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By Keith Fitz-Gerald
As I stare at my trading screens today, I’m reminded of that Hans Christian Anderson fable in which the Emperor has no clothes.
In case you don’t recall that story from your childhood, the “Emperor” walks around naked while all his subjects “admire” his invisible garments. Finally, a young boy states the obvious and all hell breaks loose.
We’ve had the equivalent of that this morning on the heels of an overnight statement by BNP Paribas (EPA: BNP), France’s largest listed bank, which said “the complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating.”
At the same time, BNP froze some $2.2 billion of mortgage-exposed funds and also barred redemptions. Even though this represents a scant 0.5% of total BNP funds under management, the damage was done – and continues as I write this. A few hours later, a separate European fund worth 750 billion euros ($1.03 trillion) was frozen. And a Dutch bank pulled a new one after it, too, got trashed thanks to additional sub-prime losses.
Meanwhile, Germany’s Bundesbank held an emergency meeting for those banks involved in the IKB rescue and the European Central Bank and “ensure smooth function of markets,” which is central-bank-speak for: “We’re preparing to bail out your tail-ends” – albeit in much-less diplomatic language.
Considering that the ECB has already pumped a staggering 95 billion euros ($131 billion) into the Eurozone banking market, the sub-prime credit woes finally are getting the attention they deserve. In fact, this is the single-largest liquidity intervention in the Eurozone banking system since immediately after the 9/11 terrorist attacks in the United States.
I’d expect a similar intervention here in the U.S. financial markets, but “Team Bernanke” seems to be asleep at the wheel.** People I regularly talk with on an “off-the-record” basis at trading houses around the world are literally pulling their hair out in frustration. The fallout from this could be far worse than the idiots inside the Beltway realize or even understand. The U.S. economy may not be a Ferrari, but it’s also not Chitty Chitty Bang Bang: Somebody has to guide it and steer it or there’s going to be one hell of a wreck.
[**As a side note for any conspiracy buffs out there, my reference to Team Bernanke is an admittedly snide – though public – reference to the European equivalent of the mythical U.S. Plunge Protection Team, which has long been rumored to exist, but which seems to operate in the shadows of our own financial markets…but that’s another story for another time.]
For now, the real question is this: How long will this downdraft last, and how bad will it get?
Personally, I believe we’re in for a long and nasty stretch. As I’ve been saying for months, now, this has a long way to play out. Keep watching the headlines and you’ll see story after story about hedge-fund flameouts. And if you keep a running tally on the loss totals as they’re announced, you’ll soon become very worried about the staggering dollar figures that are mounting on your little scratch pad (and if it’s that little, you may well be on Page 10 or 11 by the time the cold chill takes hold). As if that’s not difficult enough for the regular retail investor to stomach, the extraordinary volatility we’ve seen in recent weeks will only continue, with the wildest gyrations accompanying each new breaking story. That’s great for a trader like me, but is very disconcerting for someone looking to be a true “long-term investor.”
I realize that I sound a bit like Dr. Gloom and Doom (unfortunate, given that this is my introductory investment note to all you new readers), but you can take some solace in this one important fact: From a historical standpoint, this kind of periodic “backwashing” of the capital-markets’ pipes is actually a good thing for your investment portfolio.
And the reason is actually quite simple. One of my Contrarian-oriented colleagues here at Money Morning loves investing adages, and one of his favorites is the old French saying: Achetez aux canons, vendex aux clarions – which translates roughly to “Buy on the cannons, sell on the trumpets.”
And as I like to say, history shows time and again that investors with the “intestinal fortitude” (i.e. “guts”) to wade in and buy at the points when all hope appears lost are almost always the biggest winners when the sun is shining brightly again. If you buy on panic, you’re likely getting bargain-basement prices, and that can only magnify your gains when the markets inevitably rebound.
I’ll let you know when the dust settles…and when the outlook appears bright once again – at least in my opinion.
And I’m looking forward to sharing my opinions with all of you. I hope you’ll find them useful.
Contributing Editor Keith Fitz-Gerald, a brand-new addition to the Money Morning research team, is one of the world’s foremost experts on the Asian markets, especially China and Japan. A professional trader who works with wealthy investors and institutions, Fitz-Gerald is also a truly global investor: He and his family split their time between Portland, Oregon, and Kyoto, Japan.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.