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• The G7 Put vs. the Greenspan Put

October 13, 2008

The G7 Put vs. the Greenspan Put

936 points on the Dow. 11.1%. Oh. My. Goodness. Almost unbelievable. I'll leave to others to put it in context in terms of biggest-first-day-after-apocalypse-rebounds-on-prime-numbered-weekdays-in-October, but I'll just say this: the G7 put sure beats the crap out of the Greenspan put.

Somewhat more seriously, has it changed anything for me? Not really. Governments around the world have said that they will prop up financial markets, not letting major institutions fail. And that's mostly good, if not entirely unexpected, and if replete with unintended consequences galore.

But let's get big picture for a second. Recall, there had been been two broad fears taking markets lower. First, a fear that financial systems themselves were collapsing worldwide. That fear seemed overdone (if understandable in the context), given the actions governments were willing to take. And now markets feel justified in bouncing the other way with the G7 essentially supplying a "put" option here -- it is saying that the credit system itself will not be allowed to fail.

The second fear has not gone away, however. And that is a global recession caused by an immense contraction caused, in large part, by a credit bubble collapse. Having saved the credit system we are not going to return to the days of yore, with too many banks, too much leverage, and too much consumer debt. The system will not do that again -- if not never, then likely not again in our lives. As a result, consumers will become savers, to the extent they can, and the upshot is that credit market weakness, having hit the broader economy, will circle back and hit credit markets, and that will circle back to consumers again. Earnings estimates for 2008 and 2009 are too high (I will come back to that in another post), and while markets aren't as expensive as they were, they are far from cheap. We may not have 20% more downside, but churning away in place seems the most plausible present bullish scenario.

What would change things for me? Let me revisit that in an upcoming post.

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