit markets runs deeper than paper made worthless by an inability to further inflate the real estate market. Contrary to pronouncements made by our monetarist monkey Treasury Secretary, housing deflation is a symptom, not a cause. We are dealing with an economic breakdown crisis here. This involves matters of real economic wealth generation capacity versus financial claims leveraged atop this. Thus, Pinky's attempt at turning Treasury into a hedge fund, further leveraging a collapsing economic capacity to generate real, tangible, physical, productivity-enhancing wealth ultimately is doomed to fail. This is true even if Treasury takes on MBS (and god knows what else) at a deep discount. Without growing capacity to service debt making for leverage, it does not matter whether Treasury or the private sector holds financial claims that CANNOT BE PAID. On this count, watch the exchange rate value of the dollar for signs "the market" concurs with my thinking here.

Per UYG, $25 looks to be current resistance. So, I might be inclined to add to short position as price rises to this level, and set a very tight stop ($25.51?). However, I would be cautious with this position because the broad market might have a good bit further to rally. So, looking at this UYG short position as a trade, I would be targeting $19-20 as an exit point.

Obviously, the present situation is rather fluid. At any given moment something could develop leading financials to crater. Contrarily, the ban on shorting financials might distort the performance of UYG. As such, then, consider this view of mine subject to changing.

SDMikeV said...

Thanks, Tom-

That pretty well confirms my reading of the current situation. Each time I think the outer limits of "free" market manipulation have been reached, we get another move like this. What is truly worrying is the dramatically increased frequency of the interventions. We went months between BS and the 1st SEC naked short ban (Admittedly with all kinds of "liquidity injections" along the way). Then a few more months to Fannie and Freddie. Then a week to LEH and BAC-MER. The 2 days to AIG. And another two days to this. At this point, I'd love a weekend where my biggest worry is wondering about what new way the Chargers can find to lose a game in the last minute. Sadly, I don't think that's in the cards for at least a while longer.

Thanks again for the great work on your blog. Take care.

Anonymous said...

Proclamation on the Federal Reserve System of the United States of America

March 2008

WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";

WHEREAS, on December 13th, 1913 the US Congress enacted the Federal Reserve System;

WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;

WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;

WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;

WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;

WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;

WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;

WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);

WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;

WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;

WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;

WHEREAS, it is recognized that the current time is such a time of great difficulty;

WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;

WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;

WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;

WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its constitutional mandate;

IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;

WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.

NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necassary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.

IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necassary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;

FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;

WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.