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Is it Safe?

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The Fed cut Fed Funds and the Discount Rate by 50 bps each. Most pundits did not think they would cut both, nor did they think they would cut either one as much as they did. The market took this news as being a catalyst to put money to work, Buying Long and Covering Shorts. The indices had big moves today too. It seems that the investment community felt safe, or safe enough, to trade after some very low volume days. But is it safe?

I don’t know a lot about the woes of credit markets these days, other than the fact that I know lenders like a steep Yield Curve, and the Fed is doing everything it can to steepen it. There is such a lack of transparency (integrity) in the marketplace.

My sense is that investors want to trust, but at the same time they don’t want to wake up to an ABN Amro, Sentinel, Countrywide, or Northern Rock – and this is just a partial list. How does anyone know there isn’t another well-known name out there that won’t be the next shoe to drop? You don’t and it’s impossible to predict. I know. I was in business with Refco.

This is a type of dicey negative proposition – that there are no further sub-prime woes. As William Eckhardt said in Schwager’s The New Market Wizards, “Any negative proposition is very difficult to confirm because you’re trying to prove that something doesn’t exist. For example, consider the negative proposition that there are no chocolate cakes orbiting Jupiter. That may be true, but it’s very hard to prove.”

My sense is that cutting rates now to help the lenders is a lot like caring for your teeth between Dentist visits: you can’t start flossing 2 days before your next visit. The damage may have already been done – and the drilling may be inevitable.

From the film Marathon Man (1976) with Laurence Olivier (Christian Szell) and Dustin Hoffman (Thomas “Babe” Levy).

Christian Szell: Is it safe?

Babe: You’re talking to me?

Christian Szell: Is it safe?

Babe: Is what safe?

Christian Szell: Is it safe?

Babe: I don’t know what you mean. I can’t tell you something’s safe or not, unless I know specifically what you’re talking about.

Christian Szell: Is it safe?

Babe: Tell me what the “it” refers to.

Christian Szell: Is it safe?

Babe: Yes, it’s safe, it’s very safe, it’s so safe you wouldn’t believe it.

Christian Szell: Is it safe?

Babe: No. It’s not safe, it’s… very dangerous, be careful.

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