I had a most pleasant weekend off – the first in a very long time – and spent some of it pondering an unusual recent event.

We are raising turkeys, five very large, gorgeous bronze birds.  Last Thursday they started making their alarm sounds, meaning that something was not right.  Rushing out, I saw that "Skunky McGee", our ancient resident neighborhood skunk, was in their pen toodling around. He’s nearly all white, we know his habits quite well, and his appearance at 9:30 in the morning was a bit late for him to be out and about.

It took me far too many beats to realize he wasn’t toodling around looking for errant food scraps, he was chasing our turkeys in an unbalanced, tippy version of the skunk waddle.  As I stared in wonder, he caught one, and began, well, chewing on it.  You see, skunks are not usually predators of anything larger than a lawn grub, so he was incapable of really doing much more than begin a long process of gnawing.  He started near the tail. 

It was at this time that the word finally popped in my head: "rabies".

The broad stock market is now testing the recent lows.  But the real story is in the financial stocks themselves.

This is as close to an all out breakdown as I can imagine.

For starters, I have been keeping a close eye on Citigroup because they hold massive amounts of both derivatives and so called "Level III assets", those unknowable piles of junk assets that management gets to park off to the side at whatever value they want to put on them because there is no open market for them.  

This chart says "bankruptcy coming soon."

As fast as the Federal Reserve and US government have shoveled money into the Wall Street machinery, it has been disappearing even faster.

The evidence is contained in the falling prices of:

• Houses
• Stocks
• Most bonds
• Commodities
• A rising dollar

The problem with deflation is that it is a certified bummer.  Falling asset prices mean a negative "wealth effect," which depresses both additional borrowing and spending by consumers.  Less consumer spending means falling revenues and falling profits, and then falling employment.

At the local Old Navy store, in a big mall, a very strange thing was recently spotted… the floor space of the store has been cut in half, using fabric curtains hastily hung from the rafters.

When asked, the manager said, "We’ve downsized; this is how big the store is now."

Excuse me, but what?

What kind of a strategy is that?

All that saves is a small bit of inventory carrying cost and perhaps a couple of employees. But unless they renegotiated the lease rate, their fixed overhead burden just shot through the roof. 

Goodbye, profits.  Hello weird, unsettling shopping experience.

I nominate this for understatement of the year:

While the myth is that the stock market is a discounting machine, the reality is that it is mostly a liquidity measuring device.

What I mean by this is that the gigantic machinery of Wall Street, which includes all the people working at brokerages, as well as all of the buildings and infrastructure involved in operating a market, are not cheap, and the money to operate all of that has to come from somewhere.

It is safe to say that just keeping the machinery well-oiled requires several billions of new money each month to keep it fed at a subsistence level (for the pin-stripe crowd, I mean).

Yes, we could look at stock’s p/e ratios and scrutinize annual reports, but the sad truth is that if more money is leaving the market than entering it, prices will fall.

It’s very simple:

Well, the G7 met and decided that what we needed was, unsurprisingly, a flood of money.  An unlimited wall of new money to replace the money that mysteriously evaporated into the mist of the credit crisis.

I say "unsurprisingly," because this has all been tried before.

When John Law’s infamous credit experiment started to unravel in 1720, the French authorities first resorted to decreeing that their failing paper promises were worth more than gold  and silver, and then, upon the almost immediate failure of that edict, to printing as much as necessary to buy out the failing equity and debt issuances upon which the entire bubble was formed.

The whole thing collapsed in rather short order, and the angry, destitute crowds took matters into their own hands shortly thereafter.

Here’s how I summarize the news from this weekend: