Even though he is a right wing cheerleader who is always eager to politicize every stock market jitter, while wearing his pinstripe suit and pinkie ring, I have to take my hat off to CNBC's Larry Kudlow. He has always had the guts to take a contrarian stance. Lately though, he seems to have lost his marbles. "I don't want to do a Lehman analysis on this program," said Larry, eager to skip the bad news and move on to the miracle of Sarah Palin. "It's too darn boring!" With all due respect to Larry, Lehman's demise might be the biggest story yet.
Photo: sloomis08, Creative Commons, Flickr
We have made it through round 1 of the credit crisis, with about $500 billion in writedowns already announced. According to some estimates, most notably the IMF, we could end up writing down as much as $1 trillion to get through the junk. Now that we have entered round 2 of the credit crisis, with another $500 billion writedowns to get through, we have to acknowledge an important change.
Round 1 was associated with robust global growth - foreign banks and sovereign wealth funds could prop up Wall Street while the rest of the world "decoupled" from America's slowdown. Now that the theory of "decoupling" has been taken to the cleaners, the rest of the world is slowing down.
Round 2 will probably be associated with slowing global growth - as a result, foreign banks and sovereign wealth funds may be unable to come to Wall Street's rescue. Due to a global economic slowdown, the next $500 billion in writedowns will be harder to get through than the first $500 billion.
In a way, Lehman's demise represents this shifting landscape. A few months ago, state-owned Korea Development Bank might have bought into the broker, but political authorities have now halted negotiations. Admittedly it is an unlikely scenario, but the Koreans have a potential currency crisis on their hands, and now is not the time for imperialistic adventures. According to reports, Lehman also had talks with Japan's Nomura, but the Land of the Rising Sun's economic outlook is not looking too bright.
Lehman's inability to raise capital is perhaps the most important development in the credit crisis. Foreigners have been burned badly by round 1 of the credit crisis, and they may stay away during round 2 as their own economies slow down.
Disclaimer: I own SDS and DXD (short U.S. equities)