New Year Day Prediction on the 2008 Stock Market Confirmed: Ugly Bear Market Ahead
This is what this author wrote on January 1st 2008 predicting a bear US stock market in 2008:
2007: Cash Outperformed the Stock Market
Nouriel Roubini | Jan 01, 2008
In 2007 cash (in the form of holdings of short-term Treasuries or money market funds) outperformed the stock market in the US. The year ended with a bearish note as all major indices down on Monday.
The broad index of the US stock market, the S&P500, ended the year up a mediocre 3.5%: that is less than the inflation rate for the year (that was above 4%) and that is less than holding a money market fund or a basket of short-term US Treasuries.
And the year ended with a slew of poor macro news with more to come: new home sales plunged while the marginal increase on existing home sales was associated with falling prices of home (a direct signal that homes sales are going up only because the increased excess supply of homes is driving prices lower); defaults on insured mortgages were up a whopping 35%.
Also a report suggested that Q4 earnings will be very poor. …Q4 was most likely very mediocre for earnings; while Q1-Q2 do not look much better as even the modest earning expectations of analysts may be revised downward as poor macro and corporate news batter earnings. But compared to 2007, 2008 may be real bearish for stocks: in a typical US recession the S&P 500 falls by an average of 28% in nominal terms and 21% in real terms.
No wonder as recessions are associated with sharp drops – of the order of 15-20% - in earnings. Many sectors earnings have already taken a major beating in 2007: financials, home builders, consumer discretionary, retailers. The next shoe to drop will be all the other cyclical sectors of the economy that will seriously suffer from the forthcoming recession. So while 2007 was lousy for the US market 2008 may end up being much worse. Even more than in 2007, in 2008 cash will be king.
This author has thus to contain himself from saying “I told you so!”…Still, after the massacre in US stock markets in the last two weeks his arguments that we were at the last legs of the stock market sucker’s rally are proving correct.
Even growing expectations of aggressive Fed easing cannot compensate for the relentless onslaught of bad macro news (today Philly Fed, housing starts and building permits, Merrill’s massive losses).
This is the beginning of a seriously bearish stock market. Perma bulls are in retreat, on the economy and on the stock market. It will be an ugly year for equities in the US and across the world. A severe recession and massive and growing financial losses for financial institutions, households and the corporate sector will take a severe toll on the financial markets and on the US and global stock markets.
Or as summarized in my recent 40-page “2008 US and Global Economic Outlook“:
§In US recessions S&P500 index falls by about 28% nominal (and 21% real) as earnings sharply fall
§The stock market is now pricing a Bernanke put: hope that Fed ease may prevent a hard landing. Market rallies every time the Fed eases and/or announces future easing
§ But these rallies are increasingly short-lived and running out of steam as the drumbeat of bad economic news dominates over time the effects of Fed easing
§We are at the last legs/stages of an equity sucker’s rally (as the one in April-May 2001)
§This rally will be over and a equity bear market in full swing – as in 2001- once investors realize that the Fed easing will not prevent a recession
§ Foreign equity markets will also suffer as financial and real recoupling will occur and as markets are highly correlated during episode of stress and high risk aversion
§ Such foreign equity markets have not priced yet the global recoupling with the US recession
236 Responses to “New Year Day Prediction on the 2008 Stock Market Confirmed: Ugly Bear Market Ahead”
The value of the market is a function of liquidity. Right now the cost of debt is expensive. & the ensuing margin calls due to this market fall are exacerbating the collapse…
U.S. Stocks Tumble on Recession Concern, Merrill Lynch Loss By Eric Martin Jan. 17 (Bloomberg) — Growing conviction that the U.S. is in a recession sent stocks plunging in their worst three-day decline since 2002. Exxon Mobil Corp., General Electric Co. and Bank of America Corp. led the drop after the Federal Reserve said manufacturing in the Philadelphia region slid to a six-year low and Merrill Lynch & Co. posted a loss double analysts’ estimates. Ambac Financial Group Inc. and MBIA Inc., the two biggest U.S. bond insurers, retreated on concern their AAA credit ratings will be revoked. All 10 industry groups in the Standard & Poor’s 500 Index, and 452 of its members, decreased. The S&P 500 lost 39.95, or 2.9 percent, to 1,333.25 and is down 9.2 percent this year after tumbling 5.9 percent the past three days. The Dow Jones Industrial Average decreased 306.95, or 2.5 percent, to 12,159.21. The Nasdaq Composite Index slid 47.69, or 2 percent, to 2,346.9. More than seven stocks fell for every one that rose on the New York Stock Exchange. “The problems seem to be intensifying,” said John Carey, who helps oversee about $13 billion at Pioneer Investment Management in Boston. “We’re in for some rough months.” Benchmark indexes are approaching so-called bear markets, or declines of at least 20 percent. The S&P 500, which is off to its worst-ever start for a year, and Dow average have both lost more than 14 percent from their Oct. 9 records, while the Nasdaq composite has tumbled 18 percent from an almost seven-year high on Oct. 31. The Russell 2000 Index, a benchmark for companies with a median market valuation of $510 million, is down 20 percent since its July 13 peak. Exxon, GE Slump Exxon Mobil, the biggest U.S. oil company, slid $2.62 to $83.91. GE, the world’s third-largest company by market valuation, lost $1.35 to $33.21. Bank of America, the biggest U.S. bank by valuation, fell $1.78 to $36.91. Merrill retreated $5.64, or 10 percent, to $49.45 in its biggest drop since September 2001. Merrill’s fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with a $4.82- a-share deficit forecast by analysts in a Bloomberg survey. The decline resulted in Merrill’s first full-year loss since 1989. Ambac, battered by losses from the collapse of the subprime mortgage market, dropped as much as 65 percent and Armonk, New York-based MBIA fell as much as 43 percent. Moody’s and S&P said late yesterday they are reviewing the ratings the companies’ depend on to sell bond insurance. MGIC Investment Corp., the largest U.S. mortgage insurer, declined $2.28, or 14 percent, to $13.49. Goldman Sachs Group Inc. dropped $6.52 to $190.98. Bear Stearns Cos. decreased $4.61 to $74.44. Financial companies in the S&P 500, which fell 4.7 percent today, have lost 11 percent as a group this year after tumbling 21 percent in 2007. Tennessee Bank First Horizon National Corp., Tennessee’s biggest bank, plunged $2.43, or 13 percent, to $16.48. First Horizon led regional banks stocks lower after posting a fourth-quarter loss and cutting its dividend. Concern that the economy has entered a recession was spurred after the Fed said manufacturing in the Philadelphia region contracted more than forecast in January, adding to evidence factories are cutting production as the economy slows. The Philadelphia Fed’s general economic index declined to minus 20.9, the lowest reading since October 2001, from minus 1.6 in December. The Commerce Department said builders broke ground on the fewest houses since 1991 in December, making last year’s decline in homebuilding the worst in almost three decades. Lennar Corp., the biggest U.S. homebuilder, fell 34 cents, or 2.4 percent, to $13.91. Hovnanian Enterprises Inc., New Jersey’s biggest homebuilder, dropped 8 cents, or 1.2 percent, to $6.55. Fed Watch Fed Chairman Ben S. Bernanke told Congress the outlook for economic growth has worsened. Still, he said the central bank is not forecasting a recession for this year. Bernanke said a “temporary” fiscal stimulus would help the central bank to buttress economic growth, while warning against worsening the longer-term outlook for budget deficits. Traders increased bets for a bigger interest-rate cut at the Fed’s meeting at the end of January. Fed funds futures trading indicates a 44 percent chance for a 0.75 percentage point reduction, up from 40 percent odds yesterday. The rest of the bets are for a 0.5 percentage point cut. The benchmark rate stands at 4.25 percent. Monsanto Co., the world’s biggest seed maker, posted its steepest decline in almost five years, tumbling $13.09, or 12 percent, to $99.61. UBS AG initiated coverage of the shares with a “short-term sell” rating, saying the company could miss second-quarter earnings estimates as farmers plant more soybeans and less corn. Corn made up 33 percent of Monsanto’s revenue versus 11 percent for soybeans in the fiscal year ended in August, according to Bloomberg data. `Devil’s Arcade’ “Right now, this market is the Devil’s arcade,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $6 billion in San Antonio. “We’re looking at a possible recession with housing being the drag.”
Anyone out there have any ideas about where gold may go from here? I am sitting still for now, but concerned that soon its value may start to drop quickly as speculators get out and hedge funds sell off to cover loses.
Also, I wanted to say thank you professor for continuing to provide access to this blog to those of us who are not pofessional financial types. It has been a wonderful place to learn from many people and it is appreciated.
Thanks Noriel, for all the usable info you provide. These economic lessons can sure be put to use. Investments in SKF and SRS in the last 3 weeks have been huge! Coming from the background of a CA Real Estate Investor, I could see the CA real estate downturn coming. I had no idea at the time, that it would trigger this whole series of negative events. I especialy enjoyed your 2008 predictions. I am warped in my outlook now. Bad economic news in good and vice versa.
i’m no economist and don’t access government revenue / debt figures but….with the recent massive stock selloffs, revenues on capital gains will be huge in 2008; why doesn’t the government use some of that money to finance economic stimulus, including transportation infrastructure rebuilding, mass transportation and alternative energy? Rebates to homebuilders and homeowners who adopt passive solar heating design will reduce both consumer energy costs and dependance on fossil fuels.
@Medic – I’m sitting on my gold for now. Minyanville (sorry, no link handy) predicts today that it will rise again soon after it finishes making this low. They seem confident. Personally I’ve decided to wait till it falls at least $100 from a top before I think about selling, and if the times seem perilous I’ll probably not sell even then.
@Medic Suecris’ link http://www.minyanville.com/articles/Bernanke-Fed-GLD/index/a/15572
@Medic I’m not a professional precious metals trader, but I’ve done quite well with them over the past couple of years. I’m holding all of my positions now, but like you, I’m uneasy. With precious metals one has to get used to violent moves. The supply-demand fundamentals are still bullish. If the Fed follows the prescription of the Good Professor R, gold will likely continue to go up. You might find the analysis done by Adam Hamilton to be enlightening. His most recent post can be found at http://www.zealllc.com/2008/huibears2.htm. He has other excellent essays that are available for free in addition to this one on his site. Good Luck!
Reading this blog helped me understanding the sucker rally, and hold on to my puts. Just wish if there is a donation button with PayPal. Prof. Roubini should loudly proclaim the I Told You So. Also Schwab’s Liz Ann Sonder deserve much praise.
(I tried posting this on the last thread, but somehow it didn’t go through. This has happened several times in the past week.) Professor, I’ve been visiting the blog since last fall, and your outlook and commentary, and the commentary of all the guests, impressed upon me the urgency to take steps to protect my family, and our assets, from the gathering storm. It seems most people on wall street are out to take advantage of little guys like me, with their bogus mantras and perpetually sunny groupthink. Nobody out there is telling it like it is. This forum has given me the courage and insight to break out of the box they put me in, and at just the right moment in time. I am no longer one of the sheeple. Thank you, sir. JLC
Thanks Dr. Roubini, I went into psychology because I thought it held the keys to predicting behavior. I should have gone into economics! I’m so impressed with how right you’ve been with everything and I love reading all the views on this forum. People at work think I’m a savant because I called the recession 2 weeks before Goldmans! Too bad they didn’t listen. Thanks for sharing your insights with us. Cece
More Highway Robbery Apparently Main Street needs a little more sacrifice if the Wall Street economy is to weather its current “rough patch.” So step to the front, you commuters, truckers, and home users of heating fuel, and work with Kenneth Rogoff, professor of economics at Harvard and former chief economist of the International Monetary Fund (IMF). Says Rogoff: “Balance the budget and push down the world’s energy price by levying a carbon tax of a magnitude that would raise the retail price of gasoline by $2 a gallon or more, with similar impacts on coal, heating oil and natural gas.” I guess the Harvard prof means to “push down the world’s energy price” by taking away our wheels and setting us afoot as pack animals – wrapped in animal skins… sort of a “back-to-the-soil” movement. In quoting this suggestion, and others for discussion in Barron’s “New Year’s Resolutions” editorial commentary, Thomas G. Donlan relates: “We have no fear of a carbon tax, except its power to finance foolish spending. It would promote energy efficiency and development of new technologies.” I don’t know if Congress is good at energy efficiency and R&D, but it sure is good at “foolish spending.”
Posted On: Thursday, January 17, 2008, 5:45:00 PM EST The Panic Starts Author: Jim Sinclair Anyone see this today? Whooh.. http://www.jsmineset.com/ Dear CIGAs, There is no doubt the Fed and the PPT are meeting right now. A drop of over 300 points on the Dow after the Chairman of the Federal Reserve speaks publicly presages a $1000 break in gold coming quite quickly, if not tomorrow. Unless the equity markets can be calmed, a panic is about to happen, making the statement “This is it” a horrible reality. If the equity markets cannot be calmed then: Recognize this is the Formula happening like everything else much sooner and much bigger in its implications than anticipated. Gold will rise to $1650 as an almost immediate effect of what will be done to attempt to fend off a total panic starting to take place in general equities, therein threatening to be followed by all credit markets of all kinds. The funds and hotshot short term traders in gold shares will be killed by the upward explosion of the gold price about to occur. The PPT and the Fed will step out of gold’s way because gold is one of the tools used in 1930 by Roosevelt and in 2000 by Bush. It will be used again now on the upside. Gold is the only insurance there is against what all this means because a panic in equities will blow the financial system, already coming apart, to smithereens. All country funds would shut down on any further investments in “at the wall” financial institutions. The rollover in credit and default derivatives would exceed the entire foreign debt of the USA. The rest of the $450 trillion dollar mountain of derivatives would start a disintegration like nothing you have every seen in your lifetime. Consumer demand would slam shut. The auto industry might as well go into liquidation this coming Monday, avoiding the June 2008 rush. The US dollar would burn a hole in the floor going directly to .5200 or lower. As the dollar disintegrates gold would rocket to and through $1650 in days. The markets for general equities would all have to institute total trading halts every 100 points on the downside for 30 minutes each. All commercial call loans would be called. All debtors one day late on any payment, lacking grace period, would be liquidated. All debtors over one day of the grace period would be liquidated. It is clearly visible to anyone with eyes or a mind to think that the PPT has lost all semblance of control in the equity markets and will soon in all remaining markets. The commercial paper credit market which is almost dead will die totally. Should no emergency action take place soon, you will see an old fashioned panic of the 1929 variety. Just as emotional fools sell gold and gold shares, be assured that more emotional general equity fools will unload and bring the averages down more than ever in history in one day. Recognize this is the Formula happening like everything else much sooner and much bigger in its implications than anticipated. Emergency action will be all splash and theatrics but truthfully the cat is out of the bag. It buys some time but corrects nothing. It makes the Formula 100% correct. There now must be EMERGENCY ACTION because the Chairman of the Fed has BOMBED OUT PUBLICLY and a PANIC is about to occur. Expect EMERGENCY ACTION in days, not weeks. If you have not protected yourself, you may only have days to do so now.
Maybe old but:- An interesting interview with Ian MacFarlane, the head of the Reserve Bank of Australia on Dec. 1st. http://www.the-diplomat.com/article.aspx?aeid=5061 It’s an insolvency problem: ”Macfarlane: I know. It’s an insolvency problem, not just a liquidity problem. If it’s a liquidity problem anyhow, then the thing to do is what the Fed has been doing: make sure that there’s enough cash in the system – I hate that word liquidity – to keep the banks lending to each other. That’s what you do, that’s what Bagehot said in 1880 or so and that’s still true today.” ”If there’s a macro-economic problem of insufficient demand, then monetary policy is supposed to come in. But what we’re looking is neither a pure liquidity problem nor at this stage a macro-economic problem. It’s an insolvency problem. Lenders don’t know where the insolvency is in the system. In that sense there is a lack of transparency, although I suspect there is always a lack of transparency. It is not as though this is the first time this has happened.” On the potential death of securitisation: ”Macfarlane: That may be no bad thing. That may be a medium-term correction we all have to go through. If you talk to people who run operating companies – shopping malls, for example, or electricity generating facilities or distribution facilities – they’ve been complaining for years that the sort of assets they want to buy and operate have become more expensive. The prices of everything they need to operate have been driven up by the investment banks. These banks have developed off-market vehicles that go out and bid for this stuff, securitise it and then sell it on to investors.” ”It’s very similar to private equity. The securitisation process drives up the cost or value of physical assets. If the scale of that activity is reduced, it won’t be a bad thing for the world economy at all. We’re in a process of bringing the risk spreads back to normality. This will inevitably drive some players out of the securitisation business.” On the Fed dropping interest rates: ”The Fed, in my view, isn’t keen to bail the system out because it’s a very good central bank and it has a very long view. Deep down, central bankers worry about what people will think of them in 10 years’ time.” ”It used to be tough to raise interest rates when inflation was rising. Central banks that did became extremely unpopular. The governments asserted their power over them to make sure they didn’t. Now the situation has changed and they can do that. It’s much easier than it used to be. But the new challenge is to not too readily bail out the system when there is a financial crisis. And again this will be very unpopular. I read recently someone saying “Bernanke’s made a rooky error by not already cutting interest rates”. What sort of idiot is making these comments? This is obviously someone who is very inexperienced, with an incredibly short time horizon.”
If we accept that China, the Oil countries and some of the Sovereign wealth funds keep growing and creating foreign reserves in spite of the recession, I have the following question: With easy ways like SIV to invest their money shutting down – where are they going to park all that dosh they keep making?
Today’s post by MSN’s Contrarian columnist Bill Fleckenstein’s, his first after a brief absence completing his book on “Greenspan’s Bubbles, The Age of Ignorance at the Federal Reserve,” says Greenspan ”erred by continually picking an interest rate that was too low. Then he solved the turmoil that resulted from that decision with another period of interest rates that were again too low…” “How Greenspan’s Policies Hurt You” By Bill Fleckenstein http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/HowGreenspansPoliciesHurtYou.aspx “… consider how your own life has changed over the past few years. How have Greenspan’s actions affected your stock portfolio, 401(k) or mortgage? Will you be better off for having lived through the Greenspan era, or will you be much poorer for having done so? “The truth is that the majority of Greenspan’s decisions as Fed chairman from Aug. 11, 1987, to Jan. 31, 2006, were not beneﬁcial to you, nor did they leave the country better off, despite Greenspan’s glowing self-critique in his latest book, “The Age of Turbulence.” In reality, the overwhelming majority of people in the United States will be worse off in the years ahead as a result of his stewardship… “Central bankers like Greenspan aren’t bankers at all. Anyone who thinks a central bank such as the Federal Reserve performs any function remotely similar to those they’ve experienced in their local branch banks would be wrong. Central bankers are actually like the bureaucratic leaders of centrally planned, or command, economies. They pick an interest rate to within two decimal places that they guess will be the correct one, and then they proceed to cram it down the throat of the banking system. “It is oddly ironic that a small group like the Federal Open Market Committee, similar to those found at all levels of any former communist regime, would be in charge of the world’s largest and most successful capitalist country — that is, the United States of America and its $13 trillion economy…”
Speaking of the Indian market, the latest update from Das, a January 16 interview (IMO, a must read) http://www.hinduonnet.com/thehindu/holnus/006200801161420.htm
Mortgage meltdown: Now the rents More fallout from the current housing slump – the cost of renting a home stagnated in 2007, according to an exclusive report for CNNMoney. http://money.cnn.com/2008/01/16/real_estate/rents_flat/index.htm?postversion=2008011703
Where are all the mockers of the recession call or the timing of the call now? Any mea culpas? I’ve been lurking on and off for about a year on the blog, was convinced that at least a weak recession or severe slowdown in subprime/AltA was a reasonable risk by the long paper on housing the good Dr. posted in January or February of ’07 (as well as other readings), and so very slowly moved to an more age-appropriate 30% allocation in cash-bonds as the market rose in ’08. Things, of course, could change and we could only see a severe earnings slump, but I think the Dr. deserves a little credit on quite a few calls in late ’06 and ’07, don’t you? Mind you, I’m not becoming a Ryskamp, and the further the market goes down in ’08, the more I might start nibbling, very slowly.
few months ago (during the sucker’s rally) i was just reading some nasty comments hurled at the prof… how fast the “winds” change… prof, did you keep a blacklist?! anyways, i think gold may fall further… also, somehow asia is still resilient holding on to those psychological barriers… i see some opportunity in the chinese bubbles but too bad the market is restrictive.. any ideas how to “mine” them? mrskeptical
@Concerned-Citizen Alternatively, gold may tank due to margin calls.
LB, (Apologies, Indian Banker, but I will be shorting the Nifty at 04:25 GMT tomorrow morning.) Apologies, If I may have sounded too attached to the NIFTY. I am just a banker in the true sense of the word. Even I have my PUTS out there. Everybody wants to make money. This is not the time to be foolishly patriotic. Disclosure : I will cover my puts today and steer clear of the markets until Uncle Ben announces his cuts. Its going to be too volatile for any sane person to ride.
http://www.bloomberg.com/apps/news?pid=20601087&sid=afwwP1rDSh10&refer=home here it is fiscal stimulus.. but its not getting to the right people and besides, you need ppl to start getting rid of their burdening debt not spend and spend till kingdomcome.. the most important para is at the end : ”Why “exclude people who pay payroll taxes but not income taxes?” said Lawrence Mishel, president of the Economic Policy Institute. “And what businesses need are customers, not subsidies for investment.” btw, whats the main criticism of fiscal policy again in this environment? mrskeptical
Wow! After the comments here, I just had to go over and look at the stock charts of Ambac, MBIA and Radian. Visitors, go to http://www.stockcharts.com and check the symbols : ABK, MBI and RDN. This is nothing short of incredible. We’re really looking at a piece of financial history here – there is no other way to describe it. The impact on the world of state municipal bonds should be pretty profound. California and Louisiana watch out!!! (these credit ratings are some of the poorest for the US states, so I here). Bill Ackman and the folks at Pershing Square hedge fund must be throwing a big party tonight. They went short on these insurers back in Q1 of 2007, well ahead of the majority of the competition. They have made a lot of money on this trade. Well … no wonder Mr Bernanke is turning green. The Fed has got to see things really slipping from their grasp now. I would say that those folks clamoring for an emergency Fed meeting and rate cut … could just see their wish come true. PeteCA
@Octavio, thanks for this link.. sure sounds like china!!!… http://www.stock-market-crash.net/southsea.htm it has become “conventional” wisdom that the market cant collapse during a olympic year or a election year… but i like to ask : when is a bridge most likely to collapse?.. - answer is when its under the most stress… the financial system is under alot of stress now… wont be long before optimistic speculators/investors start to crack… mrskeptical
UK Retail Property Fund Halts Redemptions Scottish Equitable’s parent group, Aegon UK, is due to announce the closure of its fund today. It said last night: “Aegon UK has decided to take this step to protect investors following a significant level of customer withdrawals from the UK property fund market.” It blamed “worldwide phenomena relating to concerns over the US sub-prime mortgage market fallout, rising interest rates and talk of recession”….. http://www.nakedcapitalism.com/2008/01/uk-retail-property-fund-halts.html Will this become a trend?
@PeteCA What is the Acheson blog?
ECB Says Banks Expect Funds Squeeze in Coming Months By Gabi Thesing Jan. 18 (Bloomberg) — European banks say they will make it harder for companies and consumers to get loans in the next three months, weakening the case for further interest rate increases. The European Central Bank’s survey of 89 financial institutions showed that banks’ willingness to lend “is expected to continue to be affected over the next three months” by “turmoil” in financial markets. Banks also expect “difficult” wholesale funding conditions to continue, the Frankfurt-based ECB said today in a report published a month earlier than usual. http://www.bloomberg.com/apps/news?pid=20601087&sid=ae9fVCTBvYEQ&refer=home
I don’t think further rate cuts by the Fed or ECB would have much impact at this point on either the markets or the real economy. Banks are seized up and broke, and rate cuts even to ZIRP won’t change that. Without access to securitisation markets, banks can’t write new loan business. And the securitisation ship has sailed, been holed below the waterline, sunk and will remain forever underwater. More than that, the insurers of the securitisation ship are about to crash to earth too. The ECB is right. Lowering base rates will make no difference to bank lending appetite. Lowering rates in the States has done nada there to restore lending too. We are about to appreciate Mariner Eccles’ quote about the futility of open market operations in a debt deflation – “pushing on a string.” That man was a genius – founding the FDIC, rewriting the Banking Act to give the Fed control over monetary policy and bank holding companies, promoting the minimum wage and income support policies, and running the Fed day to day during the most challenging period of American banking history. History has been very unfair and unkind to Eccles. Perhaps this next debt deflation will see him reconsidered and rehabilitated.
@ Suecris; tuttfrut; Don Thank you for the links and input. It is appreciated. I still can’t help but feel like I’m anxiously awaiting a train wreck – I know I shouldn’t, but I just have to watch. What person with sanity ever really believed we could have an economy based on consumerism instead of manufacturing / production?
@Lennie (Apologies to the others for the long post) I’ve not been able to post earlier since I’ve had difficulties accessing the blog. With regard to NFORBES it appears the massive drop in non-borrowed reserves was deliberately engineered by the Fed to accommodate the funds from the TAF. From Bernake’s speech on the 10th, However, as a tool for easing the strains in money markets, the discount window has two drawbacks. First, banks may be reluctant to use the window, fearing that markets will draw adverse inferences about their financial condition and access to private sources of funding–the so-called stigma problem. Second, to maintain the federal funds rate near its target, the Federal Reserve System’s open market desk must take into account the fact that loans through the discount window add reserves to the banking system and thus, all else equal, could tend to push the federal funds rate below the target set by the FOMC. The open market desk can offset this effect by draining reserves from the system. But the amounts that banks choose to borrow at the discount window can be difficult to predict, complicating the management of the federal funds rate, especially when borrowings are large. Based on our initial experience, it appears that the TAF may have overcome the two drawbacks of the discount window, in that there appears to have been little if any stigma associated with participation in the auction, and–because the Fed was able to set the amounts to be auctioned in advance–the open market desk faced minimal uncertainty about the effects of the operation on bank reserves The Fed drained reserves and then replaced them with TAF funds. This is an interesting state of affairs in that non borrowed reserves cost the bank nothing, while borrowed reserves cost the banks the TAF rate, which on January the 14th was 3.95%. In case you didn’t notice it’s below the Fed funds rate. It’s also interesting to note that the Effective Fed Funds rate (4.22%) has been below the target rate 4.25%. Basically the Fed is operating opposite to Bagehot’s principle of lending freely in a crisis at a premium. But what’s so special about 3.95%? Well it’s the same rate at which you can borrow from the FHLB for a month. Btw, the Fed knew about this. http://www.fhlbboston.com/includes/classic_pop.jsp It appears that until the Fed introduced the TAF, no one wanted to borrow from the Fed, I imagine it had nothing to do with stigma, more likely it was cheaper from the FHLB. I imagine the reason LIBOR has come down has nothing to do with a lessening of fear, rather alternative sources of funding have been found. Chart 5 is most illuminating. http://www.rgemonitor.com/blog/economonitor/237277 The FHLB has become the discount window of the Shadow Banking System.
@ Medic What person with sanity ever really believed we could have an economy based on consumerism instead of manufacturing / production? The same persons who believe that the earth is less than six thousand years old and that satan planted dinosaur bones. Faith seems to win over reason and empirical observation in America with unfortunate consistency. When confronted with the temptations of consumer marketing and unlimited credit, how could a faith-based consumer resist going into debt? As for businessmen and bankers, the slow, meticulous building of productive businesses that earn a boring single digit return over decades must have looked ridiculous. Double digit inflation of the balance sheet using flexible accounting methods and churn-em and burn-em business tactics is so much easier, faster and more remunerative. We followed the same road in the UK these past 20 years, and will pay for it the next 20. We were faith-based too, but our faith was in America as the model economy. The boring old Germans are going to be looking really good soon by comparison.
I wonder for how long, US Treasuries will continue to outperform the U.S. equities markets?? If anyone bought TIPS or bills, notes, bonds, in March of 2000, sure has outperformed equities in the USA! I wonder how long it will take equities to catchup with the performance of treasury fixed income (over march 2000 to hmmm wonder when?)! Anyone in the JPM EMBI sure has outperformed equities too, wonder how long it will take US equities to outperform the JPM EMBI??? Maybe I’m just an optimist but I think equities should outperform fixed income— but I just don’t see this happening!!! I think despite perhaps a dead cat bounce, or a relief rally today, or even next week or month, I think the markets will continue their downwards spiral for quite a while. I think Q1 real gdp will be close to zero, will cause equities to tank, Q2 might be negative (causing equites to get smashed!), Q3 could be worse or better. Wonder how low the markets will go?! MEW (mortgage equity withdrawl) is going to be ground to a hault, consumer spending will grind to a hault, government spending may be restrained, housing and commercial property will continue a vicious decline, even if oil drops (simulating a tax cut) as global growth slows dramatically— can someome say recession in the air may actually materialize!!! I think the markets will hit rock bottom when writeoffs peak, when the CBOE VIX peaks, and when equities decline a bit more. The yield curve being +118 bp is nuts! It should be inverted. The government should not deficit spend, it crowds out investment, it crowds out borrowing, puts upward pressure on interest rates, and causes credit crunches…. this mutes gdp, drives up inflation, and interest rates could rise too. The federal budget (deficit/surplus) matters! We need a presidet (like Hillary) that will balance the budget and/or run a surplus! Hillary all the way! The economic stimulus plan of Bush will be laughable today! Maybe the DJIA market will drop 500 points, because a 5, 50, or even 500 billion dollar economic-stimulus-plan is just another stupid shame of George Bush (who has an MBA folks!). No more MBAs for white house personnel.
Andrew, are you talking seriously? is this the ultimate ‘sell signal’? are you officially a bear?
http://www.nytimes.com/2008/01/18/business/18fed.html?pagewanted=2&_r=1&hp Bloomberg News, citing people who insisted on anonymity, reported on Thursday that the White House is likely to propose an $800 tax rebate for individuals, a $1,600 rebate for households and investment incentives for businesses.
The Home Equity Crisis Ahead Even banks that dodged the subprime bullet face losses from loans based on homes now at risk http://www.businessweek.com/magazine/content/08_04/b4068000575390.htm?campaign_id=rss_null
I would like to add my thanks to Dr. Roubini for being so generous with his time and energy to post on this blog. I am retired from the medical field and never paid too much attention to economics. But now, I feel the need to understand this part of my world and how it will impact the rest of my life. I have learned so much from this site and from the excellent comments here. There are some sites I never bother with reading the comments, but there are some of you here that are really outstanding. Since I have no expertise in this field, I can’t post anything of substance, but I just wanted to say thanks.
@London Banker Without access to securitisation markets, banks can’t write new loan business. And the securitisation ship has sailed, been holed below the waterline, sunk and will remain forever underwater. More than that, the insurers of the securitisation ship are about to crash to earth too As I understand it, the banks have been pushing toxic assets onto the FHLB which has been issuing bonds based on the value of this “collateral”. Securitisation is still going on strong. Apparently approximately $200 billion dollars has been raised by this mechanism. (Is this the mother of all SIV’s?) in the last quarter, mostly as short term debt. From what I understand most of it has been bought with petrodollars. This makes the Fed’s discount window offerings look puny. I think the real subsidence would begin when this spigot is closed. The collapse of the bond insurers could squeeze the banks in two ways: Firstly: by causing asset writedowns as a result of the downgrading of the affected securities. Secondly: by causing the banks to post more collateral to cover their advances with the FHLB, effectively restricting their lending. Alternatively a collapse in the dollar/rising inflation would probably cause the source of funds to dry up. Then it’s all over Rover. I agree with Pete CA. I think we are witnessing a turning point in history.
Italics off, sorry everyone.
Try again Sorry once again.
Third time lucky, if this doesn’t work would someone mind stepping in. Bother.
“What person with sanity ever really believed we could have an economy based on consumerism instead of manufacturing / production?” What will become of the euconmeny if we become citizens again instead of CONsumers. I mean: one set of pots and pans three paintings one kitchen/bathroom a lifetime wallpaper a lifetime bike …fill in as you like While 2/3rd of the world population will try to catch up(or not) with our ‘standard’ of living?
I wandered over to Hellasious’ blog, Sudden Debt. I had to repost this here as I read it and thought, “What he said!” Bad Medicine Judging from the remedy being considered, it is clear that the diagnosis is grossly wrong. The doctors are prescribing aspirin to a patient whose splitting headache is caused by a brain tumor and not the hangover from last night’s overindulgence. Let’s look at the “medical” evidence – I won’t provide charts because they have been posted here numerous times already. * Record high ratios of debt-to-GDP and debt-to-income. * Record high debt service ratio (debt payments-to-income). * Zero/negative saving rate; a hand-to-mouth existence. * Stagnant earned income growth. * Smallest job growth for a recovery ever (since at least 1940) * Low quality of new jobs, loss of high value-added manufacturing. * Rising disparities in wealth and income. * A generational time-bomb ticking away – baby boomer retirement. Say you are a doctor, and this 350-lb smoking, drinking patient with asthma, high blood cholesterol, diabetes and heart disease walks into your office complaining of a headache. Obviously, you can’t cure him overnight – but to just ask him if he had too much to drink last night is really, really bad medicine. The fellow needs a lifestyle overhaul, or he will be pushing up daisies soon enough. ”Take two and call me in the morning” is inadequate, irresponsible and dangerous for America’s economic health.
The long maturity rates of EURIBOR (3m to 1y) are collapsing from their heights in December, signally that banks are much more willing to lend to other banks. http://www.bof.fi/Stats/default.aspx?r=/tilastot/markkina-_ja_hallinnolliset_korot/euriborkorot_pv_chrt_en This make a bit odd today claim by ECB that the banks predict lending tightening in the next three months (on Bloomberg, but no link handy).
This rebate crap is idiocy! Couples under $110M per year only? What the hell is that? All this money is gonna do is pay down late mortgage payments and late credit card debt. If it goes into the economy anywhere, it will be the liquor stores and drug dealers who get the benefit. Washington is a JOKE!
Speaking of Hellasious’ Blog, check out the piece he wrote on Tuesday called Stocks, Bonds, LBO’s and PPT’s. Explains why the so called PPT’s may be taking some time off.
It’s nice to see banks are willing to lend to each other….. Now how many of us are taking out new loans for homes, cars, etc.? Anyone? Hello? That’s what I thought.
Wild swings in Europe’s markets… http://www.euronext.com/index-2166-EN.html
Following the FHLB thread, this link leads to the FHLB Debt Issuance Statistics and shows the huge growth. It’s not broken down by quarter, but I would think the growth in the 3rd and 4th would be very dramatic. http://www.fhlb-of.com/issuance/statisticsframe.html
Today’s LEI puts us at an 89% probability of recession.
@ Alessandro No inconsistency on falling Euribor/Libor and ECB warning. Interbank lending priced off Euribor/Libor is used primarily for liquidity balancing purposes among the banks to smooth temporary liquidity imbalances in their payments funding operations to each other, not for lending out to their customers on core lending operations. In the old days banks financed lending from attracting deposits. In the credit boom we have seen the last two decades, banks have been financing using (1) originate and distribute securitisation, and (2) asset back commercial paper. Since both of these innovative financing markets have seized up solid, banks are not able to expand their core lending operations regardless of what the ECB/Fed does with the base rate or what happens to Libor.
Thanks London Banker, very clear.
Dano The Acheson blog (Sidetalk Blog) is at: http://acheson.wordpress.com/ Right now there is not much dialog, but I’ll post some articles there later today. I will continue here as well. PeteCA
For those of you familiar with economist Jean-Pierre Chevallier’s January 2008 writings on what’s been happening with the money supply/savings, etc, this novice would appreciate your take ! Thank you Dr. Roubini for your website.
What would you do with 600 $(result of the fiscal stimulus) http://link.brightcove.com/services/link/bcpid203719194/bclid86272812/bctid1381652051
Here are some steps that might need to occur for the Europe/Asia block to de-couple from the USA. I’m not saying ay of these steps will necessarily occur. I’m putting these ideas out as a “strawman” so people here can poke holes in the concept, or add alternate suggestions. 1) ECB hold rates steady in 2008 2) Saudi’s and Gulf States de-peg currencies from US dollar, and target their currency against the euro 3) Russia takes concrete steps to reign in M3 money supply and targets rouble against euro 4) China further loosens controls on yuan (allowing greater freedom of movement) and accelerates its withdrawal from US Treasuries 5) Other major countries (Brazil, Pacific Basin countries) change monetary policies to targets against euro 6) Banking centers in UK and Europe move actively to pick up business now going through New York (effectively making Europe the new major world center). Issuance of euro-based securities is further expanded to provide major alternative to US Treasuries. What these steps would do, in effect, is to cause most of the global economy to adopt a stance where trading levels are based on the euro. I think that the effects on manufacturing and trade would be powerful. A global recession may not be avoided, but global re-direction would happen at an accelerated pace. PeteCA
Henry I used to read Jean-Pierre Chevallier’s work quite often. But then he moved – and I completely lost track of his articles. Where is he now? PeteCA
LOOK OUT BELOW!!!
Small correction to item above. Step 3 should have said: 3) Russia takes steps to rein in M3 money supply … I would hate to do injustice to the language of our friends in the U.K. PeteCA
tutterfrut on 2008-01-18 10:10:07 Seems to me that plain people are lot more serious about the problem than our government. Many said: If the US deficit is so large why go o the red by giving money away? If grain prices keep going up, people will use it for food! (Many are already using their CC to finance groceries)
confidence is up? Jan. 18 (Bloomberg) — Confidence among U.S. consumers unexpectedly rose in January, the first gain since July, signaling Americans are weathering higher fuel costs and a deteriorating housing market. The Reuters/University of Michigan preliminary index of consumer sentiment increased to 80.5, from December’s 75.5 reading that was the lowest since 2005.
Markets dropping vertically. What is the news?
PeteCA: Jean-Pierre Chevallier’s website: http://chevallier.over-blog.net/ Thanks for any comments on what he is saying about the current economy. Henry
@ London Banker on 2008-01-16 00:56:24 Re Bagehot: It has been a while since I read Lombard Street, and so I might be wrong, but I seem to remember that the type of crises/panic that he was talking about were liquidity crises, not solvency crises, a distinction that Nouriel has stressed ad nauseam here. If I recall correctly, Bagehot suggested that the BOE should lend profusely in times of crises, but at high interest rates (so that credit is given out efficiently, and is seeked only by those who really need it) and only to those who have good collateral. Here the situation seems to be the opposite, as those that need the money are not credit-worthy by any stretch of the imagination. IMHO any (necessarily temporary) fiscal and monetary stimulus can only soften the short term blow to the economy, but cannot change the reality on the ground. I don’t see how any internal measure could achieve that. However, it might just buy enough time to bully others into bailing us out. Bush’s recent trip to the mid-east is a case in point: he reminded me of a mobster who pays a visit to a store-keeper (the Saudi prince), flashes his guns (the Fifth fleet), and notes that it is a dangerous world out there and protection is needed.
“Markets dropping vertically. What is the news?” Written by Octavio Richetta on 2008-01-18 10:24:59 Your upperchief is gonna talk about the “euconmeny”!
The administration continues to ignore reality-markets will punish them… 11:34 Bush: Administration expects economy to continue to grow 11:34 Bush: There is risk of economic downturn 11:34 Bush says there is a risk of an economic downturn
@ Leo70 Your recollection of Bagehot is absolutely correct, and we agree that the Fed is breaking every precept he laid down for managing a crisis so as to instill confidence in the money market and the currency. We also agree that the incontinent monetary largesse of the Fed and the soon-to-be stillborn fiscal stimulus will do little to address the fundamental solvency crisis confronting the US economy. I am happy to say that Mervyn King seems to have a better grasp of both history and policy, as he has tried to follow Bagehot pretty closely. He might have succeeded if not for the blame casting of the FSA and the panicked intervention of the Treasury. As for Bush and King Abdullah, it is hard to know who is the capo and who is the frightened shopkeeper. With oil reserves and many trillions of dollars of reserves, King Abdullah can get protection from many sources. Bush, however, can seek solace from very few friendly leaders given his dishonesty and incompetence over the past 7 years.
anyone know what time Bush is going to tell the subjects he wants to give them a check so they can go out and buy a flat screen TV from China or Japan so they can see the propaganda / commercials in high definition. oh yeah, and keep the current imbalance merry go round intact ? how do the creditors of the USA feel about this ? which country is strongest ? a)one country produces b)one country is resource rich c)one country spends and does not save and has massive debt honestly, I believe the treasury, powers that be, invisible hand, etc. should end the reign of Jim Cramer on television as a matter of national security – i mean saying Bernanke should be fired last night ? Give me a break Cramer. Have you ever heard of inflation Cramer ? or are you familiar with a declining dollar ? A declining dollar HIGHLY SIMILAR to the one which just happened to be in the picture in 1987 when the market crashed and YOU were on the floor Mr. Cramer. Remember Pal ? I just want to be your friend Jim…
@Slumlord Thanks a lot for this new piece of inquiry in the banking system. I’d love some people here (LB for example) to react on your thinking. Anyway I hope you’ll continue to provide us your analysis in the coming months. Best, Lili
…The financial markets have been prioritized as a matter of national security during this Administration as nearly everything that happens is related to keeping the equity markets rolling along. If Cramer is now nightly badgering the leader of the Federal Reserve, then he is now indirectly if not directly a threat to national security.
maybe “W” is going to announce the rate cut :)
@Cctavio: Markets dropping vertically. What is the news? Check the exchange rate for the Japanese yen against the US dollar. Look at the action over the last week – esp. using charts for the data. There is a new round of strengthening of the yen against the dollar. This typically means further unwinding of carry trades. It started on Jan 13′th, and has been continuing to the present time. It does coincide with the selloff on S&P500. PeteCA
Should anything unfortunate happen to King Abdullah, I do not imagine that Crown Prince Sultan or his son Prince Bandar (also known as Bandar Bush) would survive him long. I am fairly certain that King Abdullah will have anticipated that contingency and left very clear instructions. We would undoubtedly see the blowback on some of our elites in Washington as well. No one in Saudi’s royal family has forgotten the assassination of King Faisal following his founding of OPEC and the 1973 embargo. Detante and cooperation are mutually beneficial and greatly preferred to open conflict.
Markets are plummeting. Bush must be speaking.
“maybe “W” is going to announce the rate cut” :) Written by JMa on 2008-01-18 10:44:40 Open the discount window and give them the 600$ right away…
3 day weekend ahead. No one wants to leave with long positions on the books.
Asia and Europe are going to be ugly on Monday with the US closed and a collapse like this build on if there’s no stopping the bleeding before the bell.
This must be the ultimate day traders’orgy…up, down, up, down, in,, out, long, short…
Stimulus fact sheet Unimpressive.
@LB re Bush & King Abdullah The BBC’s Greg Palast (he who broke the story on electoral fraud in Florida during Bush’s last campaign), has this to say: http://www.gregpalast.com/george-of-arabia-better-kiss-your-abe-goodbye/#more-1944 ”What’s really behind Bush’s hajj to Riyadh is that America is in hock up to our knickers. The sub-prime mortgage market implosion, hitting a dozen banks with over $100 billion in losses, is just the tip of the debt-berg. ”Since taking office, Bush has doubled the federal debt to more than $5 trillion. And, according to US Treasury figures, on net, foreign investors have purchased close to 100% of that debt. That’s $3 trillion borrowed from the Saudis, the Chinese, the Japanese and others. ”Now, Bush, our Debt Junkie-in-Chief, needs another fix. The US Treasury, Citibank, Merrill-Lynch and other financial desperados need another hand-out from Abdullah’s stash. Abdullah, in turn, gets this financial juice by pumping it out of our pockets at nearly $100 a barrel for his crude. ”Bush needs the Saudis to charge us big bucks for oil. The Saudis can’t lend the US Treasury and Citibank hundreds of billions of US dollars unless they first get these US dollars from the US. The high price of oil is, in effect, a tax levied by Bush but collected by the oil industry and the Gulf kingdoms to fund our multi-trillion dollar governmental and private debt-load.” Greg’s become a bit loopy lately, but his take seems to make sense.
Nice save by the PPT!
All green baby. Can’t have a plunging market on a holiday weekend!!
@ More Highway Robbery This week, there’s more news on the theme: “beatings will continue until morale improves.” The l2-member National Surface Transportation Policy and Revenue Study Commission – after 20 months of study – now says it knows how to fix the nation’s roads, highways, railroads and transit systems. Its report to Congress, creator of the committee, calls for a 25-cent increase in the federal gas tax (5 cents a year for 5 years) and increased fees in other transportation areas. Yes, finding the money to fix roads and bridges is a major challenge. But can’t Washington think of an approach other than adding a few more bricks to the impossible load of bricks producers are already carrying. And talk about poor timing! A quote from Barron’s columnist Alan Abelson this week seems to fit the occasion: “Even in the novel instances when its intentions are not grounded in greed, stupidity or lust for power, Washington demonstrates an unerring talent for ineptitude.”
SAN FRANCISCO (MarketWatch) — Struggling bond insurer ACA Capital has until midnight tonight to negotiate more time or come up with a rescue package, a state regulator said on Friday.
What am I going to buy with my stimulus? More gold? More foreign currency? More DBA or DBC? Or maybe more canned goods, fuel and ammunition, and meat for the freezer? So hard to decide . . . .
So the plan is that the US is going to give individuals $800 and households $1600 in a refund so we can keep the party going…… In my world, this is like giving a patient dying of lung cancer (who still smokes by the way) a fresh, but small tank of oxygen. Won’t fix the problem or save them, but it may make the last few hours more tolerable. Perfect. If we ignore the real problem, it will likely just go away.
PeteCA, Hi Pete, I finally got logged on for the first time this week. (I should have read ther fine print on the original confirmation e-mail). Re the Yen, do you have any way to quantify the amount of the carry trade outstanding? I follow the weekly CFTC Committments of Traders’ Report and note that speculator net shorts in the CME Yen contract of 2.33 trillion back in June, have turned into a net long of 600 billion in the Jan 8 stats. I wouldn’t be surprised to see that number increase when Tuesday’s stats are released later this afternoon. While I have been bullish on the Yen vs. the USD for some time and see it eventually trading into the 90s, I am a bit worried that the long side is starting to get crowded. There’s room here for a sharp correction (most likely after the 1 percent cut coming January 29 and the ensuing sharp rally in U.S. stock market indices). What are you thinking? By the way, after quickly browsing this week’s posts, it is apparent that one of our frequent posters is not taking their meds regularly.
CNN said the cap on married couples is only $110,000. Anything over that and you get nothing.
@London Banker Did Bagehot have anything to say about solvency crises, or are these a product of our times?
“Should anything unfortunate happen to King Abdullah, I do not imagine that Crown Prince Sultan or his son Prince Bandar (also known as Bandar Bush) would survive him long” Two things in 2008 that would throw US policy into a complete fenzy: 1) Pakistan becomes unstable and it looks like Islamists get the upper hand in the Gov’t. 2) Saudi Arabia’s leader is killed. I don’t know why Anonymous brought up the thing about Prince Abdullah, but it’s a scary scenario if it plays out. Sure hope this doesn’t happen. We’ll see. —————————————— Someone had made a point earlier about Hugo Chavez going to OPEC with charts showing how cheap oil is … compared to products such as shampoo (yeah … shampoo!!!). It’s pretty funny – but you’ve got to admit it might have been effective. Do you remember when oil went to $80/BL and OPEC said “we don’t think this price will be a problem”. Then the same statement from OPEC with oil at $90/BL. And the same again at $100/BL. No problem. I guess my take on it is that Chavez is not shooting guns, he’s not dropping bombs. The man is out there waging war against the US with PowerPoint charts. Isn’t that free expression? If we disagree, can’t we send someone to OPEC with charts that express a different point of view? Do we always have to play hardball and look like thugs??? PeteCA
@ Leo70 Going on recollection here, Bagehot does discuss how managers of the bank will always want to stretch earnings to please the shareholders, but that for this reason capital must be increased and keen scrutiny maintained in the good times when business is booming. Again, policy fails to match theory.
is there any way they will not cut today or tuesday ?
2:39Fitch cuts Ambac rating to AA from AAA
Citi currently down 3.4% but Merrill up 2.4% ???
WOW!!! PPT LIVES!!!
PPT: “Gotta go green before market close!”
@Leo70 When Bagehot was writing, there was no deposit insurance — and I believe many banks did not have limited liability. In other words, when Bagehot was writing market forces were a factor keeping bank balance sheets in line. Solvency crises in our banks right now are pretty clearly connected to the process of trying to hold as little capital as regulators will permit, maximizing leverage and short-term returns. It’s hard to escape the fact that the whole process was about gambling with other people’s money — and because of FDIC insurance with the government’s money.
WOW! 70 to 100 point swings in seconds now!!!!
Prof R - ask your webmaster/developer to implement a bit of code to check the cookie or session to see if a viewer is registered, and if so, to NOT display the popup. It’s fine to annoy those that have not registered, but it’s a usability sin to punish your regular, registered users and you are, on each page reload. I think the comments prove this thesis(cuz I don’t know nothin bout econ). thanks, OrangeMan
Fear and Loathing in the S&P e-Mini’s: A Savage Journey to the Heart of the American Dream. To cope with the extreme volatility, one would need a suitcase full of mind-bending pharmaceuticals……..75 pellets of mescaline….5 sheets of high-powered blotter acid….a salt shaker half-full of cocaine….a whole galaxy of multicolored uppers, downers, screamers and laughers….a quart of tequila….a quart of rum….a case of Budweiser….and a pint of raw ether. Raoul Duke and Dr. Gonzo
S&P500 dow 5.4% JUST THIS WEEK!
The Education of Ben Bernanke By ROGER LOWENSTEIN Published: January 20, 2008 http://www.nytimes.com/2008/01/20/magazine/20Ben-Bernanke-t.html?ref=magazine
WOW, this is the CNBC main article. MSM is finally allowed to catch up. – Why Stock Market’s Selloff Is Likely to Continue Posted By:Albert Bozzo Forget rate cuts and stimulus packages. In Wall Street’s eyes, the recession is already here and the credit crunch is far from over. This month’s huge selloff in the stock market reflects the double-whammy being felt by investors: shrinking economic growth and continued uncertainty over the extent of the subprime mortgage mess. http://www.cnbc.com/id/22730427
Giraf A quick thought about long’s on the yen. I’ve noticed what seems to be a new trend with US investors lately. More people seem to be considering investments in hard currency funds quite seriously. And more mainstream investment advisers are now offering people a way to get involved with currency trading – through participation in managed currency funds. There was a time when currency trading would have scared the average US investor to death because of risk and volatility. But some of the fear may have been overcome. If so, the build-up in long’s on the yen might really represent a credible increase in new investment money. A long position on the yen would be one of the most natural positions for these new kinds of investors to accept. For that matter, so would a short position on the pound. Take a look at the positions on the UK pound and see if you see the same trend. PeteCA
Just a quick comment on the NYT MaGAZINE Article above, it is well written, a pleasure to read and possibly the most instructive piece I have read on the Fed and Bernanke.
Henry I respectfully disagree with Mr Cevallier’s interpretation of what Americans are doing with their money. I think he’s got the psychology wrong. I don’t think that Americans are spending more because they have suddenly become more optimistic about the US economy. I am not seeing anyone here in the US who looks more optmisitic right now. People are becoming more concerned, and the degree of concern is widespread. Unfortunately, I think Americans continue to pile money onto credit card charges – and they are doing this with the essentials of life (grocery bills, gasoline and even mortgage payments!). It’s a disturbing trend – not a good one. Watch the US employment figures. If they shoot up, then you’ll know more danger exists for the US economy. On the other hand, if I’m wrong then unemployment will hold steady or decrease. And remember that statistics can be manipulated by the Gov’t. So look for careful analyses of the real trends – not headline news. Just my opinion. PeteCA
The Euro Area Banking Lending Survey January 2008 http://www.ecb.int/stats/pdf/blssurvey_200801.pdf Loan demand way down, outlook further down Margins up Securitization way down Tightening up etc.
@PeteCA, Doesn’t make sense for YEN to appreciate (in the long run)? I don’t see any strong economic activity in Japan, unless i’m missing something?
@Pete: “I guess my take on it is that Chavez is not shooting guns, he’s not dropping bombs. The man is out there waging war against the US with PowerPoint charts. Isn’t that free expression? If we disagree, can’t we send someone to OPEC with charts that express a different point of view? Do we always have to play hardball and look like thugs???…” The Thuggee network in Washington and New York is alive but may be running out of muggees — particularly maxed out American taxpayers. Greg Palast’s assessment, above, has a ring of truth, and probably means U.S. Big Guys have no quarrel with Chavez’s charts. To reiterate Palast: “Bush needs the Saudis to charge us big bucks for oil. The Saudis can’t lend the US Treasury and Citibank hundreds of billions of US dollars unless they first get these US dollars from the US. The high price of oil is, in effect, a tax levied by Bush but collected by the oil industry and the Gulf kingdoms to fund our multi-trillion dollar governmental and private debt-load.” The lack of Saudi bashing in Big Media underscores Palast’s point, along with silence from the oil-fed Congress and Wall Street. Apparently, American workers, American homeowners and American small businessmen are to be used as firewood to heat the ticker for the multi-nationals and financials, and to pay the debts of out-of-control government. The American people need defenders such as Gerrit Smith in their House of Representatives. In a House speech in 1854, Smith said, “I do not subscribe to the doctrine that the people are the slaves and property of their government. I believe that government is for the use of the people, and not the people for the use of government.”
@Anyone Now that AMBAC has officially been downgraded to AA, how long until significant ramifications occur?
@ST on 2008-01-18 14:35:54 Again, I’m going with my faulty memory, but I seem to recall that Bagehot was pointing out that in his time all banks had little or no reserves, and the only bank keeping any reserve was the BOE (even though in principle it was just like any other bank, and did not have any explicit mandate to do so). It was thus a de-facto lender of last resort. In this regard, I do not see a big difference with today status; if anything today things might be a bit better as being a member of the FDIC at least entails some minimum reserve requirements. The real problem as far as I understand it, is that huge sums of money were lent to subjects that were not credit worthy, and are now insolvent, as they’ll never be able to come up with the money. As was pointed out on this board a while back, they do not even have an interest in coming up with the money, as with a free-falling housing market they owe more than their property is worth. In the process a lot of people made huge amounts of money. And it’s not just those who benefited from the creation, packaging and selling of mortgages (i.e., the bad guys), but is almost everyone involved in housing: construction companies, contractors, construction workers, realtors, appliance producers and vendors, furniture producers and vendors, home remodeling stores, etc. etc. If it weren’t for the credit given out by the truck load to anyone who asked for it, they would have all made a lot less money. Now someone must lose all than money. Who will be left holding the bag?
From Mish: ”Deflation American Style” http://globaleconomicanalysis.blogspot.com/2008/01/deflation-american-style.html Executive summary: US is no Japan. At the beginning of the financial crisis Japan consumers had lots of savings, US consumers have lots of… debt.
Alessandro on 2008-01-18 17:17:26 Thanks! This is exactly the information I have been searching/waiting for the last 18 months. An analysis of a US deflationary scenario vis-a-vis Japan.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aKTGgOD1teG4&refer=home ”Mortgage lenders, eager to make bigger loans and win market share during the five-year housing boom, relied on both higher appraisals and the proliferation of subprime and adjustable-rate mortgages, said Wachter, who has consulted for mortgage buyer Freddie Mac and General Electric Co.’s U.S. home loan unit.” PeterJB
“Wars and its horrors and yet I sing…” War, as they say, is the art of making things and breaking things. And the success of war, wrote Victor Hugo, “is gauged by the amount of damage it does.” From plywood and diesel fuel to copper wire and Blackwater mercenary salaries…can there be any doubt about the tremendous support for the Dow industrials coming every day from the Iraq war. Case in point: this morning’s “good news” item on General Electric’s 15 percent increase in profits helped the Dow get started up triple digits and may have kept it from eventually falling by triple digits at the close. The search for profits must share in the list of war’s causes with National security, misrepresentations, appeals to patriotism, and all the rest. In September 1939, on the day Neville Chamberlain announced that Britain was at war with Germany, the New York Stock Exchange had its best session in two years. And bond volume was the highest on record. “War and its horrors, and yet I sing and whistle,” penned General George E. Pickett, in a letter to his wife, May 1864.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3Xei2RV5MCY&refer=home AMBAC is downgraded by Fitch. When will ramifications be felt?
@From Mish: “Deflation American Style”: “Absent of that savings cushion here, the Federal Reserve must try and induce credit demand and consumption by reflating something. The question is, without real estate, what is left for the Fed to reflate?” Isn’t a planned economy bubbleful?
From Mish: ”Those watching Bernanke’s testimony before Congress were just treated to a socialist diatribe by a congresswoman prepped to embarrass Bernanke as the “former CEO of Goldman Sachs (GS).” Of course the former CEO of GS she was referring to is Treasury Secretary Paulson, resulting in her utter embarrassment rather than Bernanke’s. Not to be outdone, a Republican colleague just had to be educated on national television about the basic functioning of the Fed’s Term Auction Facility (TAF). I agree that knowing Bernanke and Paulson’s resumes should not be expected of your average person. Nor is the TAF a household concept. But these lawmakers are on the House Budget Panel.” Moral Hazard and the art of applied intellectual integrity er “leadership”. LOL – it would actually be amusing if it wasn’t so tragic. PeterJB
@iNNOSiNz: “Doesn’t make sense for YEN to appreciate (in the long run)? “ The Japanese economy appears to be going into recession. That part is true. Consumer confidence in Japan is down to low levels. So if Japan was a “normal” nation than what you say would be true. However, what happened is that the Japanese lowered their interest rates during the last decade to extemely low levels (around 0.5% and it has been lower) to fight deflation. Major traders around the world (esp. hedge funds) now use the yen as a source of currency for their financial trades. An enormous volume of “carry trades” based on the Japanese yen are currently running, and the volume of this trade keeps the yen artificially depressed (it should normally be a lot higher except for this trade). Unwinding of these trades results in a reversal of currency positions, causing the yen to appreciate again. Hence my comments above. PeteCA
@iNNOSiNz: “Doesn’t make sense for YEN to appreciate (in the long run)? “ Besides the unwinding of the Yen carry trade, China is trying to stave off inflation by upwardly revaluing their currency. A higher Chinese currency will likely translate into higher relative currency values for all of the Asian block nations, against the lowly dollar. As of now, because many of those nations compete with China for exports to the West, they tend to either explicitly or implicitly suppress the value of their currencies. A rising Chinese currency reduces this pressure on the block — most notably on Japan, China’s biggest export competitor
You have read the Bernanke article on this Sunday’s NYT Magazine. Now read this: VOLCKER ON THE CRASH By LEONARD SILK; LEONARD SILK IS THE ECONOMICS COLUMNIST FOR THE NEW YORK TIMES AND AUTHOR OF, AMONG OTHER BOOKS, ”ECONOMICS IN THE REAL WORLD.” Published: November 8, 1987 http://query.nytimes.com/gst/fullpage.html?res=9B0DE4DC1431F93BA35752C1A961948260&sec=&spon=&pagewanted=2 …PAUL VOLCKER’S characteristic approach to problem-solving is not to assume that the future is out there and that one must go about divining it. Rather, he believes that those charged with running things must take control and not let events develop on their own. In Emersonian terms, he fears times when ”Things are in the saddle, / And ride mankind.” When it comes to policy, he is the ultimate pragmatist. Rules and economic theorems have to be set aside. The decision-maker has to proceed by ”judgment” and to rely on his ability to sense the mood – or incipient panic – in the markets. Volcker is therefore impatient with people wondering whether the real danger now facing the economy is deflation or inflation. ”The point I would make is that we don’t have to sit here helplessly amid all these kinds of speculation or let them work themselves out in the marketplace. We can control events, if we do the right things. I’m not saying we can fine-tune it. You can get a situation that is so upset and filled with risk that there is no right policy. I don’t think it has to get that way. I think we’ve had a little warning, we haven’t had a catastrophe.” … Can you see the difference?
(reposting, initial post took, but didn’t show up) @Guest on 2008-01-18 16:39:02 ”Apparently, American workers, American homeowners and American small businessmen are to be used as firewood to heat the ticker for the multi-nationals and financials, and to pay the debts of out-of-control government.” In a sense that sums it up. My impression of the “stimulus” package is that it will result in boomerang dollars going from ALL taxpayers back to the creditors, the financial and banking friends of the administration’s friends. The screws will be tightened. The debtors will be leaned on to pay their bills. This “free” money will, IMHO, mainly go into the pockets of the creditors, the very same folks who schemed this mess and have already filled their pockets (and, the higher up in their food chain you go, the more likely you will find that they’ve cashed in their chips and grabbed their insanely huge golden parachutes). I have a strong feeling, however, that justice (here on earth) will be found, and that it won’t be coming from the corrupted two-tiered “legal” system. I’m stocking up on popcorn Mark (the original? one)
Commercial banks also pay for excess reserves in the interbank market just like commercial banks pay the Central bank for borrowed reserves from either the discount window or the Term Auction Facility. IBDD’s are not always costless regardless. Prior to Jan 2003 the discount rate or adjustment credit, etc. was 25-50 basis points below the fed funds rate. Then the commercial banks flaunted the rule that advances should not be used for profit. Afterwards, the discount rate became a penalty rate designed to minimize discount window borrowing in times of rising interest rates and rising inflation. Hence, it should be obvious that by raising rates, those depository institutions that qualify for the primary credit program would have a smaller volume of discounting, regardless of the purpose of borrowings & the reserve position of the borrowing banks. I.e., because all of these institutions are able to borrow in the fed funds market at lower costs.
@iNNOSiNz: “Doesn’t make sense for YEN to appreciate (in the long run)? ” To add my two cents worth, Japan still continues to run strong current account surpluses. It’s my view that countries with CA surpluses will see their currencies appreciate over time, while those running deficits will depreciate. China is another classic example: over time, its currency will go a lot higher. I’ve never really understood why the “carry traders” would take such huge risks in being short the Yen. They made a lot of dough because, as a herd, they all did the same trade and weakened the Yen. But the Y has come a long way from its 123 lows in the summer. Similar trades were done back in the mid eighties, although that time it was Japanese investors, primarily insurance companies, that were selling Yen, where interest rates were about 8% and buying Treasury Bonds at about 13%, to earn “the carry”. Yen was about 275 to the USD at the time. Then came the Plaza Accord in 1985, October I think, and all of a sudden the FX rate was 175, on its way to about 85. @PeteCA I’ll take a look at the Sterling stats later this evening. As I recall, the specs have gone from a significant net long several months ago, to a net short. Sterling looks lower but if the bets get overdone, we could see a bounce. What do you think, GSM?
Did anyone see this about a subprime executive killing himself? http://www.forbes.com/feeds/ap/2008/01/18/ap4550746.html I suddenly feel like I’m in the Twilight Zone and we’re in early November 1929. Creepy doesn’t even begin to describe it.
@Mark (the original? one) I agree. I’ll bring the beer!
Don’t miss Nouriel Roubini’s link above: in my recent 40-page “2008 US and Global Economic Outlook”. It’s worth real money, surer even than gold, as financial protection through 2008’s precarious market landscape. It is time well profited. Personally, I am going to lose a lot of money again as Bernanke pushes interest rates way underneath inflation — because I “invest” in CDs and treasuries with no more than 8% percent in risk (the old rule)and gold. Mine is not even a break-even position. But, perhaps it’s not as precarious as I fear. For I now know where NR is coming from in his case for lowering interest rates – practically the only disagreement I’ve had with his economic analyses. His “2008 Outlook” finally convinced me that prices really are coming down with the economy in its hard landing – and that I may not be stuck out on a financial limb, as before, with negative earnings, depreciating capital, and soaring prices. Stagflation, says Roubini, is low growth (negative supply) and rising inflation. To get stagflation, you need a large negative supply side shock (for example a war in Iran that spikes the price of oil). On the other hand, a U.S. recession and global economic slowdown is a negative demand side shock that will lead to lower — not higher — inflationary pressures. In street parlance, it’s glut with no buyers. Inflationary pressures will lower in a global economic slowdown, says Roubini, as U.S. recession leads to a fall in aggregate demand and lower pricing power of firms; as slack in labor markets reduces growth of wages and labor costs; and as fall in global demand reduces commodity prices (oil, energy, metals, food, etc.). Says Roubini, “Even gold will fall…” Well, I’ve put my money and peace of mind on Roubini. I know from experience that his economic assessments are highly rated, professional, educated, researched, proven, unbiased, and truthful…and rare. I also know he isn’t God, but at least I can sleep without nightmares of Greenspan and Bernanke and CD rate robberies. That’s worth something. By the way, Roubini sums up 2008 succinctly: “Cash is king, avoid a variety of risky assets.” But you’d better read the report yourself – it’s grand and you’re in there somewhere. (And my apologies to NR for any unintentional errors.)
@ Guest on 2008-01-18 23:34:40 What you say makes a lot of sense, and I agree NR’s 2008 Outlook is very compelling. There is still huge risk IMHO that the insane war-mongering, oil-profiteering, empire-building crowd in DC could bomb Iran before Bush leaves office – probably after the election. Then I’d want those CDs in any currency but dollars.
@ Giraf; “I’ll take a look at the Sterling stats later this evening. As I recall, the specs have gone from a significant net long several months ago, to a net short. Sterling looks lower but if the bets get overdone, we could see a bounce. What do you think, GSM? “ I don’t like being long sterling at all. Any bounce would stop me out and set me up to sell more, which I am entirely comfortable with, especially against the JY. How the ECB responds to the incoming inflation data will be closely watched. They are coming under serious pressure to lower rates but to their credit, remain beholden to their mandate. The 2 key drivers of Euroland inflation – energy and food prices – do not look like they are moderating anytime soon – yet. Combined with improving German jobs data and a bolshy union wage negotiation round ahead, the ECB at present is right to hold their strong stance. Although the Euro retreated from making new recent all time highs against the dollar, there still is no sentiment move substantively changing the weaker dollar outlook. I suspect that the catalyst for new lows on the dollar from here would be a quick and serious deterioration in the US economic data; faster and deeper than is conventionally perceived. I think that possibility is very real indeed. While the US financial media has been on alert since last summer , MSM oprahland media has only just started to bring forth the enormity of what is unfolding. The housing debacle is now gaining comparisons with GD1. That will have major effects on jobs in the US from here on. The significant stresses on the deteriorating finances of local and state Gov’ts will also start showing up in jobless data now in much bigger layoff numbers. Retailers and myriad service industries (finance being the biggest) will start disgorging workers , as balance sheet protection, cash flow and retained earnings override all other concerns. This is not a drill.
A humble comment on Bernanke’s recent comments; The assumption that the US recession will be brief (and therefore manageable with some tweaking), within which he couched his whole response to the Bush stimulous plan, will likely be seen in future as tantamount to a deliberate and underhanded deception of the US public. For a person who holds such importanat office , is in command of such an enormous body of economic and financial data, with inside access to every part of the US financial system and who until recently refused to even recognize the existance of any real problem (we have contained the subcrime problem), to then go further and deliberately mislead the public as to the serious nature of the economy’s predicament will soon be seen as the public insult and total deciet that it is. If this becomes as serious as I think it may, the US Fed will have a new Chairman.
From the Professor’s ppt presentation: ”Falling home equity withdrawal (HEW) now shrinking from a peak of $700 b (AR) to below $200 b” So the $150b stimulus package is just a drop in the bucket in terms of “patching up” consumer spending.
A rare headline from usually-bullish Yahoo Finance: AP Earnings Won’t Bail Out Market This Time Saturday January 19, 3:29 am ET By Joe Bel Bruno, AP Business Writer Quarterly Earnings Won’t Help Turn Around Market, but Could Provide Clues About 2008 http://biz.yahoo.com/ap/080119/wall_main.html IMO, equity investors are just starting to feel real pain. Just wait until emerging markets/China start falling of a cliff.
The World Melts for Gold Futures in China, an ETF in India Are Part of the Frenzy By CAROLYN CUI in New York and JAMES T. AREDDY in Shanghai January 19, 2008 Gold-bug fever is spreading. http://online.wsj.com/article/SB120069299587601337.html?mod=home_we_banner_left ($) Gold-bug fever is spreading. From China to the Middle East, new ways to invest in gold are rapidly popping up in developing countries. It’s transforming the market for one of mankind’s most venerable ways to sock away wealth. The door is opening to a new class of investors who previously wouldn’t have had access to gold futures and other tools. Their rush to invest has helped fuel soaring prices — gold crossed $900 an ounce for a time in the past week, and there are some calls for $1,000 — while adding volatile new dynamics to the market. … Since 2003, Western investors have poured billions of dollars into a related investment, the gold exchange-traded fund. Gold ETFs are pegged to the price of gold, but trade like stocks. The most active gold ETF, a Big Board-listed fund called streetTracks Gold Shares, now holds more of the precious metal than the European Central Bank or China’s central bank. (ETF shares typically represent a chunk of physical gold.) Similar funds have been launched in Australia, the United Kingdom, the U.S., South Africa, Mexico, Singapore and various European countries. Cultural Attraction Gold, often in the form of jewelry, holds a special place in many Asian and Middle Eastern investors’ portfolios. Increased wealth in these regions means more people can afford to buy on impulse. Chinese officials have suggested their country’s growing demand for commodities is a reason that its three commodity-futures exchanges should play a greater role in global pricing. Sun Zhaoxue, chairman of China Gold Association, was quoted on the Shanghai Futures Exchange’s Web site as saying the new gold contract will “improve China’s influence on the global metals market and pave the way for China to set the prices in the market.” Already, a copper-cathode contract traded at the Shanghai Futures Exchange since 1999 rivals the importance of the main copper benchmark on the 130-year-old London Metal Exchange. However, commodity benchmarks are tough to create from scratch, when most global investors have the option of using the heavily traded New York and London commodity markets. –Bai Lin in Shanghai contributed to this article. Seems to me gold should move higher until deflationary forces (If they do mmaterilize) are loud and clear.
Why Banks’ Pain Could Continue By NICK TIMIRAOS January 19, 2008 http://online.wsj.com/article/SB120071292872602449.html?mod=hps_us_editors_picks ($) … Foreign investors paid $19.1 billion for stakes in Citigroup and Merrill this past week, spotlighting a shift in financial clout as U.S. institutions look abroad to help shore up their balance sheets. The losses have analysts wondering if the worst of the write-downs are over. Citigroup, for example, ended the fourth quarter still exposed to $37 billion of subprime mortgages, and $43 billion of corporate-loan commitments for leveraged buyouts remain on its balance sheet. Still, losses from the current credit crunch — nearly equivalent to 0.7% of U.S. gross domestic product — haven’t reached the level seen in the savings-and-loan collapse in the late 1980s, when losses reached $189 billion, or 3.2% of average GDP. What’s on the horizon for the banking industry? Here’s a closer look: Credit cards and consumer loans:… Credit-default swaps: … Loss reserves: Bank earnings could fall by as much as 20% over the next three years, suggests Mr. Gast, because they face a double whammy: Loan delinquencies are outpacing the capital reserves they are required to set aside, according to Mr. Moroney. As losses mount, banks have had to commit more of their revenue to loss reserves. Those low reserve levels, coupled with deteriorating credit, could force banks to increase their loan-loss provisions by $30 billion to $85 billion, according to Mr. Gast, which would put further pressure on earnings. Loss reserves fell to 1.28% of total loans in the third quarter of 2007, nearly half the 2.57% share reached in 1991. …
http://online.wsj.com/article/SB120070247843301883.html?mod=opinion_main_commentaries The Panic Stage January 19, 2008 In his book “Manias, Panics and Crashes,” the economic historian Charles Kindleberger describes the stages of financial boom and bust. Students of the good professor will recognize where we now are in the current credit crisis: the panic stage. It isn’t a pretty sight, but a crash is far from inevitable if political and economic leaders keep their wits about them and focus on the proper remedies. … Enter the panic stage. The desire for debt has turned into a stampede to quality, especially Treasury bills. The same folks who never predicted the economy would recover in 2003 are now cheerleading recession. Any bank writedown or deal to raise capital — no matter that it is part of the healing process — is taken as a sign that there is more bad news to come. Meanwhile, the politicians plot to “stimulate” the economy by dropping dollars from the Capitol dome. We are also told the Fed funds rate must chase the 90-day T-bill rate down to the levels it reached when we had negative real interest rates — never mind the anemic dollar and soaring commodity prices. The danger now is that this panic becomes a self-fulfilling prophesy and talks us into a crash. There are two ways in which a crash could happen. The first is insolvency of one or more financial institutions that triggers a systemic failure. The second is a loss of global confidence in U.S. financial management and the dollar. Neither has to happen. On the first, progress is already being made. Banks and mortgage companies are taking back their off-balance sheet assets, writing off losses, and seeking new capital. There seems to be no shortage of such capital available, and this is a healthy sign. Meanwhile, the Fed has been making creative use of its discount window, with new auctions and accepting different collateral to help ailing institutions that need to borrow. This outlet has already helped to reduce the credit spreads that ballooned late last year, and is calming lending markets. We are only in the early stages of this repair operation, and no doubt some companies will fail. The task for regulators is to avoid surprises that cause more panic and above all to prevent systemic contagion. Warren Buffett’s recent entry into the troubled bond insurance market is another sign of the marketplace helping to heal itself. In cases where there is real systemic risk, the government through the Federal Deposit Insurance Corporation may have to rescue some institutions. In those cases, the equity holders need to be zeroed out and the management replaced. The overriding goal is to keep the banking system functioning. As for the other crash scenario, we wish the Fed hadn’t squandered so much credibility this decade. Then it might be better placed to reduce interest rates as fast and as far as Wall Street and Donald Trump are demanding. But with prices rising and the dollar as weak as it’s been since the 1970s, the Fed has less room to maneuver. …
Barron’s Economics Editor Gene Epstein discusses the government’s emergency stimulus plan and Ben Bernanke’s response to it. http://www.marketwatch.com/tvradio/bcPlayer.asp?bcpid=203719194&bclid=86272812&bctid=1381651889 The stimulus plan will do nothing to improve GDP. It will help cash strapped people pay some bills.
@ Octavio Richetta: There are two ways in which a crash could happen. The first is insolvency of one or more financial institutions that triggers a systemic failure. The second is a loss of global confidence in U.S. financial management and the dollar. Neither has to happen. On the first, progress is already being made. Banks and mortgage companies are taking back their off-balance sheet assets, writing off losses, and seeking new capital. There seems to be no shortage of such capital available, and this is a healthy sign. Meanwhile, the Fed has been making creative use of its discount window, with new auctions and accepting different collateral to help ailing institutions that need to borrow. This outlet has already helped to reduce the credit spreads that ballooned late last year, and is calming lending markets. The above asks us to make a tremendous leap of faith. First, that there’s no shortage of capital as banks are forced to go out farther and farther in search of investment (and assuming this willingness of investment will continue); and secondly, that it is a good thing that the Fed is accepting alternative assets (likely valued much higher than reality dictates) from banks. So really, the insolvent banks, in needing to keep reserve levels high as defaults climb are getting a bailout from the Fed and foreign funds. Great plan!
We are in the early stages of a bursting credit bubble, and a real estate bubble. Consumers took on credit to make up for stagnant wages, as corporations made record profits. Consumer debt is a claim on future earnings and wealth. Now as we enter a recession, layoffs are inevitable, so claims on future earnings may be futile. Real estate values have fallen off a cliff, so there goes consumer wealth. In addition, the cost of necessities has risen. Prescription drugs, health care, higher eduation, food, fuel. Based on analysis from London Banker, consumers are now using credit cards for puchases of necessities. Consumer wealth has evaporated. They have claims to future earnings, which may decline due to the coming recession. A lack of regulation and investor speculation in commodities has caused the price of necessities to rise, taking more of consumers shrinking finances. There are structural problems as well. Baby boomer retirement, a falling dollar, and a FED that has lost credibility (witness the 300 pt drop in the DOW after Ben’s press conference). Taken in combination with a faltering consumer that is 70% of the economy, and we may be entering a vicious cycle. What to do? -Regulations must be adopted to manage the cost of health care, prescriptions. This will reduce other costs, such as higher education and municipal taxes. -Speculation in essential commodities must be regulated. A bubble cannot be allowed to form in them -Increase taxes on the richest 1%, tax US corporations with offshore headquarters, and reduce the income tax on the middle class -The FED must speak the truth and regain credibility. Ben’s pollyanna routine is terrible. The mortgage crisis must be dealt with. If people are thrown out of their homes on top of their other difficulties, especially subprime lower class borrowers who are also otherwise disadvantaged, there will be social unrest. Speculators and college educated suburbanites who bought 3000sf homes on terms they could have understood I have less sympathy for. But lower class borrowers with a HS education who were steered toward bad mortgage products were just victemized, and they know it. They’ll be mad, real mad. The resources have to be committed to deal with fraud. If someone is being forclosed upon based on a mortgage with fraudlent terms, it will hvae to be re-negotiated. The RMBS derived from the mortgages are worthless anyway. Funds to deal with sorting out the mess should come from the mortgage and banking industry. They made the mess, they should clean it up.
Iphones for everyone! Seriously. If they’re so concerned about getting the $ into the economy why doesn’t the government just send a big check to Stevie J so that everyone who hasn’t yet bought one can have one. Maybe felons could receive theirs as a parting gift when they leave jail. It would make looking for a job (which they won’t find) alot more entertaining…. They could call it the I-Bate. And maybe a one time investment in technology for all americans would so improve our efficiency-further stimulating the economy… At least we’d buy more Itunes. And peripherals to go with the phone. But perhaps that’s not fair. Maybe people should get a choice Iphone or Blackberry you decide. A bit like our two party system. Honestly I’d rather it go to a thriving corporation than some bank or mortgage lender or buyer that’s going to go belly up soon anyway.
Octavio Richetta: VOLCKER ON THE CRASH — “Rather, he believes that those charged with running things must take control and not let events develop on their own” Paul Volcker was the worst Federal Reserve Chairman ever appointed: Through the years, Volcker’s exegesis, debate, and reinterpretation consumed reams of paper and buckets of printer’s ink. Monetarism involves controlling the volume of total reserves, not the volume of non-borrowed reserves as administered by Paul Volcker. Monetarism has never been tried. If the money supply is controlled properly, the determination of interest rates can be left to market forces. In 1980, Paul Volcker, Past chairman of the Board of Governors of the Federal Reserve System, appeared before the House Domestic Monetary Policy Subcommittee. In response to a question as to why the Fed had supplied an excessive volume of legal reserves to the member banks in the third quarter 1980 (annual rate of increase 13.2%), Volcker’s defense was that there are two types of legal reserves: 1) borrowed (reserves obtained by the banks through the Federal Reserve Bank discount windows), and 2) non-borrowed (reserves supplied the banking system consequent to open market purchases). He advised the congressmen to watch the non-borrowed reserves — “Watch what we do on our own initiative.” The Chairman further added — “Relatively large borrowing (by the banks from the Fed) exerts a lot of restraint.” This is of course, economic nonsense. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days was immaterial. A new advance can be obtained, or the borrowing bank replaced by other borrowing banks. The importance of controlling borrowed reserves was indicated by the fact that at times nearly 10% of all legal reserves were borrowed. The next 20 years also benefited from the decline in the proliferation of new financial instruments & the resulting drop in the rise in the transactions velocity of money. The sharp increase in DD velocity between 1964 & 1982 was the consequence of a variety of factors which include 1) the daily compounding of interest on savings accounts in commercial banks and “thrift” institutions, 2) the increasing use of electronics to transfer funds, 3) the introduction of negotiable commercial bank certificates of deposits, and 4) the rapid growth of ATS (automatic transfers of savings to DDs) and NOW (negotiable orders of withdrawal) accounts. But the most important single factor contributing to the increased rate of money turnover probably was those structural changes which made virtually all time deposits the equivalent of low velocity demand deposits That’s the decadence of economic theory. Now our history books have been re-written.
Update from the comments over at Hellasious’s Sudden debt: “Say you are a doctor, and this 350-lb smoking, drinking patient with asthma, high blood cholesterol, diabetes and heart disease walks into your office complaining of a headache.” That was in 1999. Today a few more complications have developed….. Today our patient is a 350-lb crack smoking, heroin shooting, cigarette smoking, drinking patient with asthma, kidney and liver failure, high blood cholesterol, diabetes and heart disease. Who lives in a perpetual state of denial…. CALL A MOTHER F&%$ing WITCH DOCTOR….! And hope for the best. Best regards, Econolicious January 18, 2008 6:24 PM
I’m really enjoying the Volker article from 1987. Here he is channelling Bagehot: Under these circumstances, Volcker ”would support the dollar.” The weakness of the dollar, he adds, ”creates a limitation on what the Fed can do in terms of providing liquidity.” What he fears is that a plummeting dollar would cause capital to rush out of the United States, giving an extreme wrench to the system. I think a decade from now when central bankers hold a symposium on this crash, they will identify the trashing of the dollar with the August discount rate cut as the critical decision that led to the end of American economic era and dollar hegemony.
It is my considered opinion that the USA is now in a saturated state of “anarchy” – er, as defined by their own definition and strictly adhered to as, to the definitions and inherent meanings of such terminology as “government”, etc. It is too late… PeterJB
Octavio I am expecting a banking crisis in the USA in 2008. ————- Giraf and GSM If you check the US broad dollar index these days, you’ll see it is declining steadily. It did not show the recent (brief) uptrend shown by the US dollar index. ———————– I am also contributing a few articles to the new Sidetalk blog. http://acheson.wordpress.com/ Go back to the article “Bernanke’s Messages … Run Run Run” and see comments there. I am aiming my comments specifically to help Americans who are new to economics and are trying to understand our economy better. This is a new blog, so there’s not a lot of discussion. But if you look around, you’ll find my postings. PeteCA
Written by Guest on 2008-01-19 08:19:18 Thanks for the input. I am not an economist so my familiarity with Volcker comes from what I have read in the MSM, so your views come as a big surprise. Is this how the profession views Volcker now a days? So how do they call economics, the dismal science? My take is that more so than other disciplines, economics is as much an art as it is a science. For instance, BB econometric models failed to forecast the subprime/credit crunch mess. However, IMO, anyone with half a decent brain and willing to take a closer look at the facts would have agreed with Professor Roubini’s view a long time ago. Does Volcker get any credit for subduing the inflation beast for over 20 years or was that a trivial matter that would have been just as easily tackled by any other “fill in the blank” Fed chairman? So, probably, Volcker is not a hot modeler/theoretician but his intuition and “cojones” probably made up for it. His lack of knowledge probably resulted in mistakes such as possibly an unnecessary recession in 81/82. I amm not trying to be sarcastic here. I honestly want to find out if my view of Volcker is totally off.
The danger — if those who want rates lowered get their way and are wrong – is that the big banks live to cheat again.
PeteCA Written by Guest on 2008-01-19 10:04:37 I will also start reading, and if relevant, posting in the SideTalk blog: http://acheson.wordpress.com/
Watch out for those naughty bankers in china … i wonder if they were involved in the ant parts industry.
@ Octavio Richetta and Guest on 2008-01-19 08:19:18 Paul Volker is a central banker’s central banker, and therefore hated by the establishment that is for huge leverage, low taxes, government subsidy to corporatism, warmongering and fearmongering, and unfettered capitalism. After Princeton, Harvard and London School of Economics, Volker spent most of his career in the public sector with the Fed and Treasury. From the Wiki: In 1952 he joined the staff of the Federal Reserve Bank of New York as a full-time economist. He left that position in 1957 to become a financial economist with the Chase Manhattan Bank. In 1962 he joined the U.S. Treasury Department as director of financial analysis, and in 1963 he became deputy under-secretary for monetary affairs. He returned to Chase Manhattan Bank as vice president and director of planning in 1965. From 1969 to 1974 Mr. Volcker served as under-secretary of the Treasury for international monetary affairs. He played an important role in the decisions surrounding the U.S. decision to suspend gold convertibility in 1971, which resulted in the collapse of the Bretton Woods system. In general he acted as a moderating influence on policy, advocating the pursuit of an international solution to monetary problems. After leaving the U.S. Treasury, he became president of the Federal Reserve Bank of New York from 1975 to 1979, leaving to take up the chairmanship of the Federal Reserve in August 1979. More than any other central banker in the post-WWII USA, Volker instilled professionalism in to central banking, preferring clear rules, scrutiny, audit and vigilance. Few under 50 today will remember the horrible effects of inflation under Nixon/Ford (“Whip Inflation Now” anyone?) when Carter became president. Volker was singlehandedly responsible for saving the dollar and Bretton Woods II from collapse by hiking interest rates to wring the excess debt out and promote productive use of capital. He also saved the US banks from folding during the Third World Debt Crisis. Volker spread professionalism to central bankers globally, establishing the forums and symposia that allow central bankers to exchange thier views and hone their craft. There is a reason that central bankers still gather in Wyoming every August. It’s where Volker likes to fish.
Just finished reading Barron’s. It is filled with lots of bullishness: 1. stocks in general seen as cheap on 2008 based earnings forecasts/fed valuation model 2. many specific stocks seen as bargains due to the recent correction 3. Lots of skepticism on whether we will actually have a recession (still talk about a 50/50 chance at most) This probably indicates we are still very far from reaching bottom.
It should always be kept in mind that Fed chairmen, Greenspan and Bernanke and Volcker for that matter, primarily are employees – not of the Executive Branch – but the private cartel of banker shareholders who own the Fed, especially the New York Federal Reserve Bank where all trends by the Fed are initiated. In this self-inflicted financial crisis, the media is dusting off the old canard “fractional-reserve banking” to lend an air of respectability and false image to the bankers, in pretense that they honor their contracts to pay on demand. It might be wise today to remember the words of John Maynard Keynes (who should know): “A ‘sound’ banker, alas! is not one who foresees danger, and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can readily blame him. It is necessarily part of the business of a banker to maintain appearances, and to confess a conventional respectability, which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men.” The main point to remember here about fractional-reserve banking, IMHO, is that the smaller the fraction of money reserved becomes, the less it resembles receipt money and the more closely it comes to fiat money. When the fraction held finally reaches zero, then it has made the complete transition and money has become pure fiat. It has been said that there is no example in history where men, “once they had accepted the concept of fractional money, didn’t reduce the fraction lower and lower until, eventually, it became zero.” That is where we are today. Calculations by Richard Daughty of the Mogambo Guru (below) show that the “fraction” of money held on “reserve” for demand call in the Fed’s banking system is 0.0026%, i.e. zero. In real terms, the Fed is “creating money out of thin air.” 10/10/07 – Did He Say, “Tighter Monetary Policy”? ‘So, for how much assets and debt is this piddly $40.2 billion counted as its “reserves”? Doug Noland, in his Credit Bubble Bulletin at PrudentBear.com, reports that bank credit alone is $8.923 trillion. And how fast is bank credit growing? “Bank Credit,” says Mr. Noland, “is now up $280bn over the past ten weeks, with a $627bn, or 10.1% annualized, y-t-d gain”, while “Loans & Leases surged $25.9bn to a record $6.574 TN (10-wk gain of $249bn).” ‘So it looks like about $15.4 trillion in bank assets and liabilities is being backed up by a minuscule $40.2 billion! That’s a microscopic 0.0026%. A quarter of 1%! Hahahaha! Fractional reserve banking at its finest! Hahahaha!”’
@London Banker You mean Volcker is not part of the shakedown conspiracy?
“Money is honey, my little sonny…” As NR has reminded us, cash was better than shares in 2007. Even the growing emphasis on push-money couldn’t jump start Wall Street’s year-end rally. But it did expose an overweight market to the real economy in the beginning days of January 2008. Stockholders already abhor 2008, of course, but a “Bloomberg News” item yesterday from Christine Harper poured even more vinegar into their wine. While many stockholders of Wall Street’s largest firms found coal in their Christmas stockings, the Street’s five largest firms passed out massive bonus payments to their executives and employees…hiking their compensation and benefits for the year to $65.6 billlion. Writes Harper: “That means year-end bonuses, at 60 percent of the total, exceed the $36 billion distributed in 2006 when the industry reported all-time high profits.” The five firms are Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. In 1928, the average price of a home was $1,200 and the Christmas bonus for each of the Morgan partners was $1 million. Funny the way these things happen, isn’t it? But then, there’s the old proverb: “Money is honey, my little sonny, and a rich man’s joke is always funny.”
@ Jason B: You have alluded to some things that have puzzled me for quite a while. The central one of these is that “Consumer debt is a claim on future earnings and wealth.” It seems as though wages and salaries of the hoi polloi are something evil and should be kept minimal, and reduced whenever possible. Yet, that is where the major consumer market resides. If the average Joe and Sally are financially strapped, eventually this is going to reduce corporate profits. Back during the evil days of the last Clinton administration, economists were praising rising unemployment since that meant that cost push inflation was contained. These same solons had no similar views on corporate profits. For some reason, income increases for non-corporeal persons are great, but the same is not true for corporeal beings. I assumed at the time that this was an example of “he who pays the piper, calls the tune.” Cheers went up every time a union was busted. Offshoring of jobs was a great thing since it stimulates efficiency and raises profits. It also demolished the domestic manufacturing capacity and working class. People of modest means watched their earning power drop, all the while being bombarded with carefully crafted admonishments to Consume! Consume! Consume! The Fed destroyed savers, and rewarded borrowers. Hence, we are now in a real pickle. No one in this sad scenario is without guilt, but the task now is to pick up the pieces and avoid total collapse. Our first task, in my mind is to realize that efficiency is a means to an end, not an end in itself. Aristotle reminds us that the difference between correct and deviant regimes is that the former rule for the overall public benefit. Our present oligarchy had best start learning and practicing to be an aristocracy. The alternative can be found in Thucydides, and the French Revolution. Wendell Berry is sounding better all the time.
DocBerg: Offshoring is nothing more than wage arbitrage. ‘Efficiency’ is a euphemism. Its shameful that American companies can offshore their headquarters and labor for financial gain, which ends up in the hands of the elite management. Inequality is at its highest since the 1920′s.
ACA’s clock supposedly stopped clicking at midnight on Friday, but I can’t find any info on whether it was bailed out at the last minute or whether it went under. Has anyone seen or heard anything?
“The President, Congress, and the Supreme Court have clearly proved their inability or unwillingness to protect the common man, the voter, from being victimized by inflationary machinations. The function of securing a sound currency must pass into new hands, into those of the whole nation.” Ludwig von Mises , The Theory of Money and Credit (Irvington-on-Hudson, New York: Foundation for Economic Education, 1971), pp. 448–52. This is a definition of “anarchy”, the state in which the USA now finds itself. PeterJB
Retail in the USA is hurting VERY BADLY…all the places I’ve been shopping have prices slashed 30, 40, even percent or more just to get people spending/buying again.
Retail in the USA is hurting VERY BADLY…all the places I’ve been shopping recently have prices slashed 30, 40, even 50 percent or more just to get people spending/buying again. Definitely already in a recession in U.S. since retailers have all of this unsold merchandise stacking up in their stores!
World not running out of oil, say experts. Doom-laden forecasts that world oil supplies are poised to fall off the edge of a cliff are wide of the mark, according to leading oil industry experts who gave warning that human factors, not geology, will drive the oil market. The optimistic view of the world’s oil resource was also given support by BP’s chief economist, Peter Davies,…..Mr Davies said that peaks in world production had been wrongly predicted throughout history but he agreed that oil might peak within a generation “as a result of a peaking of demand rather than supply”. http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3207311.ece
@Guest on 2008-01-19 23:09:05 [quoting the referenced article] “World not running out of oil, say experts.” ”Mr Davies said that peaks in world production had been wrongly predicted throughout history” Fact 1: Anytime you have consumption of a resource exceeding its replenishment rate you are DEPLETING that resource. By simple logic this means that we ARE running out of oil. But we will never USE all of the available oil; some won’t be accessible, and much won’t be extracted due to negative EROEI. Fact 2: People HAVE accurately predicted production peaks (M.L. King Hubbard being the most widely noted person). And such people, scientists and geologists, tend to be pretty accurate, versus blovating economists, politicians and bean counters. There’s much more data now to go on, in which case the levels of certainty are far greater than at any previous time. As Clint Eastwood’s famous line goes: “Do you feel lucky punk?” Fact 3: We WILL reduce our reliance on mineral oils. As the costs go up (and EROEI declines) we won’t be using as much. So, I agree that demand will decline, but to suggest that we could increase production for any significant period of time is pure hogwash. ”[Mr Davies]agreed that oil might peak within a generation” If oil production has peaked, as many preeminent geologists suggest happened in 2006, then this statement is already true. As I’ve contended here, the markets are primarily messed up because there’s no longer any clear growth prospects; without increasing energy you can’t have increasing growth. This fundamental can be waltzed around all one wants, but the physical realities are playing out and trumping all of our virtualness. Oil is in decline. End of story. Get over it already. Mark (the original? one)
@ Peter CA; I follow the USDX every day, hourly. The US banks are already in a crisis. It just hasn’t been labeled so yet. Rather, let’s call it a “credit crunch” with innocuous labels like “sub prime” and “liquidity problems” so ordinary folk keep the impression that this is all manageable. And while we are at it, let’s continue to understate the housing crisis and keep trotting out bogus economic data to keep the lid on this shambles After all ,must keep the sheeple fat ,dumb and happy yes? Like with the recent attempted bank bailout, thinly disguised as a stimulous plan. With the patient terminally ill in ER and the specialists floundering around for a solution, life support is provided by a stream of non-event false fixes. But, there is starting to be real panic. If one needed to see how truly bad things were in the US, we need look no further than the AWFUL performance put in by the captain of the good ship USTitanic , Ben himself Bernanke. Here is a Fed chief who cannot distance himself further from the dollar, which by default then excuses him from being responsible for inflation. Has anyone not yet told him that ALL worldwide commodities of import are priced in US dollars- and that they are rising in price? A lot!(Even the grossly falsified official US data is now having problems hiding that damaging news.) Nope, doesn’t matter because the dollar is Hank’s problem folks. Hank, the bankster and econoThug- ex GS hitman. GS now has its greedy hooks into the way of the dollar- the world’s reserve currency. How’s that for manipulation? LB is quite right- the trashing of the dollar has paved the way for the end of the American era. US dollar hegemony is now propped by the oil arabs- no prizes for guessing the real reason why GWB was in Riyadh recently. Should the oil arabs change, loosen, modify that longstanding peg, irrepairable damage to the dollar will follow. US dollar hegemony will have effectively ended. Long before subcrime, the US was firmly set on an expedient policy of currency debasement on the false premise of national competitiveness. The US arrogantly took advantage of its position of being the world’s reserve by defying the simple laws of fiscal prudence and debt management. That has led to this point, where all monetary and fiscal responses become exceedingly harmful to the US financial position. These are truly momentous times in the history of world finance. I do mean it readers- This is NOT a drill.
anyone else having their posts not post?
“anyone else having their posts not post? Written by Guest on 2008-01-20 00:47:05″ Yes, 2 failed attempts on my last one.
Is anyone else hearing rumors that Bank of America is pulling out of its bid for Countrywide? If this is true, Countrywide will go bankrupt. This will be a disaster. Forget recession, we may be looking at a depression folks.
Countrywide et BoA – Anonymous http://online.wsj.com/article/SB120070492065001981.html?mod=googlenews_wsj PeterJB
Inflation – Global source LaRouche The food price index of the U.N. Food and Agriculture Organization rose 37 percent in 2007, after a 14 percent increase in 2006, and prices on some commodities have increased much faster, with palm oil jumping more than 70 percent last year. Protests and food riots have erupted in many countries, including Pakistan, Indonesia, Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen, and China and Egypt have taken measures to stop food exports and control prices. It is just starting now… Now it becomes a Global Socio-economic crisis of biblical proportions comparative to circa 1300 BCE PeterJB
California home prices drop nearly 15 percent Plummeting median cost in December during a 20-year record sales falloff http://www.msnbc.msn.com/id/22712082/
Forget recession, we may be looking at a depression folks. Written by Anonymous on 2008-01-20 01:45:23 keep your guard up.. =Lonely Soldier Boy= http://www.youtube.com/watch?v=pY4VfBNClNs&feature=related good luck & godspeed to all
Calm surface disguises turmoil beneath By Aline van Duyn in New York Published: January 18 2008 21:36 | Last updated: January 18 2008 21:36 A glance at the website of ACA Capital gives no clue to the trouble the company is in, or indeed the billions of dollars of losses it has caused at some of the world’s biggest banks. http://www.ft.com/cms/s/0/0976affc-c60c-11dc-8378-0000779fd2ac.html?nclick_check=1
I just read in this month’s Economist cover page article that foreign central banks hold 40% USD and 2% YEN. I would attribute most of the difference to the USD reserve currency status. If the dollar loses reserve currency status, as it must if it ceases to be a store of value and exports inflation in pegging countries, the damage to the dollar will be catastrophic. Our economy will undergo wrenching change. There are WAY TOO many dollars out there if the USD loses reserve status. Look for more signs of an orderly retreat from the dollar by foreign banks. SWF may be the vehicle. GSM, everything you say strikes a chord. This is not a drill. I am beginning to feel personally frightened for the economic future. And therefore the political future. A clash of civilizations world war may in fact be in the future. I am going to teach my boy and girl to be fluent in Spanish, and take family vacations down there. I’ll send them away before they fight in a war. I’ll be damned if my children end up being drafted. Ryskamp was maddening, but prescient.
Overseas Investors Buy U.S. Holdings at a Record Pace By PETER S. GOODMAN and LOUISE STORY Published: January 20, 2008 http://www.nytimes.com/2008/01/20/business/20invest.html?_r=1&hp&oref=slogin
Editorial Pump-Priming the Economy Published: January 20, 2008 http://www.nytimes.com/2008/01/20/opinion/20sun1.html?hp … The package has obvious flaws. Research on the investment incentives provided after the 2001 recession suggest that tax cuts for businesses will not have much short-term effect on investment, providing little immediate benefit to the economy. Tax rebates for consumers do provide effective economic stimulus. Rebate checks sent after the 2001 recession — $300 for qualifying individuals and $600 for families — were spent relatively quickly, according to research, providing the economy with a shot in the arm. Twenty percent to 40 percent of the rebate was spent within three months, one study found. But in its embrace of the notion that relief means letting people keep their own money, the White House’s proposal excludes those who have no money to keep — about 45 million families earning too little to pay income taxes and to qualify for a rebate. Yet these are exactly the people who should be helped, not only because of their dire need but also because they would be most likely to spend quickly whatever assistance they got. …
Fundamentally A Recession’s Impact Is All in the Timing By PAUL J. LIM Does the timing of a recession really matter? If you’re an equity investor, it does. http://www.nytimes.com/2008/01/20/business/20fund.html?ref=business
This Time, Rate Cuts May Not Be a Panacea By J. ALEX TARQUINIO Published: January 20, 2008 http://www.nytimes.com/2008/01/20/business/20rate.html?_r=1&ref=business&oref=login
The Food Chain A New, Global Oil Quandary: Costly Fuel Means Costly Calories http://www.nytimes.com/2008/01/19/business/worldbusiness/19palmoil.html?ref=business
@Jason B on 2008-01-20 05:30:43 Thanks for telling us about the buy signal for the US$. If you look over time, when a story finally makes it to the cover of the Economist, Business Week, etc., it has usually run its course.
“the White House’s proposal excludes those who have no money to keep — about 45 million families earning too little to pay income taxes and to qualify for a rebate.” Giving money to those who have nothing is a good idea if you want economic stimulus. They are more likely to spend it on goods and services rather than repay debt, which as others here have pointed out, is just another leg up for the financial moguls. With luck it will cycle through the real economy a few times before it gets sucked into that black hole excuse for a banking system.
Giraf: http://www.economist.com/opinion/displayStory.cfm?Story_ID=10533866 not sure if I’d call it a buy signal.
@guest ”With luck it will cycle through the real economy a few times before it gets sucked into that black hole excuse for a banking system.” More likely to be sucked into China’s trade surplus, if you ask me. The whole thing is completely ridiculous. Recessions are part of the economic cycle. Let it happen! We`ll likely come out stronger on the other side, less a few current financial institutions.
If there is little new business in credit cards, mortgages, or investment banking, what will banks do for income? Is there any scenario whereby Citigroup et. al. survive?
GSM: “the US was firmly set on an expedient policy of currency debasement on the false premise of national competitiveness. The US arrogantly took advantage of its position of being the world’s reserve by defying the simple laws of fiscal prudence and debt management. It’s not a drill. “ I agree with you that it’s not a drill. Also, when I mentioned “bank crisis” to Octavio I had in mind something similar to the string of failures that the US saw with the S&L crisis in the 80′s and 90′s. Only this time it will be a string of banks. Kind of like a multiple scenario of the Northern Rock problem that happened in the UK (and the UK may see more of this too). I am especially worried about the situation facing our small and medium banks. They depend upon residential loans, construction loans, commercial RE loans, and loans to corporate customers. All those sources of income are fallling apart – or will be soon. I think the Fed/Treasury will do whatever it takes to save the big banks (incl. allowing them to be sold). But I don’t see how they can save all the smaller banks. But back to your point … the fundamental premise (or hope) that Paulson & Bernanke are following is that a devaluation of the US dollar should make the US more competitive. If their assumption is correct, we should see falling US trade deficits and stable employment (a pickup in the US export sector is supposed to cancel out any harm done to shrinking US businesses). On the other hand, if the trade deficit stays high and unemployment soars – then that will be a sign that fixing US competitiveness is a lot harder than the policies established so far. PeteCA
There is an alternative scenario to massive, widespread bank failures, although I agree that is a serious risk. The alternative would widespread shrinking of banks as their balance sheets came into line with their capital and reserves. The loans that they have already written have value and produce income (although less with each successive wave of defaults). So long as they can live within that existing income, they stand a decent chance of survival. Cutting costs – particularly executive compensation and unviable business lines and activities – will be critical to shrinking expenditure in line with income. Unemployment is going to rise. It is inevitable when so many jobs of the last decade were in consumer finance and securitisation and those industries will shrink radically. All the retail and construction industries dependent on consumer and securitisation finance will shrink too. That is what is going to shape this particular recession/depression. Leverage is going to be wrung out of the sytem. If the regulators are wise (seems unlikely in the US, more likely in the UK), it will be possible to save or consolidate most of the existing players. If the regulators are stupid, then the real economy will contract massively along with the financial sector, with resulting social dislocation and political instability. Let’s hope the regulators wise up fast.
@London Banker If I understand you correcltly, it is inevitable that the bank stocks and broad market indexes will be much lower a year from now. Are AMBAC, MBIA, and ACA insolvencies with consequent far reaching effects now also inevitable and likely to happen soon?
I’m not going to predict timing or extent of a crash given that the levels of leverage we are talking about and the international imbalances are at historic highs. Financial meltdowns can be brutally fast and thorough, like the bank panic of 1907, or they can be slow and unremitting, like the Japanese deflation that continues today 18 years after it started. Either way, the end state is the same with stupid, unviable, speculative lending being squeezed out in favour of prosaic, boring, productive investment. What I can say with some certainty is that there will be fewer banks a year from now than today. Some will fail. Some will amalgamate. Many will do both if the FDIC and Fed staff are good at their jobs. I remember my boss saying in the 1980s, “There will always be a biggest bank in America. It doesn’t have to be Citibank.” That’s just as true today. In my view, the faster this crisis moves, the better for America in many ways. The levels of corruption in government and markets have gotten to the point that democracy and human rights and civil rights are in serious danger. If this is a fast, nasty crisis, it may wake up the US electorate in time to change the politics. Otherwise I see the US following the Soviet Union to some state of middling corporatist bureaucratic tyranny like modern Russia, but with better television.
Barron’s “Streetwise” column this week points out that this entire decade – despite the big interim market rally – is the ”first in some time that hasn’t been good to U.S. stocks.” However, on an upbeat note, it quotes Jeremy Grantham, chief investment officer of GMO Securities, that “once the excesses of the great bull market are gone, the next decade will be great.” Grantham notes that “the1982-2000 bull market was the biggest in history, so you’d expect it to take a long time to wash out the excesses… “What we needed to wash out the excesses was a nice juicy credit crunch,” he said, “precisely like the one we are having right now.” However, IMHO, this is not a “nice juicy credit crunch.” It’s a systemic crack-up. Front line foot soldiers such as Countrywide and Washington Mutual face going belly-up, and the Street’s muscle is facing cutting to the quick, now. The economy is coming down hard because it couldn’t withstand the excessive and obscene drain of its resources by risk-packagers on Wall Street. The money came from savers, commuters, truckers, homeowners, wage earners, retirees and small businessmen, all targeted to keep the DOW up and the financial profiteers filthy rich. When the little dominoes fall, the big financials may have no place to move their white-shoe operations, either offshore or to foreign countries. When you ride roughshod and get into trouble, your “friends” are delighted to walk away. Frankly, it looks to me as if the economy never really took off on its “bubble recovery,” and that those just now heeding recession are Johnnies-come-lately. A “Streetwise” chart titled “What Bull Market?” from Morningstar says “Despite doubling in the five years ended 2007, equities have been outperformed by bonds and roughly matched by cash so far this decade.” According to the chart: “Annualized Total Returns from 12/31/99-12/31/07 for the following Asset Class are: 30-year Treasurys (8.77%); 10-year Treasurys (6.45); Dow Jones Industrials (3.95); Cash (3.24); S&P 500 Index (1.66); Nasdaq (-4.70).”
The $800 per family stimulus plan is another ruse. If implemented most of the funds will just be used to forestall defaults or foreclosures on wounded debtors, or be spent in retail to reduce the stockpiled inventories. I doubt it will lead to any ramp up in manufacturing or production. It is just distributing lifevests now that the ship’s complement realize there are just not enough life rafts. The psychological damage has been done, no matter how much credit or free money is distributed, Americans are much less likely to spend. Then this modest retrenchment will steeply slow the ability to service the debt, defaults will ensue. Defaults will lead to steeper pull back, etc. Unease, worry, fear, desperation, panic. Hello Death Spiral.
I have heard of the city of IREM reputed to be somewhere near Oman on the Arabian Peninsula. Rumored to be the city of gold by T.E. Lawrence and 1001 Arabian nights. Immensely rich and prosperous city. Greatest wealth was water in its desert. They drained and drained the underground aquifers until the honeycombed caverns collapsed by the weight of the city and it vanished under the desert sands. Often spoken of in the Koran. See any parallels?
THAT NEON GLOW… Wall Street’s blinking BUY BUY BUY marquee never missed a neon blink during this month’s costume switch from bull to – well, not bear — but bargain tipster! In spite of the Street’s shattered optimism, Andrew Bary in “Barron’s” cover story this week managed to find a silver lining amidst the darkening clouds. Says Bary regarding 2008, “The upbeat assessment was apparent in ‘Barron’s’ December survey of Wall Street strategists, which found all 12 bullish on stocks for 2008. The good news is that barring a deep recession or financial catastrophe, stocks could be approaching a huge buying opportunity.” Well, yes they could, barring “deep recession or financial catastrophe.” The S&P 500 is now down 15 percent from its October high. And to Bary’s credit, he does point out, from Citigroup strategist Tobias Levkovich, that the average peak-to-trough move in recession-related slides since 1950 has been 25.6 percent.
@LB et al. I’ve heard several opinions here and elsewhere about how much of the responsibility for the current situation rests with the Fed, but I’m still unconvinced. Of course one cannot reach any conclusion on this subject unless there is agreement on what the role of the Fed is. So, for the sake of argument, let’s say that we all agree with Mishkin on this, i.e., that the over-riding long term role of the Fed is price stability (ideally as a govt mandated numerical inflation goal, which unfortunately is not the case). In the short term this goal can be relaxed to sustain output growth, but without letting price stability out of sight (when price stability slips the seeds of a financial crisis are planted, and the worst contractions in history have been associated with financial instabilities). Now my questions are: 1) Is price stability, intended as keeping in check the (IMHO severely flawed) classic inflation measures, sufficient (and not just necessary) to prevent financial instabilities? 2) Isn’t monetary policy too blunt an instrument, as it does not allow a sectorial control of lending (e.g., at one point it might be desirable to make mortgage lending tighter without affecting corporate lending), and has often very limited effect on long rates? 3) As the Fed is supposed to be the lender of last resort, shouldn’t it be granted more extensive overview power over banks to keep the moral hazard in check?
The markets are due for a nice run up! Especially since many shares now, primarily financials, are trading well beneath book value. Wonder what will spark some buying?
“Guest “Wonder what will spark some buying?“ Maybe Andrew turning bearish.
Leo70; In 1994, a Democratic Congress passed the Homeowners Equity Protection Act, giving the Federal Reserve the power to regulate all home mortgage loans. Alan Greenspan, a staunch advocate of deregulation and then Chairman of the Federal Reserve, flatly refused to use any of that authority. In fact, he kept rates at 1% too long and advised people to take out ARM’s on national television. Yeah, I’d say the FED bears some responsibility for this problem. BTW, price stability includes housing price stability.
I think equities are poised for a nice run up! Equities are cheap. When does the foolish masses realise this? What’s the deal? Purchase equities people!!
@ Anonymous… “See any parallels?” The fall and self-destruction of a people or empire is an old story, perhaps ready to be replayed again, if Americans do not regain the spirit of Ralph Waldo Emerson and stand up to Wall Street and Washington. Wrote Emerson in “The Conservative” in 1841: “I laid my bones to, and drudged for the good I possess; it was not got by fraud, nor by luck, but by work, and you must show me a warrant like these stubborn facts in your own fidelity and labor before I suffer you, on the faith of a few fine words, to ride into my estate, and claim to scatter it as your own” Your story of the downfall of IREM brought to mind the fallen statue of Percy Bysshe Shelley’s King “Ozymandius”, lying lifeless and broken in the vast empty silence of desert sands: I met a traveler from an antique land, Who said–”Two vast and trunkless legs of stone Stand in the desert . . . . Near them, on the sand, Half sunk a shattered visage lies, whose frown, And wrinkled lip, and sneer of cold command, Tell that its sculptor well those passions read Which yet survive, stamped on these lifeless things, The hand that mocked them, the heart that fed; And on the pedestal, these words appear: My name is Ozymandius, King of Kings, Look on my Works, ye Mighty, and despair! Nothing beside remains. Round the decay Of that colossal Wreck, boundless and bare The lone and level sands stretch far away.”
“Do good for good is good to do, spurn bribe of heaven and threat of hell.” The Kasidah
Do good, for Good is good to do: Spurn bribe of Heaven and threatof Hell. And hold Humanity one man, Whose universal agony Still strains and strives to gain the goal, Where agonies shall cease to be.
When you come to a fork in the road, take it. Yogi Berra
Investors are very far from having reached the “puke” point with stocks: http://biz.yahoo.com/ap/080120/wall_street_week_ahead.html … We’ve baked in a lot of bad news. But we don’t know the magnitude of the bad news yet. We don’t know if we’ve overdone it,” said Arthur Hogan, chief market analyst at Jefferies & Co. “I don’t think there’s any combination of things next week that will necessarily turn things around.” … We’ve baked in a lot of bad news. But we don’t know the magnitude of the bad news yet. We don’t know if we’ve overdone it,” said Arthur Hogan, chief market analyst at Jefferies & Co. “I don’t think there’s any combination of things next week that will necessarily turn things around.” … With market pessimism at heights not seen in years, it is certainly possible the market is near its bottom. But there are few investors eager to bet on when stocks will resume their climb, and how long it will be before new records are reached again. ”Maybe by the end of the first quarter, things will line up for the market to find to some stability,” said Steven Goldman, chief market strategist at Weeden & Co.
… Until then, the market will keep falling.
The Coming Bankruptcy of America ——————————————————————————– http://www.newstarget.com/z019659.html The coming financial collapse of the U.S. government: Fed papers reveal what’s in store for Americans by Mike Adams The bankruptcy of the United States government has been talked about for years by independent observers. If you’ve read the book, “Empire of Debt,” then you know where the U.S. is headed financially. But most people have no idea about the ultimate financial consequences of decades of borrowing and spending by Washington, and they remain irrationally convinced that the status quo will remain intact for eternity. No one in any position of authority, you see, has yet admitted that the U.S. government is indeed going bankrupt. Until now, that is. In a remarkable paper posted by the Federal Reserve of St. Louis, and authored by a Boston University teacher named Prof Kotlikoff, it is revealed in blunt, powerful language that the era of borrowing and spending without consequence may soon come to a close. The paper, entitled, Is the United States Bankrupt?, may not remain posted for very long once the public gets word of what it actually says. And what, exactly, does it say? For starters, Kotlikoff explains, “Unless the United States moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion.” The country is bankrupt He goes on to explain, “[that] the United States is going broke, [and] …that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.” Failure to engage in these massive reforms will inevitably result in the financial demise of the United States, Kotlikoff says: “[W]e have a country at the end of its resources. It’s exhausted, stripped bear, destitute, bereft, wanting in property, and wrecked (at least in terms of its consumption and borrowing capacity) in consequence of failure to pay its creditors. In short, the country is bankrupt and is forced to reorganize its operations by paying its creditors (the oldsters) less than they were promised.” We might possibly be saved, he explains, if the nation engages in massive, radical reform in three areas: 1) Eliminating the current income tax system and moving to a national retail sales tax of 33 percent. 2) Privatizing social security so that workers own their savings accounts and the federal government can no longer swipe funds from Social Security. 3) Launching a national health insurance program that covers everyone and relies on a system of government-issued vouchers that citizens can spend with health insurance companies. These radical reforms are necessary because the future gap between what the government owes and what it stands to receive in revenues is already monstrously large, and it’s growing by the minute. This gap, called the Gokhale and Smetters measure, currently stands at an astonishing $65.9 trillion. (Yes, with a “T”.) As Kotlikoff explains, “This figure is more than five times U.S. GDP and almost twice the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent.” If you read that last paragraph with any presence of mind, you now begin to understand the magnitude of the fiscal problem facing the United States. It could be solved, as explained above, by doubling all personal and corporate income taxes. But then what’s the point in working? It could also be solved by slashing promised benefits in Social Security and Medicare. But what about the inevitable street riots? None of these solutions are likely to occur. And that leaves the Ace up the sleeve. It’s the Ace that all government eventually play on their way to bankruptcy and collapse, and it’s the Ace that the United States will ultimately be forced to play, too: hyperinflation. The U.S. will have to print more money to escape the financial consequences of its unbridled spending. Hyperinflation is inevitable As Kotlikoff explains: ”Given the reluctance of our politicians to raise taxes, cut benefits, or even limit the growth in benefits, the most likely scenario is that the government will start printing money to pay its bills. This could arise in the context of the Federal Reserve “being forced” to buy Treasury bills and bonds to reduce interest rates. Specifically, once the financial markets begin to understand the depth and extent of the country’s financial insolvency, they will start worrying about inflation and about being paid back in watered-down dollars. This concern will lead them to start dumping their holdings of U.S. Treasuries. In so doing, they’ll drive up interest rates, which will lead the Fed to print money to buy up those bonds. The consequence will be more money creation—exactly what the bond traders will have come to fear. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation.” It’s not like it hasn’t happened before. Hyperinflation is actually the norm, not the exception, and it’s the escape route taken by virtually every country suffering under the burden of payment promises is cannot possibly keep. Whether we’re talking about Germany after World War I, or the United States over the next few years, hyperinflation is the only option remaining for politicians who refuse to practice fiscal sanity. No politician ever got elected by promising voters their entitlements would be halted, did they? Political popularity is derived from promising voters precisely what the nation cannot afford: Endless entitlements and runaway spending without apparent consequence. The China factor The only thing keeping the U.S. afloat right now is the temporary willingness of Asian countries to keep buying U.S. debt, thereby pumping up the U.S. economy with dollars earned on the backs of Chinese laborers. But even the Chinese — known for their tolerance of hard times and manual labor — may eventually tire of lending money to a posh, arrogant Western nation that has all but abandoned the concept of saving money. Says Kotlikoff, “China is saving so much that it’s running a current account surplus. Not only is China supplying capital to the rest of the world, it’s increasingly doing so via direct investment. The question for the United States is whether China will tire of investing only indirectly in our country and begin to sell its dollar-denominated reserves. Doing so could have spectacularly bad implications for the value of the dollar and the level of U.S. interest rates.” By “spectacularly bad implications,” Kotlikoff means the value of the U.S. dollar would plummet, the level of U.S. interest rates would skyrocket, and hyperinflation would be well underway. U.S. citizens would find not only their dollars to be near-worthless on the global market, but their savings to be all but wiped out as well. Sure, you’ll still have the same number of dollars in your bank account, but they won’t be worth anything. This is what eventually happens, by the way, when a government eliminates the gold standard and separates its currency from prec
ious metals. The U.S. dollar, a green piece of paper, technically stands for nothing other than the U.S. government’s promise to pay. But when push comes to shove, the government will have no choice but to hyperinflate its way out of financial obligations, thereby rendering all currently-held U.S. dollars to be virtually worthless. Those investors or citizens who hold savings in U.S. dollars will be wiped out by a government that will essentially steal their wealth without having to snatch a single physical dollar from their hands. Future obligations cannot be met And yet, despite the seriousness of the U.S. fiscal situation, Americans and their elected representative live their merry lives oblivious to financial reality. National newspaper headlines even add to the denial, running headlines that claim the nation’s economy is strong because the 2006 budget deficit will be “only” $296 billion. That this is considered a success by the Bush Administration is testament to the psychotic fiscal self-deception that now serves as the norm in the United States. It’s like a family that owes $1 million on a $200,000 home announcing “success” because it has just reduced its monthly credit card borrowing from $15,000 to $12,000. And that’s if you actually believe the numbers, because if there’s one area where Washington has proven its skill, it’s the expert deployment of smoke and mirrors on all things involving numbers. Cutting the annual budget deficit won’t save us anyway. It only means that we’re barreling head-first into a brick wall at a slightly slower pace than before. The entitlements will still come due: ”There are 77 million baby boomers now ranging from age 41 to age 59. All are hoping to collect tens of thousands of dollars in pension and healthcare benefits from the next generation. These claimants aren’t going away. In three years, the oldest boomers will be eligible for early Social Security benefits. In six years, the boomer vanguard will start collecting Medicare. Our nation has done nothing to prepare for this onslaught of obligation. Instead, it has continued to focus on a completely meaningless fiscal metric—“the” federal deficit—censored and studiously ignored long-term fiscal analyses that are scientifically coherent, and dramatically expanded the benefit levels being explicitly or implicitly promised to the baby boomers.” The result of this is not in question: The United States government is already running on fumes, and in a few more years, it will suffer financial collapse. ”Countries can and do go bankrupt,” says Kotlikoff, and the U.S. is no exception to the laws of economic reality. Oblivious to what’s coming The American people, as usual, remain oblivious to the financial future that awaits them. Even as the housing bubble is now beginning to burst in the nation’s most overpriced real estate markets, most people don’t have a clue what “hard times” really means. To today’s debt-ridden yuppie spenders, “hard times” means shuffling six different credit card accounts to cover the payments on an overpriced house, two new SUVs in the driveway and a vacation to Paris, none of which the yuppie couple can afford. The idea of ever having to pay back their debt and live within their means is as foreign to most Americans as it is their own government. Financial consequences have been put off so habitually, for so long, that people forget they even exist. And thus the reality awakening becomes ever more rude when it finally appears. To say that most Americans will be in a state of shock when their life savings are suddenly wiped out is an understatement: These people will have never even imagined such an event is possible, much less contemplated how it might affect them. Rome is burning It’s too late to save the United States from its financial meltdown, I believe. For starters, there is a complete lack of willingness to make tough financial decisions and begin paying off the national debt. Such an idea is so foreign to the U.S. that no presidential candidate in the last two decades has even seriously proposed such a plan, save perhaps Ross Perot, a man with such well-grounded ideas of cutting government spending that he was immediately branded a crackpot by the status quo. Even worse, there’s not even recognition among the masses that a financial problem exists. As long as the President continues to proclaim the economy is in good shape, and the press remains complicit with its printing of economic half-truths, few will recognize any problem at all. Besides, any such recognition of the financial problems now facing this nation requires the observers to actually be able to do basic math. Our public education system, which is now largely considered institutionalized day care for nutritionally-deficient children, has seen to it that mathematics instruction never gets in the way of diagnosing children with Attention Deficit Hyperactivity Disorder and drugging them up on amphetamines so powerful that they actually have a street value as recreational drugs. Thus, few young Americans can even do math. And none of them lived through the Great Depression, nor did they understand the study of it in school, meaning they are precisely the kind of naive, overconfident yuppie spenders who are ripe for being financially obliterated by an economic meltdown. When their ignorance turns to fear, the ever-widening spiral of financial panic becomes unstoppable until the whole system hits rock bottom. And “rock bottom” is far, far below the relatively luxurious lifestyle to which American consumers have become so smugly accustomed. Protecting yourself from the inevitable The timetable for this economic collapse is unknown, but it’s very unlikely to happen in the next year or two. A collapse by 2012 is certainly possible, and seeing it by 2020 is almost certain. That leaves the more intelligent among us plenty of time to prepare. But the usual preparatory actions by Americans won’t suffice in such a large-scale collapse. FDIC-insured banks, for example, will almost certainly collapse and take the DFIC down with them. Even if you are repaid by the FDIC, you’ll only be paid in worthless U.S. dollars anyway. Beating the odds on this financial hurricane requires exceptional planning and preparedness. I’ll publish practical solutions and strategies on this website in the months and years ahead. If you’d like to stay informed, subscribe to the free NewsTarget email newsletter (see below) and make sure you select either “All topics” or the “CounterThink” topic. As a subscriber, you’ll receive an email alert when I publish new solutions to the coming financial crisis that, according to many observers, now seems a foregone conclusion. Americans, it seems, are in for a rude awakening in the near future. __________________
Here is a more realistic piece: Coming Week: Upside Down By Nat Worden The Street is grim, as bond insurers teeter on catastrophe and battered banks get set to report earnings. http://www.thestreet.com/s/coming-week-upside-down/markets/marketfeatures/10399592.html … If the bond insurers fail, that raises the specter of a massive wave of wealth destruction in a global financial system that is flooded with illiquid and opaque derivative securities of which there is little understanding, except that their value is connected to credit ratings on structured finance securities. ”This is going to be worse than anybody thinks,” says Marta. “What I heard from Ambac [on Friday] is that they’re throwing back the lifeline and saying, ‘We’re not going to make it.’ On a fixed income trading floor, that means the world truly is upside down.”
@Jason B on 2008-01-20 15:16:43 Sorry, but I do not buy your argument. As far as I know, for most central banks the price stability goal is explicitly spelled-out as maintaining the CPI within a certain band; there is nothing explicit about house prices (i.e., only implicitly as they figure in the CPI). As the Fed does not have a clear mandate, they could hardly be blamed for being held to the same standard that other central banks are kept to. Re: ARMs. I don’t see what is wrong with that. In many countries there is no such thing as a fixed rate mortgage. Virtually all mortgages are adjustable rate. It is the type of ARMs created here that are the real problem. But again, does the Fed have the authority to determine which mortgages are sound? This lack of a clear mandate, and IMO unrealistic expectations of what the Fed can achieve with the tools at its disposal, make it easy for conspiration theorists to assign all blame to them, and difficult for someone serious in evaluating their performance to hold them accountable.
I must say the NYTImes is making a value judgement about who “needs” it. Maybe the poor would be more likely to spend it but that doesn’t mean they “need” it more. And moreover, you can be poor with few expenses or middle class with a hell of alot of expenses. My grandmother is “poor” in terms of not being a taxpayer but she is rich in terms of she’s in assisted living and has very few expenses. In contrast my physician brother in law with 3 kids, a mortgage and a wife who stays at home probably won’t qualify for this rebate but he could very much use it if he hopes to send them to college and retire. I know gobs of people making $120,000 a year or more who are living paycheck to paycheck. Additionally, are the people who make so little money that they aren’t taxed the same people in defaulting mortgages? From what I see lots of above middle class people are defaulting. Regardless, if you give back to non-tax payers aren’t you pulling a Robin Hood (eg rob from the rich give to the poor). Don’t people who pay taxes pay on the faith that they’re being taxed at a certain known and presumably agreed to be fair rate that won’t come back and turn into something else higher retroactively? If you take $ from the coffers which presumably came from prior taxes and then give back to people who never paid in aren’t you effectively changing the rate people paid to a higher rate ? I’m sorry but that seems a bit like socialism to me. And not socialism that we’ve all agreed to up front for the good of everyone in some nice little hippy Waldon II scenario but socialism thats being imposed after the fact. I know this isn’t moral hazard but it seems extremely hazardous and anti-american to throw welfare at the non-producers during times of trouble. If the concern is getting people to spend the $ why can’t it expire within 2 months and only be good for use on consumer goods made in the USA???? I know gift cards often don’t get spent but a visa card with a $1600 balance good on any products made in the USA would probably get used by even King George W himself. He’d buy a treadmill for when he leaves office.
PIMCO slowly shifting from gloal soft landing to hard landing: Market Outlook First Quarter 2008 Heightened Recession Risk Threatens Global Soft Landing http://www.pimco.com/LeftNav/Viewpoints/2007/Market+Outlook+Q1+2008.htm
Lots of “actionable” views in this one. IMO, their view on housing and mortgage securities is a bit too rosy. William C. Powers Discusses PIMCO’s Cyclical Outlook and Global Strategy http://www.pimco.com/LeftNav/PIMCO+Spotlight/2008/Powers+QA+01-2008.htm
@Jason B on 2008-01-20 15:16:43 Also, HOEPA only applies to closed-end home equity loans bearing rates and fees above certain levels, but it does not apply to home-purchase loans. These rates and fees had been set very high by Congress, and were lowered by the Fed board when it amended Regulation Z in 2001, to encompass more mortgages. However, I doubt that they could have extended the rules to the explicitly excluded home-purchase loans.
@ Leo70 on 2008-01-18 17:14:36 ”I seem to recall that Bagehot was pointing out that in his time all banks had little or no reserves, and the only bank keeping any reserve was the BOE (even though in principle it was just like any other bank, and did not have any explicit mandate to do so). It was thus a de-facto lender of last resort.” You are 100% correct. But you need to remember that the reserves Bagehot was talking about were gold coins and bullion. The BoE was pretty much the only bank in England that actually stored large quantities of the stuff. Bagehot did not consider any paper asset to be “reserves”. Most banks had balance sheets full of assets that were discountable at the BoE: i.e. the equivalent of Treasury Bills and commercial bills of exchange. A three-year loan counted as long term, high risk lending for a bank in the nineteenth c. So I guess if we are to compare the situation to current FDIC insured banks, the way to think about it is that modern banks have primary reserves of 10% of their balance sheets and secondary reserves (Tbills and other highly liquid assets) of (I’m guessing here) another 10%. Whereas 19th c. British banks had primary reserves of about 0% and secondary reserves of over 50%. Overall I think that 19th c. banks took fewer risks with their solvency.
@Leo70 on 2008-01-20 14:38:43 ”1) Is price stability sufficient to prevent financial instabilities?” No. Liquidity crises happen. ”2) Isn’t monetary policy too blunt an instrument, as it does not allow a sectorial control of lending (e.g., at one point it might be desirable to make mortgage lending tighter without affecting corporate lending), and has often very limited effect on long rates?” The traditional view is that open market operations are an excellent tool precisely because they do not discriminate between sectors. The genius of the market is allowed to work. The only alternative I know of is direct lending to banks through auctions or a central bank window. While specific sectors can be supported through a credit crunch by central bank lending against loans made to those sectors, you seem to be talking about industrial policy which is definitely not the purview of a central bank. Also, how do you propose attempting to control long term interest rates — aren’t they mostly demand and supply driven? ”3) As the Fed is supposed to be the lender of last resort, shouldn’t it be granted more extensive overview power over banks to keep the moral hazard in check?” To be honest I’m not sure the Fed is the lender of last resort any more. In 1989 Congress made the Federal Home Loan Bank system a lender of last resort to the banking system (or at least to all banks with a significant proportion of mortgages on the balance sheet). While the FHLBs only accept mortgage related collateral, that doesn’t seem to be much of a constraint on borrowing. We have a government subsidized (FDIC, not to mention the GSEs), highly regulated banking system, where the regulatory structure is extremely fragmented. It’s not clear that the regulators know how to allow insolvent banks to fail (I’d be very pleased to learn that I’m wrong about this). I am confident of only one thing: the current crisis will contain a lot of lessons for how to improve the regulatory structure.
@Leo70 Went back and reread your 14:38:43 post. The tenor of my previous post was off. Sorry about that. I think we agree with each other: The Fed’s powers are limited. The Fed actually has legal authority to give banks money against anything it cares to call collateral and in this sense has the ability to keep insolvent banks alive. I haven’t seen any evidence that this is actually going on and expect that the people most horrified at the idea of doing something like this would be the heads of the Federal Reserve Banks themselves. I’m a little less confident that the Federal Home Loan Banks have been checking out the quality of balance sheets before giving out loans and think that this is where systemic danger may come in.
Stand back and look at the big picture. The US system is basically bankrupt. So where will the money come from? It can only come from two sources: 1) Money accumulated in pension hedge funds, pension plans, 401K’s and 403b’s. In other words, as equities and bonds take a bath, money is recovered from these sources. The losses may be quick, or they may be over a prolonged period of time (in which case high inflation rates also cause major damage to accumulated funds). 2) Future earnings of US taxpayers. The forward obligation of the US Gov’t is basically a lien against future taxes from the US public. In my mind it doesn’t add up – a lot that has been promised can’t be delivered. But the idea of tax cuts is fraudulent – how could this possibly work for a shrinking base of taxpayers? PeteCA
@ST on 2008-01-20 18:06:43 I agree. I also don’t see how the Fed could have done much if the FHFB did not do his job. Again, in view of all the people dumping on the Fed, I’m interested in understanding what they could or should have done to prevent this, but the more I inform myself, and more it seems to me that people is barking at the wrong tree. I hope that this crisis will lead to a more explicit declaration of what the mandate of the Fed is. It always struck me as absurd that the role of the central bank is so often loosely defined, or not defined at all. It seems that the ECB is one of the few exceptions.
@Leo70 Frankly, Leo70, the Fed way, IMO, leads down “The Road to Serfdom,” that dead end of lost freedoms inherent in all centrally planned economies. As Thomas Jefferson put it: “The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. “If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered”. Or, as Bill Fleckenstein said this week: “Central bankers like Greenspan aren’t bankers at all. Anyone who thinks a central bank such as the Federal Reserve performs any function remotely similar to those they’ve experienced in their local branch banks would be wrong. Central bankers are actually like the bureaucratic leaders of centrally planned, or command, economies. They pick an interest rate to within two decimal places that they guess will be the correct one, and then they proceed to cram it down the throat of the banking system. “It is oddly ironic that a small group like the Federal Open Market Committee, similar to those found at all levels of any former communist regime, would be in charge of the world’s largest and most successful capitalist country — that is, the United States of America and its $13 trillion economy.” Unfortunately, America’s free republic is morphing into a planned economy that has not yet collapsed – after years of manipulation and ownership transfer by the Fed and Washington’s new deals. Hopefully, its old roots aren’t yet dead. To quote Yogi Berra again, “You’ve got to be careful if you don’t know where you’re going because you might not get there.”
@Concerned-Citizen Your posts look like advertisements to me. Quite inappropriate.
does anyone knwo the details on how china effectively controls its currency?… often explained as “china prints more yuan to buy usd”… is it as simple as it sounds? i would imagine there are more to it? the reason i am asking is, wouldnt china be in a really risky position when they are holding so much forex reserves and the us recession is likely to be rather severe? mrskeptical
http://biz.yahoo.com/ap/080120/china_property_pullback.html http://www.guardian.co.uk/money/2008/jan/18/property.moneyinvestments more signs of the global property bubble cracking at the seams… does anyone have news regarding the corp bonds? this segment can severely damage the CDS!… cant “bear” to watch anymore.. mrskeptical
@hazleton Not advertisements, as it was not my intent, just a few articles or bytes I thought relevant here in light of some recent discussions regarding the Fed and Bernanke’s recent testimony. Bush 150 Billion package, etc.. I’ll try and keep these shorter in the future. I do very much value this forum and the Professors commentary as well as the comments from several others here, in attempts to gain a better understanding of what is occurring in these interesting financial times. CC
@Peter CA We are already seeing a turnaround in the US current account as imports predictably decline. But, I think “competitiveness” is a vastly different and more difficult ballgame these days for the US. Since the early 90’s masses of US production and manufacturing has been relinquished to offshore locations and it continues. My guess is that the US will find it exceedingly hard to see benefits of a cheaper dollar in its own competitiveness, Here is why. The US economy has migrated in a significant way towards the service industries. So the question then becomes; be competitive at what? Arms manufacturing? Yes. Auto manufacturing, white goods manufacturing, electronics manufacturing, steel and metals manufacturing, widgets – NO. The US economy has fundamentally restructured in the last nearly 2 decades in a dramatic way. (More alchemy from TPTB). Looking ahead, the beneficiaries of any turnaround in US demand (whenever that may come) will increasingly be offshore rather than at home. That is clearly not good for the (then) unemployed of the US. Should these circumstances become chronic enough, the response then from policy makers will increasingly turn towards protectionism and bringing manufacturing back Onshore US as a remedy. I think LB has raised a good point in that the US Finance (service) industry may well dramatically shrink if only to survive. Should this happen, obviously credit/lending will dramatically shrink as well bringing with it the brakes to future US rates of economic growth. Timing is everything so they say. Which is why the other 2 BIG issues headed the US’s way are so particularly crucial- at this point in time. I am referring to Boomer retirements and the effects of Peak Oil. Taken in their entirety – Rising unemployment, a hollowed out economy, systemic banking crisis, astronomical levels of debt, rising boomers claims, the steady disappearance of cheap energy, rising inflation from a debasing currency- this is a witches brew that speaks to me of a nation headed for dire trouble. Considering the enormous structural nature of these various predicaments , it would appear that time is fast running out when any meaningful medicine ( which would be enormously painful for the US to administer to itself ) could stave off a messy collapse of the US economy.
Nikkei almost shed 4%, OZ S&P 3% hmmm traders EU gotta wake up early today
@ Guest on 2008-01-21 00:45:59 I’m awake and I’m watching the lines trail down my screen in every market that’s open. I set a target yesterday of X on my shorts this week with the bonus being a new laptop with integrated mobile broadband. I’ll be ordering it this morning as I hit X at 06:47 GMT. It’s going to be an ugly week for those watching their savings wiped out across Asia.
@London Banker You predicted this on Friday. Good call !
London Banker, good call!.. but somehow the support level is still holding!!… you know wat they say abt the cracking dam dont you?.. btw, do you know how china effectively controls their currency?.. often explained as “china prints more yuan to buy usd”… is it as simple as it sounds? i would imagine there is much more to it? the reason i am asking is, wouldnt china be in a really risky position when they are holding so much forex reserves and the us recession is likely to be rather severe? mrskeptical
It has started. Just look at the DJIA Futures: http://www.bloomberg.com/markets/stocks/futures.html Dax has lost 2.15% within the first 15 minutes of trading. FTSE 100 Index has lost 2.50%. Houston we have a problem.
Bernanke has lost control (which implicitly asserts that he ever had it). Q: does he capitulate, and let things wash out (DJIA 9800 aint outta the question, and for that matter, neither is 8100)? Or does he battle for public perception and–what he believes would accrue to him as a market savior–a place in history, and drop a super-size rate cut on Tuesday AM (we’re taking triple figures, here boys: 100 Basis Points, just to join the game). Gonna be interesting, come Tuesday AM. Futures already off almost 300; if that holds and the market sets up to open below 12k, do we Fed action? And if so, do we see a snap-back? Or have we already seen the setting of the stage for an old-school gangs-of-New york style massacre? Time to strap on the third ‘nad and get back into battle..
I know I should be pleased about making the call, but instead I am sitting here queasy and shaky. There is a world of hurt out there. None of us will get through this without scars, even those who were short, because the impacts are going to be felt in our societies, in our politics and in our relationships with others for years to come. I’m going out to work in the garden until my hands are blistered and my back aches.
The last 18 years in Japan could be endured globally because Japan was effectively delinked. This time, with the USA tanking, the entire globe’s equity markets are harmonically amplifying the downturn. This will not be a slow Japan style deflationary spiral. This is a global downturn that may easily slip into a deep collapse. There is no such thing as decoupling when you talk about the USA. For all the bashers we are still the technological, innovative idea & inventor, financial bulwark, peacemaker of last resort. Remember the greatest majority of shareholders in the global equities are unsophisticated investors trying to gain a little return on their little accumulated excess. They are going to withdraw it now, and when they do–all the sophisticated prognosticators and model makers’s worlds will be smashed.
@DarkSide on 2008-01-21 03:05:30 Do you have a link for the Dow Futures? The U.S> is closed today, isn’t it? Thanks.
@Guest: Make that 468…. http://www.bloomberg.com/markets/stocks/futures.html