I have always found that an aptitude for mathematics is an essential skill for a financial professional (or talk show host). Captain obvious, at your service!

Let's take the case of a change in value of an asset. Let's say a hypothetical house was purchased for $300,000 and the down payment was 25%, or $75,000. This results in a mortgage of $225,000. This means your debt to equity ratio was 3:1, $225,000 in debt divided by $75,000 in equity.

Now, let's say that same house declines 25% in value, as many markets around the country have. This means that the house is now worth $225,000. Your debt to equity ratio is now infinite. Your house is worth $225,000 and you owe $225,000. You nave no equity and, consequently, you have an incalculable debt to equity ratio, $225,000 in debt divided by $0 equity.

This minor mathematical inconvenience is the root of our financial situation. All typical reserve calculations are irrelevant. All coverage ratios cease to exist. All debt to equity ratios have been decimated and lending capacity reduced, in many cases, to below zero, effectively requiring debt outstanding to be recalled, when possible, and no issuance of incremental debt. This shrinks capital (debt plus equity) and makes the available capital very expensive.

What does this mean? This means that, with fractional banking (and investment banking) that the smaller the equity, the greater the leverage and the greater the effect of any change in equity. On the upside, leverage is your friend, allowing you to feel like a financial Batman.

However, on the downside, your equity disappears faster than Casper in a blizzard. With the unconscionable leverage of many, if not all, financial institutions, this means that your equity has gone from a positive to a negative. We know that a negative equity means that you MUST reduce your lending, unless, of course, you reduce your reserve requirements to $0 or 0%, in which case, there are no rules anymore so let's make up new ideas, laws and controls as we go. This results in bad policies and laws that reduce the ability to short investments and inject huge capital guarantees and cash into zombie companies and industries.

We have now arrived at this financial and economic precipice. You cannot create equity out of thin air. The Government may print more money but money is a debt; it is not equity. The only way many financial institutions can survive is for shadow equity to be created, giving the illusion of real equity. When the FED exchanges good (or relatively good) treasuries for bad Level 2 and Level 3 assets, negative equity was exchanged for positive equity. The bad equity now sits on the FED's books.

At this point, people like me would offer to buy this bad debt of a few pennies on the dollar but as long as the FED does not sell it, it looks like an even swap, treasuries for bad paper, thereby protecting the illusion of a sufficient equity base of the financial institutions.

Here is the real problem. This is nothing more than a guarantee without equity or substance. It is no different than the Department of Education backing Sallie Mae bonds, the Federal Government finally explicitly backing Fannie and Freddie or the FDIC backing IndyMac. There comes a point in time when all of the guarantees of all these institutions are finally recognized to be vapid assurances. Investors finally accept the fact that each of these guarantees will be honored but with no change in equity backing them. That will, indisputably, lead to massive inflation.

I believe that this is the real message we must take from the current market.

Buy gold, buy silver, short the market, take a closer look at puts, research ETF's that are inversely related to the market. Remember, you can make money in a market like this. Just bet on any investment that prospers during this "inconvenient asset revaluation period".

Should anyone disagree with this conclusion, call the show and take away our WWF ("World Wide Financial") tag team championship belt that was awarded (by us to us) for understanding the current situation better than any other host or team of hosts.

I hope that you win and take our belt. That means that we are wrong and we all live to fight another financial day. If we win, we really all loose.