Goldilocks and the Three Ugly Bears: A Year Later in Davos
From the WSJ Blog today:
BearBlog: Goldilocks and the Three Ugly Bears
BearBlog takes a look at what Davos attendees say is in store for the global economy — and what they said last year.
Last year, Nouriel Roubini was the lone pessimist on Davos’ five-person opening economics panel. His colleagues predicted the world economy would continue to grow strongly without overheating, a rosy scenario economists dubbed “Goldilocks.” Mr. Roubini, chairman of Roubini Global Economics and a New York University economics professor, demurred. “Goldilocks is threatened by three ugly bears,” he said, predicting a subprime meltdown, an end to cheap credit and rising oil prices would bring U.S. consumer spending to a halt. At the time, Mr. Roubini’s “ugly bears” provoked more laughter than concern. But Goldilocks has already met two of those bears and signs are mounting that the third — in the form of a sharp falloff in U.S. consumer spending — could show up soon. “Sometimes people say about me that even a broken clock can be right twice a day,” says Mr. Roubini, who contends his habitually gloomy outlook has been, over the years, more nuanced than he’s given credit for.
Now, though, he’s unabashedly glum. “2008 will be an ugly year,” he says. The question of whether the U.S. will fall into recession is stale: “Now the debate is, how bad will it be? I think it will be extremely severe.” Financial-market conditions will get much worse: “When you add all the losses, not just subprime but also soon enough on auto loans, credit cards, student loans, leveraged loans and corporate bonds, we’re looking at $1 trillion of losses in the financial system.” These massive losses, he contends, mean “there’s a serious risk of a systemic financial crisis. Not just in the U.S., but globally.”He laments that his colleagues are still getting it wrong. “The consensus is behind the curve” on a host of topics, including the severity of the U.S. recession, the extent to which the rest of the world can continue growing as the U.S. slows, and the depth of the problems in the financial system. Global central banks’ massive liquidity injections last year helped grease money-market wheels but can’t tackle “fundamental issues of insolvency and regulation. [These problems are] systemic. They take much more than liquidity to resolve.”Pointing out that he’s been forecasting a global stock-market fall and that global markets slid sharply on fears of a U.S. recession this Monday, he predicts: “This is just the beginning of a serious bearish market in equities. Things will get much worse before they get better. I was right a year ago and I think I’ll be right again.”
— by Joellen Perry
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Indeed, this morning I was again - like last year – a speaker in the main session at the Davos WEF on the global economic outlook. This year – in addition to myself – Steve Roach also presented a very bearish outlook for the US and global economy.
In summary here are the main points I made at this session:
The US has already entered into a recession and this recession will be much uglier than the mild recessions of 1990-91 and 2001 as a shopped out, saving less and debt burdened consumer is on the ropes and faltering.
The world will not decouple from the US hard landing; there will be significant recoupling and a sharp global economic slowdown. When the US sneezes the rest of the world catches the cold; and today the US will not experience just a simple common cold but rather a protracted and severe case of pneumonia; thus, the real and financial contagion to other economies will be severe.
Whatever the Fed does now is too little too late; the Fed had a wrong diagnosis of the economy and was behind the curve for over a year. The Fed claimed that the housing slump would bottom out a year ago; instead we have the worst housing recession in US history still getting much worse now. The Fed claimed that the subprime would be a niche and contained problem; instead we have had massive contagion to the entire financial system as a credit bubble and excessive debt and leverage occurred throughout the economy and the financial system. The Fed claimed that the housing problems would not spread to the rest of the economy; instead we had had real and financial spillovers and now a fall of most components of aggregate demand: housing, capex spending, commerical real estate investment and now, ominously, private consumption that represents 70% of demand.
The US stock market is now entering in a seriously bearish territory and will fall much more sharply throughout the year as earnings sharply drop in the recession; the Bernanke put and the aggressive Fed easing will not rescue the stock market or the financial markets as a severe recession is unavoidable regardless of what the Fed does. Fed easing cannot resolve severe insolvency problems among consumers, mortgage lenders, home builders, highly leveraged financial institutions and, soon, enough among over indebted corporate firms.
Equity markets around the world are now plunging and will plunge much more as investors are realizing that a severe US recession will lead to a sharp global economic slowdown and a significant fall in profits across the world. In an integrated global economy both economic growth rates and markets are highly correlated.
Many risky assets will face downward pressure in 2008, not just US and global equities: junk bond yield spreads will widen as bankruptcies spread; corporations will default in great number; housing bubbles will pop in many countries and lead to falls in home prices; securitized products – in housing, real estate and otherwise, will experience further massive losses.
Losses in the financial system will be greater than $1 trillion; thus there is a serious risk of a systemic banking and financial crisis. The credit crunch will become much more severe as capital of financial institutions is eroded and reintermediation of financial flows into the banking system occurs.
Certainly the audience this morning was much more receptive to my arguments than they were a year ago. And certainly the stock markets reaction to the Fed desperate 75bps easing shows that even investors now realize that the Fed will not be able to rescue the US and the global economy from a severe economic downturn.
And here are from Bloomberg some of the quotes from my panel at Davos presenting also the points made by Steve Roach, Yu Yongding, a leading Chinese economist and the other panelists:
Roach, Roubini Say U.S. Slump Threatens Global Growth
By Simon Kennedy and John Fraher
Jan. 23 (Bloomberg) — Economists Stephen Roach, Nouriel Roubini and Yu Yongding, and Indian Trade Minister Kamal Nath comment on the world economy, odds of U.S. recession and the Federal Reserve’s emergency interest-rate cut. They spoke on a panel at the World Economic Forum in Davos, Switzerland today.
Nouriel Roubini, founder and chairman of Roubini Global Economics LLC:
“The debate is not whether we are going to have a soft or hard landing, but how hard the landing is going to be. We’re going to have a serious recession.
“The global economy was being supported by one e
ngine, but the U.S. consumer is shot out. It’s going to be a serious recession.
“The Fed is going to cut even more aggressively. The Fed got it wrong on the economy. The Fed is going to do too little, too late. The Fed can’t prevent a recession. Monetary policy is not going to make much of a difference.
“The world economy cannot decouple from a U.S. hard landing. We’ve had time when the U.S. was the consumer of first and last resort and Asia was the producer of the first and last resort. Once U.S. demand goes away, there’s not enough demand in Asia to sustain economic growth. I don’t expect a global recession, but a severe global economic slowdown.”
“We’re going to have deflation of housing bubbles” internationally, he said. “A slowdown is also going to occur in emerging markets” as risk aversion builds and commodity prices fall.
“It’s going to be a difficult year for the world economy. There is a risk of outright recession in the U.K., Spain, Portugal and other countries. The ECB is realizing this is happening. Once there is a slowing, inflation is going to be the least of their concerns.
“Given a U.S. slowdown, it’s going to be a rougher time for emerging markets.
Yu Yongding, director of the Chinese Academy of Social Sciences and a former monetary-policy adviser to the central bank.
“The number one priority of the Chinese economy is to fight against inflation so we’re going to use a tight monetary policy. Tight monetary policy will have an impact on China’s economic goals. We must strike a balance between growth and inflation.
“China’s reliance on external demand is tremendous. If there is weakness in the world economy, the impact on the Chinese economy will be very serious so we must do our best to stimulate the domestic market.”
Indian Trade Minister Kamal Nath:
“No economy can completely decouple from the U.S. I don’t see a sustained impact from the slowing United States. For the first time, we’re looking at a recession with two engines of growth: China and India.
“The magnitude of impact is obviously not going to be what it was in the past. There is a great change taking place. A great recession is going to be needed to stop this momentum.”
Morgan Stanley’s Asia Chairman Stephen Roach:
“What worries me is policy makers especially in the U.S. are reaching back into the same playbook that created the mess in the first place. We have a central bank that doesn’t believe it should look at asset prices, only we have to clean up after bubble’s burst.
“That’s a dangerous, reckless and irresponsible way to run the world’s largest economy. By easing aggressively on the basis of no new information, they’re sending a message that they have to protect and defend the markets.
“The Fed has a regularly scheduled meeting next week. What’s the difference in yesterday or next week. The only difference I see is markets were screaming for the Fed to move and the Fed gave what the market wanted. Is that the way to run a central bank?
“When the U.S. consumer is in trouble, this has great consequences for the global economy,” Roach said. India and China are “not at a stage where they’ll fill the void that’s to be left by the American consumer.”
“I’m still a dollar bear, but in the near term the dollar finds a bottom. It’s going to be evident that this decoupling story is a fantasy.
“Europe is not going to get special dispensation from a global slowdown. Europe is not this dynamic, rapidly growing economy.
“We won’t get to 2.5 percent threshold” that signals a global recession “but we’ll get close,” he said. “We’re starting to price for a global recession scare. We have to worry what markets are fearing, not what actually is going to happen. It’s going to be a close call, but we won’t move into global recession.”
104 Responses to “Goldilocks and the Three Ugly Bears: A Year Later in Davos”
Anonymous • January 23rd, 2008 at 10:03 am
http://online.wsj.com/article/SB120108613736709707.html Stocks Suffer Further Declines Wall Street Journal January 23, 2008 10:39 a.m. One day after investors welcomed a surprise rate cut from the Federal Reserve, major indicators opened sharply lower. The central bank’s move seems to have calmed, but not erased, fears of a U.S. recession. On Wednesday morning, the Dow Jones Industrial Average was off 139.41 points, or 1.2%, at 11831.78. The Standard & Poor’s 500 was off 1.3%, or 17.10 points, at 1293.40. The Nasdaq Composite Index was off 1.8%, or 41.89 points, at 2250.38. Intraday Futures and CurrenciesIn Tuesday’s trading, the Dow opened more than 464 points down but finished with a more modest gain, off 128.11 points. Despite the efforts of policy makers to provide quick fiscal and monetary relief investors and analysts are worried that the economy may slam into reverse. A potentially “severe” U.S. recession is on tap, said Nouriel Roubini, chairman of consulting firm Roubini Global Economics, at the Davos Economic Forum. Mr. Roubini was the only member of last year’s World Economic Forum panel to predict a significant U.S. downturn as a result of what he called the “three bears” — a credit crunch, a bursting housing bubble, and soaring energy prices.
Octavio Richetta • January 23rd, 2008 at 10:03 am
U.S. Credit Perspectives Mark Kiesel | January 2008 http://www.pimco.com/LeftNav/Global+Markets/Global+Credit+Perspectives/2007/U.S.+Credit+Perspectives+1-2008.htm An excellent piece by Mark, very much in line with the Professor’s view.
Guest • January 23rd, 2008 at 10:06 am
Just an FYI-my 52 week forward earnings model for the S&P calls for roughly 4% growth in earnings and fair value on that growth puts the S&P at 1130.42-another 12.75% below our current 1295. By the way, the street is still looking for 16% growth. My model runs a .78 correlation out of 1 to actual earnings…who you gonna believe?
Anonymous • January 23rd, 2008 at 10:08 am
http://www.cnbc.com/id/22689191/for/cnbc/ World Economic Forum opens in Davos By MATT MOORE and BRADLEY S. KLAPPER updated 21 minutes ago DAVOS, Switzerland – The outlook for the global economy this year is decidedly dour, but leading economists at the World Economic Forum in Switzerland had mixed views Wednesday about the possibility of a global recession. ”If there is a tremendous slowdown in the U.S. economy, then we must be worried about it,” said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. He said China’s growth could help it weather any slowdown as that nation boosts trade with countries outside the United States. The potential for a global slowdown triggered by a U.S. recession was a top issue among economists from Asia, the United States and government ministers from India and China. Stephen Roach, chairman of investment bank Morgan Stanley in Asia, said there would be global ramifications should the world’s largest economy falter. Asked by a Mexican businessman if his country could sidestep a U.S. recession, Roach was blunt. ”My good friend from Mexico, you’re in trouble,” Roach said. “Mexican exports to the U.S. account for 25 percent of your GDP. Same number for Canada. How can the U.S. go into recession and Mexico be fine?” Nouriel Roubini, chairman of New York-based Roubini Global Economics, cited the maxim that if the U.S. economy sneezes, the rest of the world catches a cold, but said this time the diagnosis for the U.S. was worse. ”In this case the U.S. is going to have a protracted case of pneumonia,” he said. The impact of the sluggish U.S. economy, and what it may portend for other nations, hung over talks even after the U.S. Federal Reserve Bank cut its benchmark refinancing rate to 3.5 percent from 4.25 percent Tuesday to counter a global market slide. ”The United States economy will correct itself,” said David O’Reilly, chairman and CEO of Chevron Corp. “I’m an optimist when it comes to the length of what may be a slowdown or a mild recession. … the outlook is still pretty good.” Economists also split over the role of central banks and whether institutions like the Fed were equipped to steer the global economy out of danger. John Snow, the former U.S. Treasury secretary, said central banks have performed remarkably over the last two decades _ better than any time in history, perhaps _ and continue to make the necessary adjustments. ”The issue of whether central banks are capable of vigorous action, bold action, was answered yesterday,” Snow said, referring to the Fed’s interest rate cuts. “They can’t see the world ahead perfectly, but who can?” Joseph Stiglitz, the 2001 Nobel Prize winner for economics and a critic of free market champions, and billionaire philanthropist George Soros, disagreed. ”What we have now are the foreseeable consequences of bad economic management,” Stiglitz said. Lawrence Summers, former Harvard University president and Treasury secretary under U.S. President Bill Clinton, said central banks have lost their way. ”I think it’s hard to give central banks a very high grade over the last couple of years on recognition of … bubbles and the ability to address them,” he said. “I think it’s hard to give a high grade over the last 6 months when the bubbles have been bursting and (the banks) have been behind the grade.” Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said the Fed must send stronger and clearer messages to financial markets to ward off a steep slowdown. ”Alan Greenspan became famous because nobody could understand a word that he said,” Gurria said. “You can’t run a financial system like that.” Others wondered why the European Central Bank, which has kept its benchmark rate unchanged at 4 percent since last summer, had not acted in accordance with central banks in the U.S. and Britain. ”Europe is not going to get special dispensation from a global economic slowdown,” Roach said. The forum, now in its 38th year, will also touch on the effects of terrorism, a workable peace process in the Middle East and how technology is ushering in a new age of global social networking. U.S. Secretary of State Condoleezza Rice and Afghan President Hamid Karzai were scheduled to address the opening reception later Wednesday. Rice is also expected to meet with Pakistan President Pervez Musharraf and Karzai in closed-door sessions. Her meeting with Musharraf will be the first since the assassination in December of opposition leader Benazir Bhutto, which pushed the nuclear-armed Pakistan into near chaos. In a nod to concern about climate change, Rajendra K. Pachauri, chairman of the U.N.’s Intergovernmental Panel on Climate Change is to speak. Al Gore, who shared the 2007 Nobel Peace Prize with the panel, is also participating in the five-day meeting. A year ago, Davos attendees foresaw a strong economy. The credit crisis brought on by massive exposure to subprime mortgage securities has changed that. ”It’s not about a soft landing or a hard landing,” Roubini said, but “rather how hard a landing it will be.” ”We’re seeing a financial system that is under severe stress,” he said. “The Fed cannot prevent this recession from occurring.” The meeting itself will feature participants from 88 countries, including British Prime Minister Gordon Brown and Microsoft Corp. co-founder and chairman Bill Gates. ___
Guest • January 23rd, 2008 at 10:14 am
http://newsrefinance.net/business/6459/warning-about-us-economic-slump/ Warning about US economic slump The global economy is doing through some unsettled The US economy is set for a long recession, a panel of economists at the World Economic Forum has warned. The US mortgage crisis will spread to consumer and company loans, and push up defaults sharply, warned New York University economist Nouriel Roubini. A year ago, Mr Roubini had been one of the few economists to predict correctly a slump in the US housing market and subsequent crunch in credit markets. China and Europe will be hit, though India less so, the panel forecast. Discussion about global economic turmoil is the hottest topic at this year’s World Economic Forum, and this session was packed, with many participants turned away at the doors of the large conference room. ‘Severe recession’ After five years of strong global economic growth, it was now only a question how hard the landing of the US economy would be, said Mr Roubini, chairman of Roubini Global Economics. He predicted a “severe recession” that could last for a whole 12 months. The US Federal Reserve would probably keep cutting rates, and that in turn might “make the recession a bit more shallow”, but it would not stop the downturn. Mr Roubini was backed up by Stephen Roach, chairman of Morgan Stanley Asia, and a well-known “bear” or economic pessimist. He said both the Federal Reserve and the US government were trying to solve the current crisis by “reaching back into the same playbook that created the mess in the first place”. Instead of tackling asset bubbles like inflated housing and stock markets head-on, they waited until the bubble had burst and then cleaned up afterwards. “That’s a dangerous way of running the economy,” said Mr Roach. The global fallout All panellists agreed that there would be no global recession. But there is an old economic saying: “When the US sneezes, the world catches a cold.,” and the panellists were divided about whether it still holds true. Mr Roubini was the most pessimistic: “This time round the US suffers a protracted pneumonia, and we can only guess what happens in the rest of the world.” He predicted a bursting of housing bubbles in the UK, Ireland, and Spain. In Eastern Europe, meanwhile, many people had taken out mortgages denominated in euros, not their own country’s currency. If those currencies started falling, “many homeowners will go belly-up,” said Mr Roubini. Mr Roach said Europe’s economy was simply not dynamic enough to get “a dispensation from the global economic slowdown”. The region would be “lucky when it gets 2-3% [annual] growth”. Ferenc Gyurcsany, prime minister of Hungary, disagreed. Yes, EU growth rates would be hit, but not by much more than 0.8%.. China and India to the rescue? But what about the emerging giants of the world economy, China and India? A popular topic of debate here at the World Economic Forum is whether the fast-growing Asian economies are now “decoupled” from the US Economy. Not so, argued Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. China’s economy was growing rapidly, he said, but that was because every year it needed to create 24 million jobs just to keep up – and last year it had reached only the 10 million mark. China’s reliance on “external demand is enormous,” he said. India’s commerce minister Kamal Nath was more optimistic. East Asia, he said, was not as dependent on the US economy anymore, not least because South-South trade was soaring. India’s economy itself, he said, was much more driven by domestic demand than foreign investment. Who will buy? Morgan Stanley’s Stephen Roach, however, begged to differ. He was very optimistic about Indian and Chinese consumers, he said, but only in the long-term. US consumers bought goods and services worth $9.5 trillion every year, a demand that was currently running at 5% above historical levels. The Chinese consumer market, in contrast, amounted to just $1 trillion, and India’s to a mere $500bn. That was not large enough to take up the slack left by the US downturn. Africa worries about food And there were worries that Africa would be hit badly by the global economic turmoil. The reforms and better economic governance of the past decade had been rewarded with strong growth during the past few years, said Ngozi Okonjo-Iweala, a managing director of the World Bank. But she said there was uncertainty whether Africa’s economies were robust enough to cope with a sharp downturn, especially if it resulted in China cutting back on importing raw materials. Her biggest worry, though, was the recent rise in food prices. Yes, it would help farmers in Africa and other developing nations. But there were even more people in urban areas who would find it difficult to cope. Mr Nath added that there were 25 million people in India who for the first time were able to afford not one but two meals a day. How would they be affected by a doubling of the price of wheat and other commodities? With the trend for biofuels driving up demand, the panellists wondered whether the market could provide an answer. Since the “green revolution” of the 1970s, agricultural productivity has been at a standstill in recent years, and as Stephen Roach pointed out, demand for food was “not optional”. Next year, predicted Ms Okonjo-Iweala, the Davos participants would hear much more about the devastating impact of the rising cost of food.
JMa • January 23rd, 2008 at 10:30 am
Ladies and Gentlemen, please be careful and remember always… This too shall pass…
Charles N. Steele • January 23rd, 2008 at 10:35 am
Americans can survive a bad, prolonged recession. But I’m less sure China can. Even with economic growth, China has had increasing popular dissatisfaction. When their #1 export market goes down the drain, things will be much, much worse there. The threat in China isn’t economic downturn, it’s political chaos. But frankly, blaming this all on the free market is a mistake. Federal fiscal irresponsibilty, Fed enabling with easy credit, and financial regulation designed for the benefit of big financial players doesn’t constitute the free market, but a rigged one, rife with moral hazard and likely more than a little corruption. Ugly situation, albeit exciting to watch it unravel.
Guest • January 23rd, 2008 at 10:38 am
this is insane… i wonder how are longterm investors, retirees, stomaching the roller coaster ride?? .. mrskeptical Written by Guest on 2008-01-23 09:36:58 Well, you don’t get much more MSM than The Today Show. Their advice re: the financial turbulence this morning? If you plan to use your money in the near term GET OUT of the market…examples were kid going to college soon, buying a house (mphf), retiring. Said go to 60/40 cash/bonds. Written by K in TX on 2008-01-23 10:20:36
Ken Tobin • January 23rd, 2008 at 11:11 am
History tells us, “the Fed calms stormy markets” ”The analysts found that from 1973 through 2005, a broad index of nearly 1,000 stocks returned an average of 12 percent a year. But in periods after the Fed began lowering the discount rate (charged for direct Fed loans to banks), those returns soared to 17.4 percent. They fell to a meager 5.3 percent during times when the Fed was raising rates.” By Michael Sivy, Money Magazine editor at large January 23 2008: 10:28 AM EST http://money.cnn.com/2008/01/16/pf/sivy_feb.moneymag/index.htm?postversion=2008012310 Why are recent market events of today any different? If Sivy is correct, then by Nov 2008, Dow should easily rebound to the upside (considerabley, probably with double diget gaians) over the next 12 months — and bubble in real estate continues on. All comments appreciated… Professor Roubini, London Banker, Octavio Richetta, PeteCA, or anyone…
AC • January 23rd, 2008 at 11:18 am
Even with economic growth, China has had increasing popular dissatisfaction. When their #1 export market goes down the drain, things will be much, much worse there. The threat in China isn’t economic downturn, it’s political chaos.
RedCreek • January 23rd, 2008 at 11:20 am
@ Charles N. Steele on 2008-01-23 10:35:22 China’s #1 export market is Europe, not the US.
HANG SENG TRADER • January 23rd, 2008 at 11:22 am
In the middle of the night, I am getting text messages on my cell phone that AMBAC and CITI are preparing & filing bankruptcy ? Can someone pls confirm / deny this news ?
AC • January 23rd, 2008 at 11:28 am
Sorry, it did not go thru the first time. @Charles N. Steele on 2008-01-23 10:35:22 ”Even with economic growth, China has had increasing popular dissatisfaction. When their #1 export market goes down the drain, things will be much, much worse there. The threat in China isn’t economic downturn, it’s political chaos.” Where did you get this information? The truth is, as a Chinese fellow wrote on Brad Setser’s blog, that there have been huge increases in real incomes in each of the past five years. Chinese people are much better off today than any time before. 8.8 million new cars were sold last year, and 10 million will be sold this year. The number of new students entering universities went from 8 million in 1999 to 18 million last year, 36000 were given PhD degrees (in 2010 this number will be 50000, more than in the US). There are 210 million internet users (50% yearly growth), 40% in rural areas. A new health insurance law will be introduces soon, education has been made free for rural people last year, animal stocks of farmers are insured by the state. Retail sales were up 17% las year. Etc.etc. It does not look like to me that China is on the brink of chaos. But you should ask someone who lives there, Michael Pettis, for example.
Guest • January 23rd, 2008 at 11:29 am
The Fed and Collectivized Finance In the game of finance as played by the Federal Reserve, somebody’s got to win…and somebody’s got to lose. Liquidity, stimulus, discounting, plunge protection, push-pull interest rates, bailouts, debt creation, credit withdrawal, too big to fail, auctions, nationalized losses, interest-fee government debt and all the rest are presented as acts of public service. But in the end, what’s left are the winners and losers. Political parties make a big issue of winning so they can pick judges and committee chairmen. But that power, IMO, is nothing compared to the Fed’s power to decide who gets financial advantage. It’s no longer a secret that the large investment banks that share and direct this power are the first in line to pick up the winnings. Compensation and year-end bonuses of the street’s five largest firms – Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns — totaled $65.6 billion for 2007 alone. In comparison here are the GDPs of various countries: Singapore $121 billion, Czech Republic $119 billion, Hungary $113 billion, Chile $100 billion, New Zealand $99 billion, Philippines $98 billion, Algeria $92 billion, Nigeria $83 billion, Ukraine $81 billion, Romania $79 billion, Peru $76 billion, Bangladesh $69 billion, Morocco $57 billion, Vietnam $48 billion, Croatia $37 billion, Tunisia $33 billion, Ecuador $32 billion, Belarus $29 billion, Dominican Republic $20 billion, and Uzbekistan $11 billion. F. A. Hayek, the Noble prize winning economist — explaining the loss of freedoms under socialistic central planning — wrote: “As the coercive power of the state alone decides who is to have what, the only power worth having will be a share in the exercise of this directing power.” Isabel Paterson, writing about the Great Depression in “The God of the Machine,” said the real cleavage “was between the producers and the non-producers, in the main. The first measure of ‘relief’ was the Reconstruction Finance Corporation; and the first money paid out from it went to J.P. Morgan & Co. It was the non-productive rich who first went on the dole… the working man accepted it only in extremity and with bitterness; what he wanted was a job.” Paterson puts the blame for the great depression on enormous government loans abroad that were not repaid, and on the existence of the Federal Reserve System which made inordinate credit extension possible. Paterson & Depression Parallels: “Vincent Astor, drawing a large inherited income from ground rents, sold slum property which had been exploited till there was no income left in it, to the Federal government. Owning shipping, he got shipping subsidies. “Speculators urged the extension of government power to maintain the inflated values of their paper securities, by depreciation of money and by stopping ‘bear’ sales on the market, so that huge blocks of stock at artificial prices hung over the market and made normal recovery impossible. To ‘save’ them from the consequences of their own gambling, everyone who had not participated in the game was penalized. Laws were passed against ‘hoarding,’ so that the only action punished was prudence. By this means the normal reserves of cash which normally restore production were dissipated. “Likewise, thrifty, competent, and solvent farmers, who managed to get their living from their farms, were penalized with quotas and quota taxes to subsidize speculative farming. One man in Montana drew $30,000 of government money (avg. weekly earnings in mfg. $18.18 in 1932) because he had persisted in wasting seed wheat on arid land during a drought; while a poor widow in New England was forced to pay a ‘processing tax’ because she raised a couple of pigs and made them into bacon!”
heliben • January 23rd, 2008 at 11:50 am
Dow just broke yesterday’s low…. Need another 1% cut by today!!
HANG SENG TRADER • January 23rd, 2008 at 11:53 am
Is DOW tanking because the bankruptcy news AMBAC CITI planning on filing bankruptcy
Trumbull • January 23rd, 2008 at 11:53 am
Bernanke and Paulson are more worried than they let on http://jtaplin.wordpress.com/2008/01/23/quiet-panic/
Guest • January 23rd, 2008 at 12:02 pm
Ambac/Citi planning bankruptcy, ey? Probably explains the rally in financials today. Ramping it up one last time…
Rich H • January 23rd, 2008 at 12:03 pm
We just hit 15% from last peak. Tough call on whether the bump comes here or a little lower. My call is we’ll see a nice late week rally, even in the face of some pretty bad news. (bad news might bring bigger discounts???) What are the boys at Goldman doing right now. There are piles of cash sitting around. The vultures are out. (They’ll be eating quality, not quantity) Rich H
V • January 23rd, 2008 at 12:05 pm
So, were there really good parties at Davos? I hear the Google cocktail party was amazing…. omg tell us what went down at the Citigroup party! Enough of this economic systemic risk talk! Toga! Toga!
JMa • January 23rd, 2008 at 12:12 pm
JNJ 62 and MO 71 if those do not hold, aye aye aye… Watch the movie Rogue Trader and insert the Fed into the role of the Rogue Trader…
Guest • January 23rd, 2008 at 12:22 pm
PPT working hard here now…if they don’t save this today, we could see the Dow close down over 400 points today…
Alessandro • January 23rd, 2008 at 12:23 pm
@Rich H welcome back! Do you see the banks to still be on top of the situation? It appears that a few worms (the ‘R’ word, failed decoupling, etc) are out of the can right now. And they need to start the rally real soon now or the rest of the world will crash.
Guest • January 23rd, 2008 at 12:23 pm
What bankruptcy news??? Post a link please!
tutterfrut • January 23rd, 2008 at 12:28 pm
Fed Risks Fueling More Bubbles, Davos Economists Say “It’s good for a central bank to ease when the risks are of a crash in the global economy, but that means you have to have a more systematic approach to asset bubbles,” said Nouriel Roubini, founder of New York-based Roubini Global Economics LLC. “If we have a `Greenspan put’ or a `Bernanke put,’ then we will create over and over again a distortion of excessive debt and leverage.” http://bloomberg.com/apps/news?pid=20601087&sid=alohzhP61Auo&refer=home So what do you mean professor, cut or not cut, or cut but…?
cadams • January 23rd, 2008 at 12:30 pm
HANG SENG TRADER must be trying to cause panic on the RGE blog by passing Citi/Ambac BK rumors without backing it up.
BK • January 23rd, 2008 at 12:35 pm
Citi BK would be monumentally bad. I really hope that isn’t true.
tutterfrut • January 23rd, 2008 at 12:40 pm
The Citi rumour are probably different stories messed up, although this story could be another bad hit for Citi… Citigroup Game of Chicken May Double Enron Creditors’ Payout By Christopher Scinta Jan. 23 (Bloomberg) — Enron Corp. creditors could see their original payout more than quadruple to as much as $31 billion after a trial against Citigroup Inc. Enron Creditors Recovery Corp., the entity winding up the defunct energy trader’s affairs, distributed $13.3 billion, or 36 cents on the dollar, since a bankruptcy plan was approved in 2004. That includes most of $1.73 billion in out-of-court settlements with 10 of the 11 banks creditors accused of aiding the fraud that wiped out the company. They argue that Citigroup, the only lender that hasn’t settled, should pay the rest of the claims, about $18 billion. The amount is more than six times the $2.8 billion reserve for Enron, WorldCom Inc. and initial public offering-related litigation that Citigroup disclosed in a Nov. 5 regulatory filing. http://bloomberg.com/apps/news?pid=20601109&sid=aV_F3REPQlVI&refer=home
Guest • January 23rd, 2008 at 12:50 pm
Stocks roaring back again. Dow only down around 120 points now. Was that the climax bottom Rich is looking for?
Guest • January 23rd, 2008 at 12:56 pm
SUGAR AND FAT TO THE RESCUE Top economic observer Richard Benson, Specialty Finance Group, only shares his market view a few times a year. Yesterday’s observation didn’t pull any punches: ”Too much sugar, too much fat, a collapsing dollar, and higher inflation can cause an economic heart attack. It happened this week, and you should watch for it to happen again and again.” http://www.gold-eagle.com/editorials_05/benson012208pv.html
Andrew Bernhardt, St. Louis • January 23rd, 2008 at 12:58 pm
Looks like Goldilocks isn’t doing so well eh? Looks like the 75 bp cut isn’t really doing anything, and the seems as though the fed has had it’s thumb is it’s rear end. Looks as though the congress approved a budget that crowded out investment and borrowing, which caused the credit crunch. Looks as though borrowing 5 trillion dollars in just 8 years, which has increased the debt 100% in just eight years, is bad for the economy. What do you know, the markets are crashing. Copper will crash as construction ends, dragging down silver, gold, platinum, etc with it. Oil will drop as global demand slow, as it’s linked to global gdp, nat gas will drop too, as will all heating oils. Stocks will continue to plummet. Fixed income folks— I like fnmix, pemdx, plmdx, ief, iei, & shy [but fnmix is my fav!]. How low will the stock markets go, I think the dow jones industrial average will see 8,520, the s&p500 will see about 945.6, and the S&PMidCap400 will see roughly 555.60. I basically think that the markets will decline 40% from their peaks, so do a calculation of 0.60*(your fav index’s peak) to figure out where it will hit rock bottom! I’d guess this will be approximately August/Sept/Oct once we hit two quarters (by the calendar year) of negative real gdp growth, which will be q2 and q3— incase you’re wondering. Oh, and by the way, real gdp is finally beginning to drop, as of this December, if Jan and Feb are down too, and I think they will, that will be the first three month interval of negative gpd growth, two quarters of down means that May will be when the recession alarm sounds, but many will continue to panic. This of this crisis as hitting on all cylinders. We will have consumer spending grind to a halt once MEW (mortgage equity withdrawl stops), capital spending by corporations will end, and government spending will be restrained (and layoffs will send unemployment up to 6% or more), so it will be a recession hitting on all cylinders. Brace yourselves folks. Fixed income is the solution— anyone in stocks has got to be foolish.
Guest • January 23rd, 2008 at 1:09 pm
Bush is an absolute MORON! What a joke. That being said, they will close this green today, they have no choice. Dow down less than 80 as I type.
Anonymous • January 23rd, 2008 at 1:15 pm
@Guest on 2008-01-23 13:09:49 Who do you refer to when you say “they will close this green today”. I´m a young economist and not a trader, much to learn on how the markets really work.
Guest • January 23rd, 2008 at 1:20 pm
Paul Craig Roberts says that President Bush has put economic policy back on a Keynesian basis with his tax rebate policy. “Will it work?” http://www.vdare.com/roberts/080120_stimulus.htm “The Bush administration is turning to tax rebates, because problems in the financial system and the amount of consumer debt hinder the Federal Reserve’s ability to pump money to consumers through the banking system… “The percentage of the rebate that survives debt reduction will be further drained of effect by Americans’ dependency on imports. According to reports, 70% of the goods on Wal-Mart shelves are made in China. During 2006, Americans spent $1,861,380,000,000 on imported goods, that is, 23% of total personal consumption expenditures were spent on imports (including offshored goods). This means that between one-fifth and one-fourth of new consumption expenditures will stimulate foreign economies. “Americans worry about their dependency on imported energy, but the $145,368,000,000 paid to OPEC in 2006 is a small part of the total import bill. Americans imported $602,539,000,000 in industrial supplies and materials; $418,271,000,000 in capital goods; $256,660,000,000 in automotive vehicles, parts and engines; $423,973,000,000 in manufactured consumer goods; and $74,937,000,000 in foods, feeds and beverages.” Roberts says “the Keynesian policy of driving the economy through consumer demand was applied to a different economy than the one we have today. In those days the goods Americans purchased, such as cars and appliances, were mainly made in America. Construction workers were not illegals sending their wages back to Mexico. The US had a robust manufacturing workforce… “Today Americans are losing jobs for reasons that have nothing to do with recession. They are losing their jobs to offshoring and to foreigners brought in on work visas… Today many American brands are produced offshore in whole or part with foreign labor and imported to the US for sale in the American market. In 2007, prior to the onset of the 2008 recession, 217,000 manufacturing jobs were lost. The US now has fewer manufacturing jobs than it had in 1950 when the population was half the current size. “US job growth in the 21st century has been confined to low-pay domestic services. During 2007, waitresses and bartenders, health care and social assistance, and wholesale and retail trade, transportation and utilities accounted for 91% of new private sector jobs.”
Guest • January 23rd, 2008 at 1:21 pm
Young Economist, the big money center banks that get the liquidity injections from the Fed. It is orchestrated by the “Working Group on Financial Markets” affetctionatly know round these parts as the PPT or “Plunge Protection Team”. The overseers of that group are none other than Ben Bernanke and Hank Paulson. It is there job to bring some order to the chaos that is price discovery-they don’t want anyone to discover anything! LOLOL
Guest • January 23rd, 2008 at 1:23 pm
Dow only down 40 now, $BKXis at teh high of the day, up 6.54% now
Guest • January 23rd, 2008 at 1:25 pm
Goin green baby!!!!!
Guest • January 23rd, 2008 at 1:27 pm
WOW! Where are the volatility puke bags! This is crazy, crazy stuff…
Guest • January 23rd, 2008 at 1:29 pm
GREEN!!! That is a 335 point reversal in a little over an hour!
Anonymous • January 23rd, 2008 at 1:30 pm
Thanks, been wondering what the PPT is… /YE
Alessandro • January 23rd, 2008 at 1:31 pm
Can you say: “panic buying!” @Rich H You called the bottom with less than one hour accuracy. WOW! @Anonymous on 2008-01-23 13:15:18 You see. Free market is a sad joke.
Charles N. Steele • January 23rd, 2008 at 1:35 pm
To AC: I didn’t say China is on the “brink of chaos.” I am aware the Chinese economy has shown remarkable growth (I used to live there, too). My point is that there also seems to be increasing popular dissatisfaction with income distribution and various features of the system. If China were to face a severe economic downturn, I think there’s good possibility of serious political turmoil there — not my own reading, I gather that political scientists & China watchers see this as the #1 fear of the communist party. Since China is heavily dependent on foreign demand, demand that seems very vulnerable now, I don’t think I’m saying anything unreasonable. Who is China’s no. 1 market? I just looked today at a Congressional Research Service report saying it’s the U.S. Maybe the data are dated, but my point really doesn’t depend on who’s #1 anyway. Are you expecting China’s European markets to boom, taking up the slack? If so, why?
Guest • January 23rd, 2008 at 1:38 pm
There it is, the headline plastered everywhere now: ”Dow Insustrials Erase Steep Decline”
Guest • January 23rd, 2008 at 1:39 pm
Well gosh-by-golly, since the dow erased those steep declines, I am gonna go buy myself a house!
Guest • January 23rd, 2008 at 1:40 pm
Dow surging now!
Guest • January 23rd, 2008 at 1:54 pm
Andrew has done it again! What an incredibly valuable reverse indicator. His last ultra-bearish post hit the blog almost at the same moment that the Dow began its rally from 11,645 to unchanged on the day. Amazing! Andrew, you also seemed to have dumped thee rear view mirrors and are actually seeing the economy in decline. Well done! I hope you keep a record of your posts. Peolpe will pay good money for an accurate reverse indicator.
Guest • January 23rd, 2008 at 1:58 pm
The stock market is officially MANIC! This monster is swinging 100 points in either direction every few minutes.
Guest • January 23rd, 2008 at 2:00 pm
I wonder how the street is going to handle a surge in jobless claims tomorrow…
Hugo Penteado • January 23rd, 2008 at 2:01 pm
An economic sytem where achieved growth needs more growth to be sustained in a finite planet, is posed to a very big collapse. Tautological growth without no worry about the beneficiaries of this growht is not only a mistake, it is immoral. Each 160 dollars added to world wealth, only 1 dollar goes to the poor. This high centered conversation of the economists is idiot, given that do not recognize the huge mistake of implicit declaring that economic system is neutral to the environment and that the environment is inexhaustible. Since the beginning of the year, human population grew 4.700.000, 8.306.000 births! In the same period we produced 2.236.000 cars, 6.754.000 bikes, 5.215.000 computers, etc. etc. etc. What economists really believe means that Earth is a huge trash can, with every human being inside and we going to be buried by an infinite growing quantity of things and people in a finite space like Earth. No problem about a finite territory, because hydrogen fuels will give us an infinite source of energy!!! Ah, probably this belief works with the idea that with such big amount of energy, humans will be immaterial… and our production of goods and services also will be immaterial. Very funny this false theory that in the end only give profit for those that already have. Hugo
Guest • January 23rd, 2008 at 2:01 pm
Dow going green once again!!!! This is incredible volatility.
Neide Penteado • January 23rd, 2008 at 2:02 pm
An economic sytem where achieved growth needs more growth to be sustained in a finite planet, is posed to a very big collapse. Tautological growth without no worry about the beneficiaries of this growht is not only a mistake, it is immoral. Each 160 dollars added to world wealth, only 1 dollar goes to the poor. This high centered conversation of the economists is idiot, given that do not recognize the huge mistake of implicit declaring that economic system is neutral to the environment and that the environment is inexhaustible. Since the beginning of the year, human population grew 4.700.000, 8.306.000 births! In the same period we produced 2.236.000 cars, 6.754.000 bikes, 5.215.000 computers, etc. etc. etc. What economists really believe means that Earth is a huge trash can, with every human being inside and we going to be buried by an infinite growing quantity of things and people in a finite space like Earth. No problem about a finite territory, because hydrogen fuels will give us an infinite source of energy!!! Ah, probably this belief works with the idea that with such big amount of energy, humans will be immaterial… and our production of goods and services also will be immaterial. Very funny this false theory that in the end only give profit for those that already have. Hugo
Guest • January 23rd, 2008 at 2:02 pm
Dow is gonna rally 200 point today-you watch!
London Banker • January 23rd, 2008 at 2:06 pm
I put on just one contract to watch the Dow trade, and it’s moved up 127 in just minutes. Wow. They really want to close in the green today above 12000. I think I’ll let them and then join the after hours club to trade it down overnight in Asia.
Guest • January 23rd, 2008 at 2:09 pm
400 point up swing for the Dow now. PPT…naaaawwwwwww
Guest • January 23rd, 2008 at 2:10 pm
Sow moving up in a stragiht line now, up 100 points now.
London Banker • January 23rd, 2008 at 2:13 pm
Interesting. The Dow always used to be top line of the Market Overview inset with chart on the Marketwatch homepage – until it started falling by triple digits. The Dow hasn’t appeared at all on the Market Overview box since last week. Now that the Dow is up 60 points, suddenly it’s back and it’s back in the top slot. If the Dow makes triple digits up today, I am taking this as a sign. When it disappears, it will be to hide the bear action from a nervous investing public. When it reappears, it will be to adverstise the latest bull run. Manipulation? Conspiracy? What else?
Rich H • January 23rd, 2008 at 2:15 pm
@ Alessandro I think there’s a 1 hour lag on post time? I posted at 1pm (on the nose) Let’s see. It’s 3:15 NY time right now… RH
Guest • January 23rd, 2008 at 2:18 pm
London W Have another hot chocolate with lots of brandy and count your profits. Make sure you check the windows to see if a big black car is parked outside. The PPT might send someone to get you.
cj • January 23rd, 2008 at 2:20 pm
All around Davos the chorus of americans sing “PPT PPT PPT PPT PPT” And the europeans are depressed.
Guest • January 23rd, 2008 at 2:26 pm
WHAT DID I TELL YOU! DOW + 200 right around the corner. WOW!!!!!!!!!!!!!!!!!!!!
cj • January 23rd, 2008 at 2:29 pm
Rich H be sure to call the top for us thanks.
London Banker • January 23rd, 2008 at 2:35 pm
@ Guest on 2008-01-23 14:18:07 I stand to get hit with huge losses on my Indian short positions if the market goes up triple digits for the close. I’ll be up bright and early to reverse position. Thanks, Rich H. If you ever want lunch in London, I will be pleased to host you at my club . . .
- jd - • January 23rd, 2008 at 2:36 pm
I’ve been waiting for someone to raise a loud hoorah for BB today. In spite of what anyone thinks about Fed policy or the effectiveness of rate cuts preventing a recession yesterday’s cuts effectively kept the markets functioning. Not just the NY markets. From here markets can go up or down. I feel we just passed a very dangerous moment. Don’t drop your guard though. Rich H, you’re the man! - jd -
Guest • January 23rd, 2008 at 2:41 pm
BUY BUY BUY Wow, seems like just out of a dang movie. Is this real, someone pinch me.
Guest • January 23rd, 2008 at 2:41 pm
Rich, are they going to run this all the way up to the 50 dma’s???? Or is this just a 3 or 4 day thing to suck in som elongs and the slap it hard next week when the Fed only moves 25?
Alessandro • January 23rd, 2008 at 2:42 pm
@Rich H if the market goes up 10% and you call a top, you can be sure that the best past of the life savings of the regulars of this blog will be shorting the market within a few minutes! LOL!
Guest • January 23rd, 2008 at 2:43 pm
I would love to see the Dow close RED now!!! LOLOLOLOL
Guest • January 23rd, 2008 at 2:44 pm
Alright, so who the hell said at 1:00 today, buy the piss out of the indexes????????
Guest • January 23rd, 2008 at 2:46 pm
you can’t ever, ever get me to believe the U.S. marets are “free” markets!! Look at an intra-day chart of teh Dow-1:00 was a coordianted buy plan and the chart is straight up since then, almost 600 points! Who is gonna look out for the little investors out there in such a rigged mine field?
Guest • January 23rd, 2008 at 3:00 pm
Dow closing up over 300 points! A 650 point reversal in 2 hours.
Anonymous • January 23rd, 2008 at 3:03 pm
This is mostly short covering in financials and retail sector. I am ready tho short at this levels. This Friday could be bloodbath for US markets.
Alessandro • January 23rd, 2008 at 3:23 pm
@Anonymous on 2008-01-23 15:03:36 Apparently the bomb has been the rumor about the MBIA and Ambac bailout. Think about it: banks can claim their hedges now hold water and average Joe will know that financials can go down the drain. MSM will trumpet that the tax payer will bailout Wall Street and that it’s better join the party now, stocks are so unbelievably cheep. Watch out before shorting this sad joke of a free market.
Guest • January 23rd, 2008 at 3:23 pm
ALMOST 7 BILLION SHARES TRADED ON THE NYSE TODAY
Guest • January 23rd, 2008 at 3:24 pm
From Briefing.com-PPT action recorded here too: 3:30 pm : The market has found a new rally gear in the past half hour, greased by program trading activity that has carried the Dow more than 200 points higher in the last 30 minutes.
Alessandro • January 23rd, 2008 at 3:24 pm
oops. comment above should read: “…average Joe will know that financials can’t go down the drain.”
Lili • January 23rd, 2008 at 3:31 pm
Yep, I agree with Alessandro, it must be this : http://www.bloomberg.com/apps/news?pid=20601103&sid=aneyXTf8spRI&refer=news
Guest • January 23rd, 2008 at 3:31 pm
Yeah, buy financials!!! What a joke: By Monica M. Clark Last update: 4:27 p.m. EST Jan. 23, 2008Print 4:06pm 01/23/2008 Sovereign Bancorp Inc.’s fourth-quarter loss widened, hurt by $1.6 billion in pretax goodwill impairment charges and a loan loss provision that exceeded net charge-offs by $88 million. The company also discontinued its stock dividend.
Guest • January 23rd, 2008 at 3:35 pm
By Wallace Witkowski Last update: 3:58 p.m. EST Jan. 23, 2008Print SAN FRANCISCO (MarketWatch) — Fitch Ratings placed AmeriCredit Corp. (ACF:AmeriCredit Corp News, chart, profile, more Last: 11.50+1.22+11.87% 4:06pm 01/23/2008 ACF 11.50, +1.22, +11.9%) on Rating Watch Negative Wednesday because of deterioration in portfolio asset quality and profitability measures, and the uncertainty in capital markets. About $950 million of debt is affected. Fitch has a BB rating on AmeriCredit’s long-term issuer default and senior debt.
Guest • January 23rd, 2008 at 3:37 pm
The new motto for the US will be “privatize gains, socialize losses”. This is all bullsh%!#! Free market my a$$…
Guest • January 23rd, 2008 at 3:48 pm
Yeah, buy financials! By Alistair Barr Last update: 4:44 p.m. EST Jan. 23, 2008Print SAN FRANCISCO (MarketWatch) — Capital One Financial Corp. (COF:Capital One Financial Corporation COF 44.20, +4.39, +11.0%) said late Wednesday that fourth-quarter net income came in at $226.6 million, or 60 cents a share, down 72% from a year earlier when the credit card company made $390.7 million, or $1.16 a share. “As the economy has weakened, we have selectively pulled back loan growth and maintained appropriately conservative underwriting standards,” said Richard Fairbank, Capital One’s Chief Executive
JLC • January 23rd, 2008 at 3:58 pm
What the hell? I leave for a couple of hours and come back to see this? ALL GREEN, and a huge rally off the lows? Come on! Financial had a huge rally? Anyone have any logical explanations out there? Of course, we will hear the usual BS “the market was oversold, there was massive short covering,” etc. But I mean a real reason and not the usual blah blah blah? You want proof there is a PPT. Look at today’s DOW chart. I don’t see how else it can be explained. Nice job RH, you da man!
Gloomy • January 23rd, 2008 at 4:15 pm
The explanation for the rally is the misplaced hope for banks caused by news that an official from NY state is meeting with banks to try to get them to bail out the monolines(see Bloomberg). There are 2 possible outcomes of this. First, if the banks agree to do the bailout it will cost them billions in hard cash which will seriously cripple them. Second, if they fail to do so they will face billions more in write-offs which will seriously cripple them. Heads the banks lose, tails the banks lose!!!
BK • January 23rd, 2008 at 4:20 pm
Is the Ambac/MBIA bailout news what sent the market toward today’s highs? Here is an article about it off of MarketWatch, better than the Bloomberg or WSJ aritcles I think. http://www.marketwatch.com/news/story/ambac-mbia-shares-extend-gains/story.aspx?guid=%7B3F39F792-86F3-4ED3-AEFA-2B1E68F55505%7D
Alessandro • January 23rd, 2008 at 4:23 pm
@Gloomy, I’d try to factor the ‘US tax-payer’ or the ‘foreign investor’ somewhere into the equation.
Little saver • January 23rd, 2008 at 4:49 pm
Ambac/MBIA bailout Well, whenever somebody tries to tell me that the US are proponents of free markets, I’ll have my own idea about it.
Giraf • January 23rd, 2008 at 4:52 pm
Lots of sour grapes here this afternoon. This is what I wrote to an investment management friend of mine after the close. ”A very interesting day. As you know, I`ve been a bear on the U.S. economy and the stock markets. However, today was an interesting day. We put in a double bottom on the Dow, which I`ve found to be a very reliable signal. We also had outside reversals in both the 10 year Treasury and stock indices. Fundamentally, I think things should go lower but those are pretty powerful technical signals saying that the bear is all over, at least for the next little while. Probably time to take the weightings back to neutral.” Don’t fight the tape you guys. Take the emotion out of your games.
Octavio Richetta • January 23rd, 2008 at 4:53 pm
Written by Lili on 2008-01-23 15:31:30 This is correct. A short squeeze in heavily shorted sectors (such as financials, real estate, tranports, retailers) was the napalm Market that ignited the market. It looks like short hedge funds don’t get a good break:-)
Gloomy • January 23rd, 2008 at 5:12 pm
I think Giraf is right to some extent and that there may be a technical short term rally here. But, in keeping with the professor’s prescient views, these should mainly be viewed as opportunities to buy more short positions. The long term picture cannot be foretold by technical analysis, only by economic analysis. Having said that have some fun and check out these charts from the Big Picture comparing the current chart to previous bear markets http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/2008/01/22/4_crashes.png
Andrew Bernhardt, St. Louis • January 23rd, 2008 at 5:14 pm
Wow, looks like the market see-sawed today quite a bit. What a sucker’s rally as Nouriel would say!!! The markets will plunge again, we’re not done. There will be releif rallys, aka dead cat bounces, but the markets will keep on declining and depreciating until we get to the recession, and until we get HUGE writeoffs. What a sucker’s rally!!!
freejack • January 23rd, 2008 at 5:17 pm
Nouriel Roubini on Bloomberg Radio right now….. http://www.penguinradio.com/station/1365
Anonymous • January 23rd, 2008 at 5:20 pm
If Ambac and MBIA is bailed out, does’nt it mean end of Bank writedowns? If banks don’t have further writedowns, I dont see what would keep this market from shooting up. Asians markets will shoot up today like never before. My question is, Is this beginning of another bull market?
Guest • January 23rd, 2008 at 5:29 pm
Thanks, Andrew B from St Louis. You made (saved?) people a ton of money with your prescient comments yesterday morning and lunch time today.
Guest • January 23rd, 2008 at 5:35 pm
Gloomy on 2008-01-23 17:12:13 I try to use fundamentals (economics, etc) with technicals to help with timing. The biggest problem with economic forecasts and economic data is that the latter are subject to massive revisions. Unfortunately, none of us can “revise” our trades when economic data is changed. The good thing about technical analysis is that it uses cold, hard data that does not get revised.
Giraf • January 23rd, 2008 at 5:36 pm
Gloomy on 2008-01-23 17:12:13 Sorry, forgot to sign the last post.
YANKEE • January 23rd, 2008 at 6:17 pm
You guys are kidding, right? You are trading based on obscure references off a blog (a great one, to be sure) or doing the opposite of what ‘Andrew’ says?!!!! Just checking….maybe I am way too conservative! Much thanks for the informative macro thinking here. What does the ‘guest’ say? Let’s rally to the sun
- jd - • January 23rd, 2008 at 6:36 pm
NY insurance superintendent Eric Dinallo has gone to banks to provide capital? Banks don’t provide capital. Banks provide loans (liquidity in Bubblespeak). How is this going to work? Am I missing something? Banks have been going abroad for capital.
Anonymous • January 23rd, 2008 at 6:51 pm
@jd it could be Taxpayer paid bailout of bond insurers.
Guest • January 23rd, 2008 at 6:56 pm
YANKEE on 2008-01-23 18:17:02 Relax. We (or at least this Guest) are(is) just pulling Andrew’s chain. But you do have to admit, his timing for posting the wrong thing has been uncanny lately.
Guest • January 23rd, 2008 at 7:07 pm
In December, Bernard Ducalion wrote on the Wall Street Examiner, “So you don’t think that the Plunge Protection Team exists?” http://wallstreetexaminer.com/blogs/ducalion/?p=140#more-140 “Perhaps you think that this is the half-baked notion of some crazy conspiracy theorists? “Then you need to read this”: A report by Sprott Asset Management quotes George Stephanopoulos (top advisor to President Clinton) as saying the following on ABC’s “Good Morning America” on September 17, 2001: Well, what I just want to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets. You reported just a while ago that the Fed has lowered the overnight interest rates, will put about $80 billion into the market. In addition, the SEC, the Securities and Exchange Commission, has relaxed the rules for companies on whether or not they can buy back their stock in case they start to fall. And dozens of companies, including big companies like Intel and Cisco have announced that they would buy back their stock if necessary. Third, there will be some trading curbs in effect today. If the market drops by about 1,100 points, they will probably suspend trading for a while. And perhaps most important, there’s been – the Fed in 1989 created what is called a plunge protection team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there – they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. Source: Transcript of ABC News “Good Morning America”. “Newscast: SEC relaxing rules to help stock exchanges; Banks agreeing to help if market gets in trouble.” September 17, 2001. “Please note that Mr. Stephanopoulos served in the Clinton administration…” I would sure be interested in Bernard’s take on today’s events. Personally, I think we just had an enactment of the above scenario.
Anonymous • January 23rd, 2008 at 7:12 pm
Bond insurers need $5b immediately to keep their AAA rating. Mr. Eric Dinallo urged banks to give $5 billion immediately and promise of another $15 billion. Is he dreaming? This is a pure suckers rally!
Anonymous • January 23rd, 2008 at 7:16 pm
George Soros, the billionaire investor, on Wednesday told the Financial Times: “I don’t think it would be feasible for the US government to organise a bail-out of the monolines right now because it would be an open-ended obligation. But I do think the US and European authorities must ensure the major market makers are able to meet their counterparty obligations. Until you do that, the banking crisis will last. The authorities have to remove this counterparty risk.” http://www.ft.com/cms/s/0/dd4035f6-c9fe-11dc-b5dc-000077b07658.html
mannfm11 • January 23rd, 2008 at 7:17 pm
Kind of absurd isn’t it? The biggest problem to come out of a crash would be bank insolvency, but the solution is for the banks to buy stocks. I doubt that lending money themselves is actually lawful, but who cares, right. Also, the idea banks would bail out the monolines is even more stupid than them bailing out the stock market. The idea that the holders of insured debt are now providing the insurance means there isn’t any insurance. If the issuers of the bonds own the insurer, which would be the case if the states took them over, then it would be the insured insuring themselves. If they rallied the market on this news, then we have morons running Wall Street or at least making impacts on morons.
mannfm11 • January 23rd, 2008 at 7:27 pm
I will also go out on the limb and say this rally is about over. I don’t put much value in double bottoms 24 hours apart, especially when the one on Tuesday really didn’t exist. If you buy the market really fell 460 points after a rate cut of epic proportions for all of 30 seconds, then I have something you can buy. Second, this is a bear market. If it was a bear reversal, the A/D would have been a hell of a lot more bullish, the trin would have been a lot more bullish and there would have been something of substance instead of an interrupted panic. The panic is still ahead of us. 600 points is a large section of a large retrace and I would get short the market on a hot open tomorrow, stopped at maybe 1% above entry, then to the opening high if I got my fade. There isn’t any reason to buy this thing or the financials. Who wants the financials when every other week they are diluting ownership (C going to Arabia at the first hint of trouble and borrowing $5 billion at 11% with a huge section of ownership promised when their financials state $130 billion in capital shows the risk involved, along with how much the pie might be sliced before this is done), yet we had a huge rally. This, as Roubini says, is about capital, not interest.
Guest • January 23rd, 2008 at 8:12 pm
mannfm, i totally agree with you.. either : a) the banks insurance policies are worthless and so they need to write-off the insurance recoverables or b) pump more capital into the insurers and pay for the losses.. and i guess all banks will need to scramble for more capital now… “3rd strike and you are out?” having said that, i am not sure if there are deeper/obscure reasons for the rally… gold and oil is sliding… some major hedge funds setting up bear traps or a dead cat bounces… who really knows for sure? mrskeptical
