The Elephant In the Room, by Rick Ackerman

November 9th, 2007 Price: Subscribe »

Published Daily

ARCHIVED COMMENTARY

The Elephant
In the Room

For edition of November 08, 2007

With stocks falling harder than usual yesterday, schadenfreude was running high in the Rick’s Picks chat room. The word means “malicious or smug pleasure taken in somebody else’s misfortune,” and at times the chat room’s patented brand of schadenfreude felt positively jovial. Considering who’s misfortune was giving room-regulars such an unaccustomed frisson, it’s a wonder anyone could stop wisecracking long enough to get off a short.

(Click on image to enlarge)

Fortunately, we had begun the day holding some at-the-money Diamond puts purchased a day earlier. They turned into solid winners well before the final bell, more than doubling in value to 3.65 from 1.73. Evidently feeling cockier than usual, some chat room denizens announced they were adding to put positions on the way down. For a rare change, no one who bought a put yesterday would have gotten punished for it. It was that kind of day.

Steep Markdowns

So what do we make of the stock market’s dispiriting performance? It could be attributed to any of a dozen major worries, although by the final bell it must have seemed to beleaguered investors as though each and every one of those worries had contributed to the day’s steep markdowns. Even so, no one was talking about the elephant in the room. Which elephant? Why, of course, the collapsing dollar, which is rapidly overtaking the subprime mess as America’s #1 economic problem – make that, the world’s #1 economic problem.

Who stands to lose, and how much, as a consequence of the dollar’s historical plunge? For one, there’s China, which currently holds $1.43 trillion dollars in reserves, mostly in the form of U.S. Treasurys or cash. Then there’s Japan, at $923 billion, followed by Taiwan ($263 billion), South Korea ($257 billion), and Russia ($400 billion). Oops. Almost forgot the biggest bag-holder of them all: Europe, whose cup runneth over with green confetti. How much of it? To borrow an accounting euphemism from McDonald’s, the EU holds “too many trillions to count.”

Euro-Hatred

If the euroids hated us before, just imagine how they’re going to feel after they put two and two together and realize they’re about to get stiffed? But what can they – or Japan, or China, for that matter -- do about it? If Citigroup is in the too-big-to-fail category, then the U.S. economy is, well, let’s not even think about it. Meanwhile, the dollar’s unprecedented plunge should disabuse Wall Street of the notion that more easing is in-the-bag. More easing simply means more dollar weakness that the world would factor into the price of the money it lends us, and the products it sells us.

If easing is no longer possible without causing grave and unpredictable consequences, what then?