This morning, as we glanced at the front page of our daily newspaper, we got quite a shock. There were SCREAMING HEADLINES -- and we do mean screaming since headline was in enormous, very rarely used type and covered three quarters of top of the front page -- "Slowdown Fears Rock Markets." There was a huge picture of ostensibly frenzied traders, their arms thrust forward holding pens, shouting out orders, clutching order books, "jostling" as the paper said in futures pits "when oil hit $100 barrel for the first time."

Of course, to take last things first, commodity traders always look like that. Traders always "jostle" -- that, after all, is how they earn a living. The trading floor is where momentary truth of one kind -- the truth about current price -- is revealed. Unlike the news pressroom, where all too often --though certainly not always -- a combination of the demand for headlines, the need to scare up fear in order to sell newspapers, the perceived imperative of pandering to the crudest of human emotions -- dominates the "news reporting" story. Unfortunately, it often seems to untutored folk like ourselves that what passes for "news" might more accurately be described as "counter-news" or "non-news" or recent history, at best.

Seriously. We are weary of the endless and seemingly limitless wasting of ink by economists, Wall Street experts, financial writers, the general media, the Administration, and last, but by no means least, the Federal Reserve -- all professing to prognosticate what the economy will look like in 3 months, 3 weeks, 3 days, 3 minutes. The ability to see the forest for the trees is constricted by orders of magnitude because of the typhoon of empty and useless verbiage we are subjected to every waking hour by the media, the economics profession, Wall Street, and the FED. Rather than participate in, or even waste time critically assessing the possibilities of short-term forecasting, we prefer to look at the longer-term prospects. Not only are these predictable with a vastly higher degree of certainty than the near-term future, but they are MORE SIGNIFICANT, by orders of magnitude, to serious investors seeking to place investment decision-making within the context of a reasonably hypothesizable future economic environment.

Now that the year is drawing to a close, the flow of Wall Street prognostications for the new year has begun. The tone of the prognostications we have thus far seen is: gloom and cautioun. This brings to mind last year's round of predictive pronunicamentos: they were characterized by a near-universal consensus among the market strategists that 2007 would be an outstanding year in the market. One noted guru, himself known for his traditionally bearish stance, observed about him and his confreres at other firms: "This year we are all bullish." Well, with the market as measured by the S &P 500 up barely 3%, we can see why a skeptical attitude toward the Wall Street consensus has so much to recommend it.

Of course, a predominant factor in shaping strategists' view of the coming year is informed by the actual performance of the prior year. Here, the deeply engrained tendency to extrapolate the past into the future, and label it "forecasting" plays a crucial role. For this reason alone, the Wall Street consensus view usually constitutes more of a CONTRARY SIGNAL than a reliable compass for the coming year. Wall Street strategists, it would seem, are no less susceptible to being ruled by their emotions than the Great Unwashed, to whom they peddle their rather shopworn wares.

"Those who forget history are condemned to repeat it." -- George Santayana

Lincoln contended that "You can fool some of the people all of the time and all of the people some of the time, but you can't fool all of the people all of the time." (We hope we got this quote right). As an observer of the "investment world" -- if we were to so dignify the endless and largely meaningless whirl of activity under the Big Tent -- we never cease to be amazed by the inanities which pass for wisdom. We do, from time to time, wonder about the accuracy of the last portion of President Lincoln's dictum.

About no "issue" do we hear more than the universally loathed inflation. (Well, maybe NOT universally loathed; many, in fact do benefit from inflation, and some are aware of same; however, it is necessary to maintain pretenses. Sort of similar to the Marranos in the Spain of the Hapsburgs).

In a post just a few days ago ("Municipal Bond Crisis, or Journalistic Fear-Mongering")we suggested that new municipal bond insurers were likely to materialize, given the "golden goose" appeal of insuring securities which almost never default and which are consequently an ideal asset for insurers to insure.

And this morning, according to news accounts, Warren Buffett is starting a bond insurance business. In fact, Berkshire Hathaway Assurance Corp. reportedly opens for business TODAY, in New York.

Mr. Buffett remains the smartest of the smart money. And we ain't so dumb either, if we do say so ourselves.

Well folks, this morning we are treated to the news that four of the most important banks in the United States are offering discounts of up to 10% in order to "clear" a $231 billion "backlog" of high-yield bonds and loans.

The greatest miracle in the world, according to financial world folklore, is "the miracle of compound interest." It is said that Albert Einstein himself coined this phrase in recognition of the astonishing growth of nominal capital hoards thanks to the multiplicative power -- over time -- of compound interest. Today's news brings Einstein's apothegm to mind. Let us phrase it as tactfully as we can insofar as it clearly applies to banks: "Compound stupidity produces the most egregious of losses." If there is smart money and dumb money, as their surely is, there can be no question about where the banks stand. We do not think it is much of an overstatement to say that banks rank high as the dumbest of the dumb money. The opposite side of the coin is the smart money, as epitomized by some of the buyout shops and other private equity players. The banks, it turns out, reap what the private equity shops have sown. Unfortunately, it is the shareholder and, more significantly, the average citizen and taxpayer who are likely to have to reap what bank stupidity and greed have sown.

Our only question is to ourselves. Why the question mark in the title of this post?

The global slowdown is HERE, of course. The forthcoming condition of the U.S. economy, which is roughly one-quarter of the global economy, is by now known to even the "policmakers" at the FED. (These folk, who have the resources to place themselves at the very top of the informational and analytical food chain, deliberately choose to pretend that they are at the very bottom. Their pretense is very convincing, by the way).

For the Euro zone, growth has been running at at a most unimpressive 2% rate. Factor in the recent commencement of serious real estate bear markets in Britain, Spain, Ireland, and perhaps others in Euroland before too long, and add to this witches' brew the continuing rigidly contractionary policy of the inflation-obsessed European Central Bank (ECB) and voila -- we are looking at slowdown verging onto, if not tipping over into, recession. Depending upon the future policy flexibility of the ECB, or lack thereof, we may wind up looking at a pretty serious recession in Euroland. The tightening credit situation on the Old Continent is no joke.

Since the inception of this blog in mid-August we have repeatedly maintained that one of the two indispensable actions necessary to resolve the sub-prime crisis and the derivative credit contraction was a government-sponsored bailout of the banking system. As we noted in our very first post, on August 12th 2007 ("The Sub-Prime Crisis: Made in Washington") the Federal Reserve, or some other government modality, would have to purchase from the banks their sub-prime infected mortgage-backed securities at par, in order to remove them from the banks' balance sheets where they were choking off the banks' supply of lendable capital.

Over the past 4 months we have not seen anywhere A SINGLE comment, assessment, or analysis even remotely resembling this.
UNTIL December 23rd, when an economics writer carried by AP penned a piece entitled "Government Tries to Contain Mortgage Crisis." In this piece, the writer noted that: "Gaining some currency it the idea of a government agency modeled after the Resolution Trust Corp. of the S & L days that would buy up mortgage-backed securities as a way of delaing with bad loans....if the government spent $150 billion to $200 billion to purchase mortgage-backed securities, the thinking goes, it would prevent a fire-sale that would drive prices of these securities even lower."

Imagine the following scenario. You are the principal decision-maker of a gigantic pot of foreign money. (Asian, Middle Eastern, sovereign, or private money pool). You are seeking investments for your vast -- and constantly growing -- pile of money. There are certain characteristics for investments you prize greatly, and are willing to pay a hefty premium to market prices for. These characteristics are:
--safety;
--political, financial, and economic stability in the nation of investment choice;
--solidity of the individual investments in the country of prime desirability.

What, in your fondest dreams, would you wish for?

We would opine that you would wish to acquire these incomparably appealing premium assets AT A DISCOUNT. A discount beyond that offered by a temporarily depressed currency in the investment target country.

And what would you be willing to pay to get a discount, which could save you countless billions, in purchasing assets you desperately desire and would purchase in any event, almost irrespective of the size of the mark-up obtainable by sellers of said uniquely desirable assets?

A lot, we would guess.

We are sitting here, wondering how much longer irrational fear will be able to restrain the forthcoming market surge we expect. Looking at the balance sheet between risk and reward insofar as the U.S. equity market is concerned, what we see is the following:
Risk
1. Hysteria, panic, mindless fear
continuing to restrain rally;
2. Apocalypse -- which we deem unlikely
in the extreme;
3. Depression -- which we deem to stand
at the outermost limits of remoteness.

Reward
1. Lowest absolute S&P 500 valuations v. forward earnings in nearly 20 years;
2. Equity valuations relative to interest rates as cheap as any time in past 30 years;
3. Declining rate cycle SOLIDLY established;
4. Contrarian signs -- ie. media panic-mongering, bearishness, and investor sentiment at levels more characteristic of major bottom than major top.