What's The Deal?

Well, the narrative shaping up this morning is this. Asia tanked 4% this morning, but Euro stocks are mixed. US futures are up about 2 percent, shaping up to be a decent day. It's cleaning up after the hurricane, and things will probably be pretty good today after yesterday's hideous losses.

So, like lancing a boil, it's over now, right? Lot of pain but you bandage it up and it heals, right?

Not hardly. Banks are still terrified to lend to each other. The LIBOR vaulted to 6.88 at one point, but still well over 5%. Banks are hoarding cash and reducing or pulling entire lines of business credit just to maintain operating capital. Here's the thing however: the companies they provide credit to also need that money just to provide THEM with operating capital.

Fairly quickly I would wager, the lockup in the credit market must be broken or you're going to see major world businesses say "We have to shut down some operations for a bit." We're talking things like "inability to meet payroll requirements" and whatnot. That's how serious this is. The first major news stories break about that, and panic doesn't begin to describe it.

It'll only get worse should Asia and Europe take their money out of US banks and go home. There's ample evidence they are doing that right now. If this keeps up, US banks will have no choice but to pull credit back to stay open, and the businesses that depend on that credit will have to find it elsewhere at usurious rates.

Bad things will happen after that. We're watching the credit markets die in real time. Pretty soon we're going to get to the "call in your debt" phase of the market lockup, and THEN things get really, really bad for America.

I am still not convinced any sort of bailout is going to help. The Fed threw $600+ billion at the credit markets yesterday, and it did nothing. A $700 billion bailout isn't going to do a damn thing for the credit markets. I expect emergency measures to be taken in the next few days or weeks.

But let's remember what this bailout was: a terrible bill that was designed in secrecy, rushed, and defeated because the House GOP was terrified of the Dems getting a monstrous margin in the next House. The talk radio noise machine killed this bill, folks. Even worse, the bill wouldn't have worked and it was a sweetheart deal for the banks and for Wall Street. Enough sheer voter outrage ended it...for now.

But some action is needed. We're facing anarchy here: not tomorrow, but very soon. Unless the credit market Gordian knot is sliced open, we're talking about mass layoffs and shuttered businesses across the country and the world. By Election Day for example, we'd be looking at the worst periods of stagflation. It's that serious.

I'm hearing noises about a massive Fed rate cut here, for starters. But that'll be it. That's the last bullet in that gun. After that, it's hyper-inflation.