Let's thank the Maestro for the mess we are in

The financial system is in the process of unwinding the subprime craze.

Losses in the U.S. subprime mortgage market were worse than Standard & Poor's expectations, according to an official of the rating company (Source: Bloomberg).

Investors are not buying the repackaged subprime bonds. Credit is shutting down. Liquidity is decreasing. M&A activity is dwindling.

This is a classic bubble in the process of imploding. And we have to thank Mr. Greenspan for this experience.

He lowered interest rates to 1% to cushion the 1999-2000 equity bubble (that also happened under his reign). How could he think that 1% interest rates would not create distortions?

The moral of the story is that we have to be very careful in acclaiming the wisdom of many political operators. Investors will lose a lot of money. Banks will have troubles that are just being recognized. Homeowners will lose the house they thought they could afford.

We are now in the midst of a credit crunch with investors not supplying the liquidity for the system to function. Bonds are not bought because rating agencies did not see the problem. Banks are trying to sell them and need to cut prices. Low grade bond prices are falling sharply to attract investors. Losses are piling up. Equities are sold to raise needed liquidity.

We need to thank the Maestro for the fine mess we are in.

The good news is that crises create investment opportunities.

The typical answer from the Fed will be to inject liquidity in the banking system to keep the system functioning and to lower interest rates. Bonds and stocks will rally and the stage is set for the next bubble.

I am a firm believer the weakness, or strength, of the dollar is the only gauge telling the health of the American system. Let's hope is going to strength real soon.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977