Time, gentlemen, please

“Even in such a time of madness as the late twenties, a great many men in Wall Street remained quite sane. But they also remained very quiet. The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them.”

- from ‘The Great Crash: 1929’, John Kenneth Galbraith.

So there we have it. The US Federal Reserve has precipitately shown that, along with other central banks, it has no real clue – other than to offer the desperate drunk one last, colossal drop. (The phrase colossal drop here used with full acknowledgment of the sick irony involved.)

There was a time when central bankers were capable of tough decisions. As their reputation has grown, their practical value has shrunk markedly. Paul Volcker at the Fed created plenty of enemies in the course of crushing inflation, even as his policies laid the ground for the strongest bull market in history. But our current situation, while it screams out for firm policy leadership, offers us the likes of Bernanke, Trichet and King. If any aspirant media tycoon wanted to reinstate The Muppet Show, he could do worse than starting there. To get the measure of our times, note how the previous Fed chairman has joined the staff of the hedge fund that probably made more money from the property crisis that he himself largely caused than any other institution. As the wags at Long or Short Capital suggest, there are just five simple steps to becoming a billionaire using ‘The Greenspan Method’:

1. Become Fed Chairman.
2. Lower interest rates until you create an asset bubble. Hold them low until stagflation is in the air and a real estate bubble is floating.
3. Stop being Fed Chairman and release a book on how you didn’t do anything wrong and have no regrets. If possible, time it perfectly with the worst real estate market in generations.
4. Join the hedge fund which has profited more in percentage and dollar terms than anyone else has from your mess (which you didn’t create).
5. Build a platinum statue of your muse, Ayn Rand, and sleep with it every night.

Perhaps the danger was always in even presuming that strong fiscal leadership might see us and the economy through. No matter. If we are to protect our capital and well-being, let alone enhance it, it is going to be every man for himself.

The amount of correspondence we have recently received that touches explicitly on the moral failings that have arguably taken the markets to this cliff edge is striking. The founder of a community currency consultancy wrote the following:

“I know next to nothing about the Casino Economy you describe but I am deeply interested in the real value of the planet we live on and the future of everything humans hold dear such as community and care for each other.. We have learned a lot as we prepare to build liferafts for the millions of people who have no stake in the Casino but who are affected by the fallout from its addictions..”

Notwithstanding the shocking recent losses incurred in an indiscriminate orgy of selling, the real danger may be to fail to appreciate the gravity of where we are and what could still be to come. Investor Jonathan Spring suggests that the current market turmoil is

“..just the beginning of what could be a long, painful period for markets worldwide. The repercussions of too much easy credit for too long, and the haphazard financial vehicles and structures that such conditions have allowed, may finally be coming home to roost. Specifically, there are potentially a lot of problems with credit and credit structures in the world today, and it could take a long time for them to get fixed. Some of the complex structures (and their dependencies upon one another) that are being revealed are poorly understood by the financial community, and much less by the average investor. I don’t think there are many upside surprises that can come from this complex web being brought under scrutiny, something which now seems may occur sooner rather than later.”

This is not scaremongering – or at least it’s not intended to be – but rather a sober assessment of the mess we’re facing. Cleaning out the Augean stables of Wall Street and structured finance is going to be a thankless task – one reason why we continue to see little point in wading into financials, even at these levels. The preferred asset class choices remain: government debt (increasingly including inflation-protected debt); very selective defensive or unequivocally “global growth” equities; absolute return funds with limited use of leverage; precious metals; soft commodities; cash. George Soros, writing in Wednesday’s Financial Times, is probably right to call this “The worst market crisis in 60 years”. He is probably also right to suggest that the Fed (and for that matter any other central bank) may not be in any position to do anything about it. In extremis, investors should only commit capital right now to those things that they can attach supreme confidence to. When there is technical evidence that equity markets have capitulated – and that will also be when they can’t sink any lower on the back of new bad news – investors can then reassess their commitment to stocks. But in the meantime, nobody wins in a bear market; the triumph will be in keeping one’s losses to a minimum.