It's Starting to Matter

Over the past few days, the market has been hesitant. Will it capitulate? I surely do not know, but today is not shaping up to be so hot.

There are two things that have stuck in my brain over these past few months, and you've seen me mention them here.

Thing 1: One of the key contributors of fueling the market is liquidity. When that liquidity dries up, be it through the carry trade unwinding or the hesitancy of investors to buy debt at paltry prices, the party ends.

Thing 2: Market corrections trigger recessions.

Before going to sleep last night I was reminded of the discussion on hedge fund risk, and that the highest probability of hedge fund failure was due to the fixed income market. You've seen at least 4-5 My friends, what each of us has witnessed unfolding is the constriction of the credit market. The great funding sphincter has now girded itself up. Remember when the media was telling us that it was a "subprime" problem? It was never a subprime issue, as you know. Rather, it was a matter of money that was too cheap chasing yield--and that chase was so focused there was no regard for being compensated for risk. Now the LBO kings are having trouble funding their deals.

The news as it has been unfolding, which in my view has been one of the most irresponsible plying of the journalistic trade as it pertains to mainstream media, is now starting to confirm the nascent fears regarding the overall credit market. But you know that, because you have been looking at the sites (such as Bill Cara, Barry Ritholtz, Calculated Risk, John Hussman) that have illuminated these problems and have looked askance at the ebullience of this market.

So we've gone from the ghetto (subprime) to the palace (LBO Kings) but neither are far apart. They both reside in the neighborhood of greed. And, everything that we've heard about the irrationality of what would seem reasonable fears to normal people such as you and me (decline in housing, consumer weakening) was merely pablum.