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                 BEST OF DOUG NOLAND

I’m never comfortable with the idea of "yelling ‘fire’ in a crowded theater." But Jim Cramer already did as much late this afternoon on CNBC. His "we’re in Armageddon" tirade (available at CNBC.com) was made moments after Bear Stearns’ CFO Samuel Molinaro offered a disconcerting assessment of market conditions during the company’s hastily called conference call: "I’ve been out here for 22 years, and this is as bad as I’ve seen it in the fixed-income markets." A highly-aroused Mr. Cramer, volunteering to speak on behalf of Wall Street, called for the Fed to aggressively cut rates and "open the discount window."

The Credit Market has Dislocated, liquidity has evaporated, and our academically-inclined new Fed chairman is in store for a historically challenging real world first test. Wall Street has been conditioned over the years to expect "bailouts." Only months on the job, Alan Greenspan stepped up and assured the markets that the Fed was ready to add liquidity after the ’87 stock market crash. The Greenspan Fed acted aggressively during the LTCM crisis and, later, Dr. ("Helicopter") Bernanke played an instrumental role in the Fed talking the risk markets higher in late 2002. To be sure, Fed "reliquefications" played a conspicuous role in fostering ever greater and more unwieldy Bubbles - and this will remain in the back of FOMC members’ minds. The Bernanke Fed today would likely prefer to maintain a "hands off" approach for as long as possible – which has already been too long for an acutely fragile "Wall Street."….

Appearing this evening with Larry Kudlow, Larry Lindsey called upon Fannie and Freddie to loosen lending standards to help ameliorate the rapidly accelerating Mortgage Credit Crunch. I was immediately reminded of how Washington nurtured the $200bn (or so) S&L bailout from what should have been resolved years earlier at a fraction of the cost to taxpayers. The GSE tab is today running out of control. Keep in mind that Fannie and Freddie already have combined "Books of Business" (MBS holdings and guarantees) of almost $4.0 TN supported (in the best case) by stockholders’ equity in the neighborhood of $60bn (current financial statements not available!). The thinly-capitalized Federal Home Loan Bank System has another $1.0 TN of assets. Before all is said and done, taxpayer GSE exposure will likely reach the trillions – to add to other untenable ballooning federal contingent liabilities.

This week, the unfolding financial crisis reached a problematic stage on several fronts. For one, illiquidity hit the gigantic "AAA" market for "private-label mortgage-backed securities." The booming market for non-agency MBS has played an instrumental role in ensuring abundant cheap mortgage Credit – on the one hand filling the liquidity void created by the constrained GSEs (balance sheets) and, on the other, providing virtually unlimited inexpensive "jumbo" mortgage finance to inflate upper-end housing Bubbles in California and the most desirable locations and neighborhoods across the country…..

A severe tightening in mortgage Credit is in itself sufficient to pierce a vulnerable U.S. Bubble Economy. But there is as well an abruptly brutal tightening in corporate Credit. The junk bond market has basically closed for business. The leveraged loan marketplace is in turmoil and scores (46 – see WSJ above) of debt deals have been pulled. And, more ominously, the previously booming ABS and CDO markets have slowed to a crawl. Perhaps not immediately, but it will not be long before the economy succumbs to recession.

Credit Market Dislocation now dictates the assumption that Federal Reserve liqudity assurances and rates cuts are on the near horizon. And while they will likely incite the expected knee jerk response in the equities market, I don’t expect they will have much lasting effect on our impaired Credit system. Current issues are much more complex and serious than ’87, ’98, 2000, or 2002. The dilemma today is that confidence in "Wall Street finance" has been shattered. The manic Bubble in Credit insurance, derivatives, and guarantees is bursting. The manic Bubble in leveraged speculation is in serious jeopardy. The currency markets are a derivative accident in waiting. Fed rate cuts risk a dollar dislocation and/or a further destabilizing (for spreads) Treasury melt-up.

A focal point of my Macro Credit Analysis has for some time been the grave risks posed to markets and economies commanded by the seductive elixir of speculative liquidity. I have compared the current backdrop to that of 1929. For too long our Bubble Economy and Bubble Asset Markets have luxuriated in liquidity created in the process of leveraging speculative securities positions (especially in the Credit market). We are now witnessing how abruptly euphoric boom-time liquidity abundance can transform to a liquidity crisis.

I apologize for appearing overly dramatic. But this evening I have nagging feelings that for me recall the disturbing emotions following the terrible 9/11 tragedy. I know the world has changed and changed for the worse – yet I recognize that I don’t know how and to what extent. I fear for our markets, our economy, our currency and our system. I received an email this week on my Bloomberg that said something to the effect, "You all must be happy in Dallas." I can tell you we’re instead sickened by what has transpired during the late-stages of this senseless Credit and speculative orgy. The Great Credit Bubble has been pierced, and there will now be a very, very heavy price to pay. And, as always, I hope I am proved absolutely wrong.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.