Is a Financial Market Last Straw Event on the Way?

by : Gerald Greene

I can't help but think that a final straw event that dramatically breaks the backs of world financial markets is on the way. Once that straw arrives there will be little that Ben Bernanke and the Fed can do about it. Extreme unwarranted optimism will turn to black hole pessimism overnight.

So far the stock market has performed extremely well after the massive injections of liquidity engineered by Ben and his good buddy at the US Treasury, Hank Paulson. It's amazing what billions of Dollars in fat cat bailout money will do. You have to give them both credit for shoring up the crumbling foundations of an overextended financial system. Good work, men. Bravo. Keep up the good work if you can. More challenges are surely on the way.

However, unfortunately, the opening of the Fed's discount window to non bank financial institutions, cutting fed funds and discount rates, and other heroic measures have done little if anything to address the core problems. Banks and other financial institutions are still sitting upon billions and billions of dollars of sub prime mortgage exposure, credit card debt exposure, student loan exposure, car loan exposure, and the granddaddy of them all, mountains of derivative financial instruments that are marked to only make believe evaluations.

As if all of that weren't enough the US housing market is still sinking, new home starts are back to early 1980's levels, oil prices continue to make record highs, gasoline is approaching a US national average price of $4.00 a gallon, and the short lived "maybe the Fed has stopped cutting rates" rally in the US Dollar seems to be over.

There seems to be on the immediate horizon an entire flock of black swan events that could easily qualify as last straw events. The probability that at least one black swan will descent from the flock and bring grief to financial markets is high.

I strongly expect that all of the recent rosy forecasts about the "worse of the financial crisis appears to be over" are more of a hope and dream than anything else. I don't know what the event will be to trigger a panic.

Perhaps it will be oil at $150 a barrel, perhaps gasoline at $4.00 plus will do it, perhaps a few more months of falling home prices, or maybe another $100 billion in bank writedowns, but I'm pretty certain that a final straw event is on the way. Certainly a US air strike against Iran would start a doomsday scenario in financial markets worldwide as oil prices spike to who knows where.

With the last straw event unfolding, whatever it may be, the optimistic forecasts about the stock market and the Dollar will evaporate and a full scale panic will set in. As these things tend to happen all hell will break lose, suddenly, without any ringing of the bell warning. It will be just one event too many piled upon a stack of financial accidents waiting to happen that already boggles the imagination.

Reality will be an unpleasant experience for all of the dreamers, including Secretary of the Treasury Paulson, and Fed Chairman Ben Helicopter Bernanke.