Wednesday, February 4, 2009

Groundhog Day in Melbourne

The question on everyone’s lips these days is: how bad is it? Are we still sliding into a deep recession, or have we hit bottom and it’s only up from here? As the Northeast shivers from a deep freeze reminiscent of days gone by, our economy suffers from a similarly debilitating winter. The only question is, when is this particular winter going to be over?

Well, it’s not over yet. We may have quite some time to go.

How do I know this?

Federer lost again.

Once invincible, Federer essentially capitulated to young Raphael Nadal in the fifth set of the Australian Open. His backhand became a shankhand. His serve became a fault. It was depressing to watch, especially since the match had been scintillating until that point.

Once upon a time, our economy, too, was chugging along, seemingly invincible. People were wondering whether we had finally figured out how to simultaneously provide for outsized growth while still controlling inflation. Wealth grew by leaps and bounds. The world marveled at its own good fortune, America leading the way.

But in 2007, there were early signs that things had gone slightly awry. In the beginning of that summer, Nadal, always a contender on clay, pushed Federer to five sets on the grass at Wimbledon. Federer still won, but it was distressingly close. Then, not one month later, credit markets froze up as the mortgage market started experiencing its first real losses in years.

But things were back to normal after RFed won his fifth US Open in September. Banks were busily writing off CMO’s, but it seemed like the worst was behind us. By the time the year-ending Master’s Series came about, Fed was back in fine form and won handily. The Dow hovered just below 14,000.

In the winter of 2008, though, the world got a wake-up call. Things were not well. Novak Djokovic, who wins tennis matches not by doing anything spectacular, but by doing absolutely nothing wrong, thumped the great Federer in three sets at the Australian. Five weeks later, while financial masters of the universe frolicked unaware on the slopes of Aspen and Telluride, the great 80 year old Wall Street wizard Bear Stearns started to crumble under pressure from client withdrawals and short sellers. All the skiers were called back from the slopes, and the firm was essentially liquidated in a fire sale to JP Morgan over the weekend.

While the financial world regrouped, licking its wounds and trying to protect itself from the reverberations of the demise of Bear Stearns, Federer headed into the clay court season, eager to reverse his slide. Alas, it was no use. Nadal was his master at the French once again. Spring was lost.

Summer came again, and the world breathed a sigh of relief. Wimbledon was around the corner, where, of course, Federer would show who’s boss. The Dow had seen some weakness, but still hovered between 12,000 and 13,000. But as fortnight at the All England Club began to unfold, we started to hear news that Fannie Mae and Freddie Mac were experiencing – could it be? – liquidity problems. By the end of the tournament, their stocks had dropped to the single digits and it was clear that they were in need of rescue. Federer faced Nadal again, and again it went to five sets, complete with rain delays and encroaching darkness. It was a hard-fought match – McEnroe said the best ever. This time, though, Nadal prevailed, even on the grass.

Bad news kept rolling in during the summer of 2008, and RFed kept losing: to Gilles Simon, to Ivo Karlovic, and then to James Blake at the Summer Olympics. We got a reprieve when Federer won his 13th Grand Slam at the US Open, defeating Andy Murray in straight sets. Professionals came back from their Labor Day breaks eager to set off on a new course, eager to prove that the financial turmoil was behind us.

October, 2008 proved that all the financial distress to date was real. Major institutions began to fail left and right. By the end of the month, not a single major investment bank was left, Goldman Sachs and Morgan Stanley having converted themselves into banks in order to have access to the Fed’s (no relation) discount window. By November, the Dow had dipped below 8,000, an unthinkable number not long ago. That month’s year-ending Masters Series saw RFed lose to Simon once again in the round robin and then get manhandled by Andy Murray in the final.

Everyone relaxed for a bit during the 2008/2009 Christmas season, hoping that Obama’s soothing tone and stimulus package might breath some life back into markets. Bookmakers had Andy Murray winning the Australian, but RFed himself and the rest of us knew better. It was either he or Nadal who would hoist the cup at the end of the fortnight.

Federer put up a spirited fight for four sets, but when it mattered, he just couldn’t keep up. I think he needs to go retool his game in order to account for Nadal’s nasty forehand.

So what does that mean for our economy? Well, I think it means that we’ve got some more work to do. The stimulus bill the House put up last week looks a little bit like RFed’s backhand – a weak response to a killer problem.