Market Control is Slip-Sliding Away from Regulators   

• From our little corner of the world, the US Treasury led by Hank Paulson made two serious tactical errors in its efforts to get its arms around a global financial crisis which has morphed into the worst global recession in our lifetime.
• Firstly, they allowed Lehman Brothers to fail, which unleased the dogs of war in the credit crisis, resulting in exploding credit spreads and serious stress to the global financial system. Secondly, they backed away from what they had pushed so hard in getting Congressional approval in the first place, i.e., from buying up toxic waste on the banks’ balance sheets. The latter decision had immediately noticeable consequences last week in the form of a resurgence in credit spreads and renewed selling pressure on bank stocks.
• In the end, it may have not made a difference either way, because central bankers and regulators at any rate have very nearly if not completely lost control of the crisis, and are largely powerless to prevent a serious global recession. It is painfully obvious that preserving capital is foremost, and while equity market valuations particularly in Japan are at some of the lowest levels seen this century, this is no time to play the markets with money you cannot afford to lose. The currently favorable long-term risk-reward balance will only work in favor of those investors who can stomach gut- wretching volatility and further losses, and can wait for payoffs several years hence.
• Relatively speaking, Japanese equities are holding up better, supported by significant buying from domestic retail investors and pension funds, which is offsetting continued selling by foreigners and unwinding of broker prop positions. But economic as well as earnings fundamentals are deteriorating in Japan as rapidly as elsewhere, leaving only break-up value to support stock prices.  Thus it is not a question of which sector or stock is better, but of whether one should be in any financial market at all, rather than stuffing one’s money under the mattress.
• Renewed concerns of serious debt deflation have, however, finally begun to stimulate gold, some of which every investor should hold as a store of value and, in the worst case, a medium of exchange.

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