On 10 May 1940, the German Wehrmacht launched its blitzkrieg on France. Panzer columns poured over the border, through the Ardennes forests the French had thought impenetrable.

General Gamelin, France’s Supreme Commander, tried several times to halt their advance. He identified ‘stop lines’ to which he sent his reserves, hoping they would hold the panzers back long enough for reinforcements to arrive.

But it was all in vain. Time and again, Gamelin’s forces arrived to discover the panzers had already passed through. Commanders like Erwin Rommel and ‘Hurrying’ Heinz Guderian were driving into France far more quickly than the French had ever expected.

Gamelin’s battle plan ignored the new realities of warfare. It was calibrated in accordance with infantry pace, not mechanised pace. As such, it was doomed from the start.

But what has this got to do with the markets? I’ll explain.

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Throughout this financial crisis I’ve been reminded of Gamelin’s plight in 1940. How many interventions have we seen? How many stop lines?

Northern Rock was nationalised. JP Morgan was bribed to buy Bear Stearns. We’ve had the special liquidity scheme... the term auction facility... rescues of Fannie Mae and Freddie Mac... AIG...

Each time it turned out the panzers were already behind us. And, each time, they blew big holes in the world’s stock markets.

Like the French in 1940, today’s financial authorities took time to get their heads around just how circumstances have changed, and how quickly contagion can spread.

Today, though, things look a little different.

"We’re undoomed!" said colleague Garry White when he entered the office this morning.

The authorities have deployed their masse de manoeuvre. Huge reinforcements have been mobilised — $700 billion in the US, £500 billion in Britain, and nearly €1.9 trillion in Europe. The Surge is on!

The tactics are changing, too. The Americans’ Troubled Asset Relief Program (TARP) was originally designed to deal with bank’s toxic debt. It envisaged a complicated reverse auction process to identify a price for the myriad complex and idiosyncratic securities that are making banks jumpy about lending to one another.

Now, though, TARP is being refocused. George Bush is expected to announce a $250 billion recapitalisation of the big US banks.

Attacking the supply columns

Solvency has been the big issue behind the liquidity crisis. No one wants to lend to a bank that might go bust before it pays back the money. By reducing that risk, it is hoped that recapitalisation will also reduce the threat posed by liquidity shortages.

The authorities are attacking the panzers’ supply columns. And the early signs are that it’s working. The three-month dollar Libor rate — the rate at which banks lend dollars to each other — dropped by seven basis points to 4.75%.

Most spectacularly of all, the markets have soared. The S&P 500 rose 11.6% yesterday — the biggest one day gain since the Depression. Short-term traders who bought on Friday will be very pleased today. But then again, it’s about time those guys’ bravery was rewarded. There have been enough big falls coming one after the other this last month.

"I expect the Dow could hit around 10,000, then we’ll see some selling," says The Fleet Street Letter’s Theo Casey.

Indeed the markets have fallen so far and so fast, we shouldn’t be surprised by the bounce. For investors — as opposed to the short-term trading guys — the question is whether this stop line will hold.

It does appear that the authorities have a better idea now than before about what they’re up against. But there is still a long, long way to go before the Great Deleveraging is over.

There are other threats, too. The derivatives market has mushroomed in recent years. It is now estimated to have a notional value of $516 trillion — between seven and ten times world output, depending on how you measure it.

It’s impossible to calculate with any precision the risk this poses. But it remains a threat, and could yet do further damage to the solvency of banks.

There’s a huge temptation to dive in and buy at times like these — especially when it seems the clouds may be starting to lift. History shows us that this sort of crisis can be when men make their fortunes.

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But there’s a silent evidence problem here. For every Warren Buffett who is "greedy when others are fearful" (and even he’s not that greedy at present), how many others get badly mauled following their contrarian instincts? We can’t be sure because they tend not to talk about it so much...

With hindsight we may discover that this was the perfect time to go back into the market. But given what we know about the threats still out there, I would counsel against being rash.

The stakes for you as an investor may not be as high as they were for France in 1940. Nevertheless, it’s worth paying heed to the lessons of the past few weeks. Markets can and do turn without warning. When they do, things can move faster than you expected.

Until tomorrow

Ben Traynor
Editor
Fleet Street Daily

Selected article:

Garry White on where commodities go from here.

The Daily Reckoning — The Bunkum Behind the Bounce

Finally, leadership! Every commentator has whined for it. Every investor has pined for it. Every politician has inclined towards it. And now they’re going to get it, as we say here at the Daily Reckoning — good and hard!

The world’s power elite have gotten behind the plan. We’re saved! They are striding boldly into the market — like J.P. Morgan in 1907 — with cash in hand. Only... it’s not their cash.

(Whose cash is it? Is it the ‘taxpayers money?’ Not exactly. Is it from savers and investors? Uh... some of it. More on where this money comes from... later...)

You can read the Daily Reckoning in full here.

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