The Limits of Expectations

When I first read this doomsday article yesterday, I thought the guy was frankly a bit extreme to say the least:

MBS Monetization and US Dollar

It wasn't only that the graphics atop the page made me hesitate, but I thought that the idea underlying his argument - that "Fannie Mae will eventually become a funnel for monetization, after functioning as a centralized efficient clearing house..." was far fetched, especially when Bush yesterday kept a lid on Fannie and Freddie Mac's capacity.

However, overnight the Fed made such a doomsday picture for the dollar more believable, as it made the writer of this complimentary article eat his words:
Fed Joins Banks Adding Cash to Stem Credit Collapse and Fed Adds $35 Bln in Funds, Most Since September 2001

Some of the figures tossed around in these articles make me begin to wonder whether such an extreme scenario is not that far fetched - particularly when I read that the intent is to provide "reserves to ``facilitate the orderly functioning'' of markets"...in other words to provide an artificial buffer to inaccurate underwriting.

I personally think that the system will not spiral out of control for a number of reasons, maybe the most important of which is that we don't want it to - in other words, investor psychology and American optimism should provide a "floor" of some kind.

However, the second consecutive brutal day in the market highlights that things are not looking pretty right now.

And those who have made heretofore money hand over fist using predictable trends are continuing to struggle as the underlying credit continues to unwind: Market Turmoil Is `Perfect Storm' for Quant Funds

As the article states and I mentioned yesterday, today is a different day: "``Previously uncorrelated factors have recently been falling with the same pace, leaving investors with very few places to hide.''