Economy

The Lehman Bros. talks have not yet resulted in a solution.  A rabbit had better be pulled out of the hat prior to the open of the Asian markets, or there are going to be some additional management problems inserted into the mix.

Here’s my read on this fast-developing situation.

This weekend, financial and government officials are furiously seeking a solution to the bankruptcy of Lehman Brothers, and, I would suspect, Washington Mutual.

The financial crisis is now officially at the dangerous stage, where any slight miscalculation or misstatement could send the markets into crash mode.  This deserves your very highest attention.

There is some confusion about what constitutes the federal deficit.  Below I explain the differences between what is reported and what is really happening.  

I happen to fully believe that our
markets are being largely influenced by official acts, both overt and
covert.  My logic is simple; where motive and opportunity co-exist, the
burden of proof shifts to the accused. 

The Central Banks and the Treasury
had a powerful set of motives to shift money away from commodity hedge
funds and into the stricken banking system.  Their opportunity is both
well characterized and self-evident, so I won’t go into that here.

The stock price of Washington Mutual (WM) is down another 25% this morning, at well under $3/shr.

There is no way for this company to raise capital, and therefore no way for this company to survive without a bailout. This company is toast. Time to write the obituary.

I am expecting FDIC receivership any day now, perhaps this weekend?  Who knows.  

NEW YORK (CNNMoney.com) — The budget deficit will jump by $246 billion
to $407 billion this year, the Congressional Budget Office estimates in
a report released Tuesday.

"Over the long run, growing budget deficits and the resulting increases
in federal debt would lead to slower economic growth," the agency said.

Today the S&P 500 stock index lost more
than 43 points, or 3.4%. This was a harsh repudiation of the US
government bailout of Fannie and Freddie over the weekend.

Actually, this bears a bit of explanation.
In the chart below of the S&P 500 I have marked three arrows. At
the purple arrow, I want you to note that the market was selling off
quite severely, and then, magically, at 11:00 it turned around and went
powerfully in the other direction. At the time, I watched that and
thought to myself, “Huh, somebody knows something I don’t.”

The housing crisis is the symptom that resulted from the largest, most dangerous credit bubble in all of history.  While I try to locate some compassion for the government’s and monetary authorities’ attempts to contain the damage, I remain concerned that they are focused on the wrong issues.

I see them as treating symptoms, not the underlying disease.  While it is remotely possible that they can hold this thing together long enough that it can fix itself, this remains a long-shot.