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Pay attention to what they do, not what they say…

I feel like I am watching Survivor. Yesterday, it was Goldman cutting estimates on Lehman; this morning, it is Citigroup cutting estimates on Goldman and Lehman; and for the last few weeks we’ve had 9 other analysts cutting numbers on all of these would be financial “innovation” kings. What an embarrassing mess.

Yesterday we called this “Macro Time” and it’s nice to see that Dick Fuld and John Thain are on board with the investment theme. After doing their best to tell us everything other than what we needed to know, these two are flying across the world in a final attempt to sell their wares to Asian governments. Remember Wall Street’s “Sovereign Fund” calling card theme from the “its global this time” 2007 highs? Well, this one is back, in full force.

How do you think this Asian story ends? Thain is cozying up to Singapore, and Fuld is allegedly crawling to the Koreans. That first slug of $5B in stock that Merrill sold to Temasek (Singapore’s Government Investment Company) was in December of 2007, and the latest wet Kleenex MER paper they sold to the folks in ‘Sea Town’ brings Temasek’s ownership close to the 10% line, which requires regulatory approval. The scary part about all of this is that it’s exactly what the investment banks did to the Middle Eastern “Sovereigns” right before oil prices tanked. Trying to plug Asian governments with toxic paper just as Asian economic growth is slowing smells all too familiar.

You see, this entire “liquidity” trade hinges on inflation. There are two interconnected parts to it: 1. Oil and 2. Global Growth. These are primary ways that Middle Eastern and Asian “Sovereigns” get richer. The problem, of course, is that the US government cannot afford importing inflation or devaluing the US Dollar anymore. They can’t afford much of anything really. They need liquidity, and every day that Oil declines or Global Growth slows further, the “Sovereigns” have less of it to give.

Don’t worry though. Fuld, Pandit, Thain, and Paulson are going to get in a room, close the doors, and hammer this out. Right. Right…

This is why credit spreads continue to widen. The TED Spread that we keep focusing on in the Portal is screaming counterparty risk. The spread between 3 month US Treasuries and 3 month LIBOR this morning has blown out to +113 basis points. Why? Well, Asian markets are telling you that they don’t like the smell of Fannie or Fuld’s paper anymore. The Asians do in fact have live quotes and charts of FNM and LEH. Now, they too are running for the exits.

We’re short Japan, but we should really be short everything in Asia. This morning China reversed for another -3.6% down day. India broke short term support, dropping another -3%. Stocks from Hong Kong to Thailand lost another 2-3% of their value, and Pakistan has dropped right back into its dark cesspool, falling -6.4% in the last 48 hours. Asian inflation is accelerating alongside social unrest, as Asian economic growth is decelerating.

As Sherlock Holmes appropriately stated, “there is nothing more deceptive than an obvious fact”, and I don’t see any way for the US Financial systems to absorb a protracted global economic slowdown. Not at this juncture at least.

This will crush corporate earnings levered to international growth, but also remove the only liquidity valve that American central and investment bankers have left – the “Sovereigns”. I wrote it on July 31st. I’ll print it again this morning, and tomorrow too. I am 85% in cash, waiting patiently to see this play out.

Good luck out there today,