Suppose you are watching US equity markets. You could be thinking of bailing out. You might be someone who has been in cash, but you do not want to miss the "bottom." Whatever your position, you seek some magic indicator.
We have already provided the basics that should help readers make this decision. Here is some extra color, but still not the full picture. We are sorry. It has been a busy time.
Meanwhile, here is some help.
The Key Question
The key question is the freeze-up in credit markets. If ordinary businesses cannot get loans, holiday retail and auto is affected. If the commercial paper market dries up, ordinary commerce cannot take place.
This is not a matter for political posturing or personal opinions. Many people who have never run a business or a bank seem to have a strong opinion on how much leverage, how much liquidity, and what duration is "correct." We think that anyone offering such an opinion should show some expertise and/or a successful business model to prove it.
Meanwhile, it is pretty obvious what the market wants:
- Participants want to know that there is no counter-party risk, something that we highlighted for you last week.
- People will not lend without knowing they will get paid back. It freezes commercial paper. It escalates LIBOR, and it causes a spike in CDS swaps.
So that is the problem, the most important problem, and possibly the only significant problem. If it is not solved, the economy may get much worse. If it is, we may escape with a milder recession.
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