Hearing The Music

Have you ever heard Twelve Tone classical music? In undergrad I overly ambitiously signed up for an advanced "set theory" class which met once a week at a famous professor's house, where he served us giant bowls of ice cream and we played "guess this song" with this 12 tone classical music. I guess partly because the squiggles on the board and Cantor arithmetic were over my head, I strained to hear the "good" in this weird sounding mess.

The optimism I have sought in the recent week or two in the markets brings this idea back - and I realize that the music is just plain bad...then and today.

More directly: my optimistic hope that the downside is somehow already priced in, or that maybe we will somehow collectively wave our hands and be OK is almost certainly mistaken.

The simple fact is that although the headlines today are resonating with the doom first expressed here in June and elsewhere much before, they nevertheless are just hinting at the potential for far deeper losses caused by things like further unwinding in the CDO market, the consolidation of failing SIV's on bank balance sheets, and the failure of financial institutions.
I spoke last night with a fairly well statured hedge fund manager who suggested that a bank failure was unlikely. However the more these writedowns continue to mount, the less room regulators have to act.

This article surely is not a coincidence: FDIC to Add Staff as Bank Failures Loom

Maybe that 12 tone stuff was really good and Aleph Naught to the Aleph Naught really matters. Or maybe the music is just really bad and people are finally beginning to notice. Keep listening.