David Gaffen has a cute piece up at Marketbeat today, looking at the number of news stories on the subprime mess which contain the word “contained” or its cognates.
A Dow Jones Factiva search shows that the number of stories mentioning “subprime” and “contained” at the end of last year averaged around 110 or so — but that more than doubled in February, and jumped to a whopping 981 in March. This is hardly a scientific approach, but could be a measure of the urgency with which pundits have been trying to reassure investors the subprime mess won’t spill over.
Those doing the reassuring include portfolio managers such as Evergreen’s Walter McCormick, to bigwigs like Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke.
This doesn’t reassure Gaffen, and it doesn’t reassure me. On the other hand, knee-deep as I am in Nassim Nicholas Taleb right now, I’m inclined to take a more existential view of things. After all, the idea of containment is closely connected to the idea of contagion, which in turn is tightly bound up with the idea of causation.
Sometimes, contagion and causation are easy to see. The Russia crisis caused the Brazil crisis, for instance – the Russia crisis was not contained. At other times, containment is easy to see: Argentina’s default caused no more general widening out of credit spreads, and Amaranth’s implosion caused no flight of capital out of hedge funds.
But credit spreads are so tight right now that they’re bound to widen out at some point. When they do, there will surely be no end of pundits crowing that they were right about the subprime mess “spilling over”, and that events are proving that the subprime mess was not “contained”. But what if these other debt markets would have widened out anyway, due to entirely fundamental reasons associated with reasonable levels at which to price risk?
I’m pretty sure that what we’ll see in practice is credit spreads in general widening out in the wake of the mortgage mess. Or, you could describe the same thing as credit spreads in general widening out in the wake of the French presidential election, or the appointment of Felix Salmon to a blogging gig at Portfolio. Causation is a hard thing to demonstrate – which means that containment, as a concept, has relatively little utility.