The Worst (For Now) Already Priced In? ~ The Risk Averse Alert

Wednesday, March 04, 2009

The Worst (For Now) Already Priced In?

One of two things was proven today during the speech given by the Prime Minister of the United Kingdom of Great Britain and Northern Ireland before a joint session of the U.S. Congress...

The first possibility is that Wall Street cares not one wit for earth shattering news.

When Prime Minister Gordon Brown asked (26:30), "How much safer would everybody's savings be if the whole world finally came together to outlaw shadow banking systems and outlaw offshore tax havens?" ... my gaze turned toward New York City in fear I might see a huge mushroom cloud on the Eastern horizon.

How do you think the Dow Jones Industrials got to 14,000 in the first place were it not for the shadow banking system and offshore tax havens? Are not bailouts and stimulus packages aimed at bolstering the underpinnings of this shadow banking system — its myriad derivative securities? What is Prime Minister Brown inferring in suggesting these be outlawed? Why if this were serious — like, say, the first House vote last September, when the $700 billion bank bailout measure was defeated — you might have figured the Dow was put at risk of closing somewhere in the vicinity of 3600 today.

But no, the market rose ... barely even flinching upon hearing the shocking statement from the honorary Chairman of Bankrupt International. Let this fact sink in, because what was contrarily demonstrated by today's trade completely jives with my near-term outlook:

The present state of bankruptcy of the shadow banking system already is priced into the stock market.

(Indeed, the XLF and BKX were the only two sectors to decline on the day.)

Brown's call to outlaw the shadow banking system only confirms what the stock market already has priced in: that the status quo cannot be saved; therefore, some new arrangement is in order.

Now, granted, just what this new arrangement might involve remains in flux. Yet it is commonly known the first step to recovery requires honestly admitting you have a problem. And a call to outlaw the shadow banking system is about as clear an admission of what lies at the foundation of our present financial crisis as could possibly be made at the present moment.

If nothing regarding money matters is set in stone, then surely nothing of profound social implication is set in stone either. Nevertheless, the movement we have seen over the past week, wherein notable personalities have expressed a will to resolve the present global breakdown crisis, advocating extraordinary measures, couching their call using the starkest of language — last week it was Felix Rohatyn and today it was Gordon Brown — truly represents a defining moment. Everyone agrees profound change is in order. Irrespective of the chasm separating views toward solution, the consensus is yesterday's status quo cannot be revived. Thus, budding humility coming from the most unexpected quarters makes for belief in what the future might hold.

Such is how confidence is cultivated, no?

Fast Money
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