Major Damage
Very interesting data via Barron’s Mike Santoli:
“The virtually unwitnessed level of damage in a short period almost defies hyperbole. After Thursday’s drop to an 11-year low on the S&P 500, the index was farther below its all-time high than at any time since 1949. The year 2008, had it ended then, would rank as the worst since 1872 at least. The S&P hadn’t been as far below its 200-day average since 1932. Nearly 40% of S&P 500 stocks were below $4 billion in market capitalization, the minimum new stocks must meet to be added to the index. More than 40% of the stocks in the Russell 3000 were trading below $10.
Investment-grade corporate bonds have outperformed stocks since 1980. The S&P 500′s indicated dividend yield rose above the 10-year Treasury yield for the first time since around the time the Giants and Colts faced off in their classic 1958 championship game…
At the moment, the only close precedents for the past year are a pair of Great Depression-era bear phases. Andrew Burkly of Brown Brothers Harriman noted Friday that the current bear was 284 days old, and was down almost exactly as much as the 1929-’32 and ’37-’38 bear markets were after 284 days.
And this was about the point where the paths of those earlier markets diverged, with the ’29-’32 example sinking relentlessly to an 86% loss, and the ’37-’38 version beginning a bounce that recouped 50% of its losses over six months before rolling over again.
Santoli notes that if you want to be aggressively bearish at these levels, it “requires a belief that the economic implications of the present crisis at least rhyme with the Depression’s.”
While that dichotomy here sounds just about right, there is a third point in between: Earnings fall to $45-50 on the SPX, and multiples compress to 10-12 PE. That mutes the bounce to a 25-30% move, before rolling back to an S&P500 fair valuation of about 500-600 . . .
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Source:
Major Damage
MICHAEL SANTOLI
Barron’s NOVEMBER 22, 2008
http://online.barrons.com/article/SB122731358435649651.html
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November 22nd, 2008 at 12:59 pm
Depression is a slam dunk. People now denying a depression are just like those who denied a recession was coming. I debate with myself whether:
1) Due to the much higher debt/gdp this time, this will be worse than the Great Depression
or
2) Our society being more technologically advanced and savvy today will figure out a way to make this less severe.
or
3) Numbers 1 and 2 above combine and it will be about the same.
November 22nd, 2008 at 1:11 pm
Bloomberg has a story up that touches on an aspect of the auto bailout that I hadn’t seen before and that reinforces parallels between now and the Depression, namely the specter of trade wars/protectionist policies, to wit:
“Americans’ ’Hypocrisy’ in Auto Rescue Spurs Me-Too Trading Ire”
http://www.bloomberg.com/apps/news?pid=20601109&sid=awkywZZdATW8&refer=home
The lede:
“A U.S.-triggered spate of global carmaker-bailout proposals may spark trade disputes over whether the Americans are unfairly trying to subsidize their industry”
Some quotes:
“The temptation may be greater now for member states to give subsidies that can result in their economic problems being exported to their neighbors but that would only worsen the economic difficulties,” Kroes said at a conference in Brussels.
[snip]
“If the U.S. gives aid to carmakers, it’s fair to have them in Europe as well,” said Gian Primo Quagliano, head of research at Bologna, Italy-based research firm Promotor.
[snip]
“If the money is given because bankruptcy would cause a lot of problems, this may be unfair,” said Takeshi Miyao, a Tokyo- based analyst at automotive consulting company CSM Worldwide. “The question of why the Japanese government isn’t helping the Japanese carmakers will definitely arise.”
November 22nd, 2008 at 1:11 pm
What is a Depression?
I’ve never been able to find an official definition anywhere.
Maybe GDP contracts 10% ? Thats just a wild guess . . .
November 22nd, 2008 at 1:12 pm
BR a depression is a long recession by definition.
November 22nd, 2008 at 1:18 pm
By any mean we are in one right now.
http://en.wikipedia.org/wiki/Depression_(economics)
Considered a rare but extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.
Abonormal increases in unemployment = YES
Restriction of Credit = YES
Shrinking output and investment = YES
Numerous bankruptcies = YES
Reduced amounts of trade and commerce = YES
Highly volatile relative currency fluctuations, mostly devaluations (Korea, Russia, Brazil) = YES
Price deflation = YES
November 22nd, 2008 at 1:20 pm
GDP down 10% is also in there Barry. Good guess. Although different sites have different definitions of what recession and depression really are.
November 22nd, 2008 at 1:20 pm
BR:
I have heard it recently as a 10% drop in GDP…your SWAG is correct.
Makes sense too…a typical recession might be a few quarters with negative 2-3 percent GDP…10% sounds about right for depression…then maybe 20% or more over a few years for a “Great Depression” (GDP dropped 29% from 1929-1932)…anymore than that is “oh shit”
November 22nd, 2008 at 1:30 pm
On another note, my mind was wondering last night and I was hoping someone here could set it straight. Is there money to be made by shorting JP Morgan Chase & BoA at this point?
Charlie G was on CNBC last night with Donny D talking about how Citibank’s balance sheet looks the same as JP Morgan Chase’s and the reason the stock has been pummeled is simply a loss of faith in the company. Is is that the case? Is it that simple? Have I missed something?
That’s when I started wondering… Is the stock so beat up simply because of short selling and fear? Now that Citi’s been beat up as bad as it has and there’s only $3+ left on the downside, why wouldn’t the shorts take their game to the next logical financial play, JP Morgan or BoA. Worse case scenario is the gov’t steps in and offers an AIG like package and the short sellers’ gain is made at the expense of taxpayers…
Somebody slap me, please.
November 22nd, 2008 at 1:31 pm
Barry asked: “What is a depression?”
I think if you have to ask the question, we don’t want to know the answer.
“There is nothing to fear, but fear itself”
This will be a depression unless we see sound consistent economic policy and TRANSPARENCY.
The opaque nature of the derivatives market is at the root of many problems.
November 22nd, 2008 at 1:34 pm
Sober data from Barron’s. Barry, your third point also solid. In context, however, we’ve got lower interest rates, lower projected unemployment (still high, by today’s standard, i know), much more access to sovereign, pseud0-sovereign global cash reserves, 80 years additional research, and, very importantly, better technology that drives global communications and greater international coordination.
November 22nd, 2008 at 1:39 pm
A depression is a recession run by Democrats. You could take a clue from the Time cover that showed Obama as FDR.
November 22nd, 2008 at 1:40 pm
Definition of a depression: a cumulative decline in GDP of more than 10.0% over four consecutive quarters.
http://gregmankiw.blogspot.com/
Intrade has a bet on the odds of a depression:
http://www.intrade.com/jsp/intrade/contractSearch/index.jsp?query=depression
November 22nd, 2008 at 1:46 pm
Besides, isn’t a more precise definition of what we’re heading for termed “Stag-Deflation”? As you’d expect, Roubini has a thoughtful piece on it. Rather than a general definition, it’s more of a diagnosis of our current situation.
The question as to how long this negative cycle persists becomes a question of how much and how quickly government fiscal stimulus – targeted at the consumer (tax breaks, etc. not $100 checks for gas) and at infrastructure – will come to the rescue.
November 22nd, 2008 at 1:49 pm
BR @ 12:00:
“… [a] bounce to a 25-30% move, before rolling back to an S&P500 fair valuation of about 500-600”.
I would more or less go along with that prediction (a 25-30% rally, followed by a 2009 low in the SPX of 650).
However, I think that Geithner and Obama will throw another trillion dollars at the economy in 2009.
November 22nd, 2008 at 1:55 pm
mark @ 1:11
Interesting point. It would serve GM right if the Japanese government pumped some money into Toyota, so that they can offer even better deals.
November 22nd, 2008 at 2:18 pm
Markaz3:
My guess is BoA first. They have all that Countrywide toxicity on their balance sheet, right? Then again, Gasparino is a hack, so I don’t know that I trust him at all.
November 22nd, 2008 at 2:18 pm
Yup, things are rough all over.
Last night I had to drive around for a while to find a parking place when I went out to eat. All the places were full. Then my restaurant had people packed in like sardines, completely destroying the ambiance. It must be this damn under $2 gas, going soon to under $1.50.
It still kills me. All the high finance types here appear to forget the consumer is 2/3 of the economy. Commodities are not naturally at excessive prices, although so many here appear to lack that basic understanding. The credit / commodity rape almost destroyed the world economy. Now that credit is not going to pump commodity prices again, they will remain low and the consumer will bring things back at deliberate speed as lower prices filter through the economy. (No, that’s not deflation.)
I suspect that the consistent falls are mostly sell offs by retard hedge fund managers. The high volume of the past couple of days tells a story of sellers and buyers fighting it out. This says bottom to me, unless more retard hedgies sell off some more.
November 22nd, 2008 at 2:20 pm
Before it was called World War One, it was called the Great War. Maybe it will take a larger more technically advanced depression for the Great Depression to be renamed GD1.
I hope we can ‘smart’ our way out of this. It seems to me that the economic growth that our current financial system is based on was rooted in the industrial revolution, the development of fossil fuels, the baby boom (and all their needs and wants, fr’instance houses), the military-industrial complex and its spin-offs in telecommunications and information technology (like the PC, the internet and the web). If those things are peaking, the new growth will have to come from somewhere else. I’ve got a hunch that feeding people and keeping them warm (without depending so heavily on fossil fuels) will figure heavily in this. But there are limits to how much growth could come from that. Or, if we can figure out how to get to low-earth orbit more cheaply, it’d open up whole new worlds (literally) of mining/energy/resource/manufacturing possibilities. That’d be growth.
November 22nd, 2008 at 2:24 pm
@ DL: The Japanese don’t give a toss about moral hazard. They already have the printing presses on and all they are doing is accelerating a bit. Let TM go down? Are you kidding me? Did the banks go down?
Re: depression. 4 quarters of -10% GDP? 20% OFFICIAL unemployment? Truly we have no concept of how awful this would be, unless we have spent hours listening to our parents and grandparents. I think I have an inkling of what it was like, and it’s not something any of us should wish for. Everything possible will be done to avoid this outcome, and we will see a deep recession with inflation.
November 22nd, 2008 at 2:33 pm
Leftback @ 2:24
I agree that the Japanese wrote the book about how to CREATE moral hazard.
But my point is that if the Japanese do pump money into Toyota and Honda, that would have the effect of undercutting GM. As it is, Toyota is offering zero percent financing (for several more days at least). If on top of that, Toyota were to cut the price of a car by $1000 or more, GM would need even more bailout money in order to survive.
November 22nd, 2008 at 2:36 pm
Re foreign help to auto maufacturers-
Every foreigh car plant was wooed by the state and local goverments with property tax abatements, environmental restrictions overlooked, roads/sewers etc. constructed at taxpayer expense, vocational training at comm colleges,etc. We helped them get established here and we damn well should help out own industries.
What would we think of a country that starts unprovoked wars and does not help the largest mfr group in their own country? I don’t think that you would call them a world leader.
November 22nd, 2008 at 2:37 pm
let’s see. It’s a recession when 500 people in Mississippi lose their job due to some crappy thing.
It’s a depression when hedgies can’t sell commodities in many forms at prices that are several times their intrinsic value. Or when scam artist wall street traders don’t get a full year end bonus, even though their employer is almost out of business. Or when people realize that the world doesn’t need so many high finance outlets on Wall St and some close down. Or when lots of idiot investment managers need someone else to blame for their reckless stupidity and hope their bosses are dumb enough to fall for it (it’s not their fault, it’s a 100 year event). Or when Detroit CEOs ask for a few billion and are actually expected to provide a good reason why. By God, we need to get these people back to work so they can pilfer at will!
This Depression is a sad one indeed. So much royalty treated so badly.
November 22nd, 2008 at 2:44 pm
@deadhobo – what you’re pointing out is a good indication that the economy hasn’t yet rippled into your demographic. i bet all those people you were eating with paid cash. i bet they don’t carry a balance on their credit card. i bet they all work for the federal government (note i didn’t say state or local), and i bet they don’t have a monthly mortgage payment, and i bet they don’t have an auto loan. thank goodness. because if they lose their job, default on their loans, don’t pay back their bank, their bank has to write down more losses, consumer gets scared and pull their money out of your bank, then we’re screwed.
just wait a few months.
November 22nd, 2008 at 2:46 pm
“However, I think that Geithner and Obama will throw another trillion dollars at the economy in 2009.”
Perhaps so… but let’s hope their aim is better than Dread Pirate Paulson. He’s been throwing money, too, but it seems to be missing the economy. In fact, I’m not sure that the Fed or the Treasury have much hope. “Stimulation of the economy” is not such a generic thing as economists like to believe. Most business people could tell you that – the money has to go somewhere useful, not somewhere to be misused.
November 22nd, 2008 at 2:50 pm
Trickstar,
Nope. I live in a normal place. Yes, some people have it bad, maybe a few more than normal.
Just as people all watch the weather report when a killer storm approaches, the newsies have learned how to exploit this by making it look like 3 inches of snow approaching is “The White Doom of Death” … and stay tuned for urgent updates. The current troubles are also a great means to sell advertising and pander to the basic need of people to be frightened.
November 22nd, 2008 at 3:05 pm
@leftback – Yes, transparency would be nice, but it ain’t in the cards. There is no lie too big to tell if it can add a penny to a share price.
@deadhobo – While SPC might be applicable to something like the Greenspan interest rate cycle, I think it preposterous to suggest it applies to daily market action. As for your other theses, they lack consistency. What is it: a boom or a bust? You can’t have both at the same time. Ja?
One funny idea making the rounds is that, “This time, people are different.” The implication is that humanity has somehow evolved to a higher form of primate in just a few generations. I call bullshit on that. Jesse Livermore summed it up nicely, a long time ago:
“At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860′s and ’70′s than in the 1900′s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.”
November 22nd, 2008 at 3:08 pm
@ dead hobo:
I’m with you sir. Especially this part:
“Now that credit is not going to pump commodity prices again, they will remain low and the consumer will bring things back at deliberate speed as lower prices filter through the economy. (No, that’s not deflation.)
I suspect that the consistent falls are mostly sell offs by retard hedge fund managers. The high volume of the past couple of days tells a story of sellers and buyers fighting it out. This says bottom to me, unless more retard hedgies sell off some more.”
Insightful, and well said.
I watch this thing tick for tick everyday, as I suspect some of you do also. I am actually slightly encouraged by the volume, thursday, and particularly friday (although expiration.) Although I was surprised by the actual break in support, I was more surprised by the muted reaction to it. Sure we had a decent flush, but it was met with some intense buying late friday. As for causes? I dont know if I altogether buy the geithner rally. But regardless of cause, I liked it.
Of course I’ve been wrong the past few weeks, but I still feel comfortable being long here, carrying losses of course, but still within my tolerance which is pretty slim on losses “in principal.” Despite some mild emotional malaise at now being an “investor by default” for a little while as opposed to my normal hyperactive trading self… My analysis currently leads me to believe we have a huge rally coming.
In fact after doing my saturday morning homework, I’m way more confident about it now than I was before. There are multiple examples of positive divergence going on in both the dow and the spx… Likewise bearish divergence going on in vix… double top forming on the vix. I think the ultrashorts are crowded longs and we’ll start to see those breakdown soon. Those things are like hot air balloons and deflate fast when the hot money leaves them at the first whiff of a more than two day rally.
If the geithner story really was the catalyst for the reverse yesterday, then its only further indication that the market is thirsty for good news and becoming more and more immune to the bad news… I only hope that there is some leadership news that can come out to replace the bad news. We need leadership to address our challenges. We know there are social and economic challenges, no one with balls has stepped up in politics or the corporate world to announce a plan to attack them. Thats all the market needs to hear IMO.
If you get a chance check out the article about Lee Iacocca in yesterdays IBD… the success section.
http://en.wikipedia.org/wiki/Lee_Iacocca
(for reference)
Thats the kind of shit we need right now. Of course, we need a little Gene Upshaw up in corporate america too.
Enjoy the weekend friends. (Wow it took awhile to proofread this first… :) )
-I-Man
November 22nd, 2008 at 3:17 pm
texasradio,
1) What does SPC stand for?
2) Boom, then bust, now recovering. Retard hedgies add to the variation from time to time, usually in the last hour of the day. The bust is overhyped to sell advertising and get free TARP money. Also, shorts appreciate the opportunities it offers. The new boom will be based on things, not credit based inflation and hot potato economics. My thesis are extremely consistent, almost to the point of repeating myself ad nauseum.
3) If space aliens or Chinese hackers were behind the troubles, it would be different this time. Otherwise, not so much.
4) No, people are as stupid now as ever before. Maybe more so.
November 22nd, 2008 at 3:23 pm
I-Man,
Thank you. Salute to you with my finest Ripple and a fresh unfiltered smoke. Ahh. Life is good.
November 22nd, 2008 at 3:30 pm
dead hobo,
Good to see another head in the market… there are few of us in this game. I salute you one Cold, Rain, and Snow to your Ripple. Life is good.
November 22nd, 2008 at 3:33 pm
A depression is simply a recession if you keep a job!
November 22nd, 2008 at 3:35 pm
@deadhobo:
I’m not sure exactly where you live, but your comments re: malls, restaurants, etc. just aren’t cohesive with what we’re seeing up in the Northeast. Malls are dead. Some good friends own establishments in the Boston entertainment scene: bar & nightclub sales are way down year over year, restaurant sales are down year over year. It’s virtually impossible to get through to the Department of Unemployment. My girlfriend laid off two of her employees, and it took them over a week to even get through to an operator. I agree that the media whips ‘Doom and Gloom’ into a frenzy, but to overlook the looming contraction in jobs and spending would be a mistake.
http://www.bea.gov/industry/gpotables/gpo_action.cfm?anon=82323&table_id=23493&format_type=0
Take a look at the percentage of the jobs in America are service-based. As a country, we don’t REALLY produce sh*t. Our automobile industry is on life support. Manufacturing accounts for 12.9% of our GDP output. Twelve-point-nine percent of our entire GDP comes from ‘creating tangible goods’. The vast majority of our economy revolves around the services provided. This is an unsustainable economic model, and the only reason you haven’t seen the ‘crash’ on the ground floor (per your anecdotes) is due to our ability to run an astronomical current account and trade deficit. We can’t run around creating more ‘services’ for the next twenty years; and it’s going to be a slow slide into a prolonged depression until we find some way to invest in actually creating, manufacturing, and providing something tangible to the rest of the world.
Fastest way to shift the inflows/outflows of our economy? Drill.
November 22nd, 2008 at 3:35 pm
Last night I had to drive around for a while to find a parking place when I went out to eat. All the places were full. Then my restaurant had people packed in like sardines, completely destroying the ambiance. It must be this damn under $2 gas, going soon to under $1.50.
Nope, that same restaurant was filled when it was 4 dollars last summer. Hence, you have no point. Consumer purchases have dropped.
November 22nd, 2008 at 3:42 pm
I’m not sure exactly where you live, but your comments re: malls, restaurants, etc. just aren’t cohesive with what we’re seeing up in the Northeast. Malls are dead. Some good friends own establishments in the Boston entertainment scene: bar & nightclub sales are way down year over year, restaurant sales are down year over year. It’s virtually impossible to get through to the Department of Unemployment. My girlfriend laid off two of her employees, and it took them over a week to even get through to an operator. I agree that the media whips ‘Doom and Gloom’ into a frenzy, but to overlook the looming contraction in jobs and spending would be a mistake
Hobo’s mistake is he doesn’t understand this nature of recession, residential investment/consumer lead. Lets be clear the economy began flirting with recession that was completely cylical in the 4th quarter of 2007. NBER will probably declare in the 1st quarter(my guess is March right now). The “Real” Recession however the structural damage didn’t start occuring to the 3rd quarter, hence the recession’s structural damage has just begun.
Very similiar to the 73-75 recession. It wasn’t to the 4th quarter of 74 things really go bad. I remember as a teenager hearing the same bs that Hobo spouts from people that summer. By the end of the recession by mid-75, they had changed their tune completely.
November 22nd, 2008 at 4:46 pm
When I go out (Orlando, FL) I observe what Dead Hobo observes.
When the CEO of Best Buy observes a seismic shift in consumer behavior. I take his observation over mine. I have visibility only to a relatively small part of a relatively small city.
I took my daughter to Epcot (Disney Theme Park) last week, the place was packed, but if Disney says theme park visits are down then they know better than me.
I asked a friend of mine in St Louis who runs a hotel how business is. Business itself was bad of course, but the scary parts of her response were “Worse than after 9/11″ (think about that, planes were grounded after 9/11) and “We pay 7.50 for housekeepers. I get about 8 applications a day. Yesterday I got 126.”
In spite of all this I’m still long, but the stuff I am long is almost exclusively commodities (gold, agg, metals), energy (NG, US based drillers/exploration, no refiners and no solar yet) and health-care. All new holdings picked up over the past month, mostly the past week. Oh, also some techs, but much smaller positions.
There is no scenario out of all this that is good for the dollar long term – but if anyone has one I’d love to hear it because I guess the one thing I do admire about Mr Paulson was that he was prepared to change his approach when the (perceived) facts changed.
November 22nd, 2008 at 5:13 pm
Orlando is an interesting place. I lived there, and loved it, from 1986-1996. I worked for Darden Restaurants, the company behind Red Lobster, Olive Garden, Smokey Bones, etc. They open the first store of a chain on International Drive, part of the tourist district, because “If we bomb one week, we have a fresh set of customers the next week”, as they work out the operating systems, receipes, service practices of each new chain.
Orlando is a rather unique place where people come from all over the world to visit the House of the Mouse, among other things. That there are full restaurants, parking spots, etc, would not necessarily be a good indication of the state of affairs in the US as a whole.
Today we drove by a closed Starbucks that had only opened a year before, near downtown Ft. Lauderdale. We were on our way to bring sack lunches to the homeless who pass their time in a park near downtown. We only brought 36 lunches, so we ran out in 5 minutes. I don’t live in a representative part of the US, but depending on where I go in South Florida I can find both filled parking lots and closed storefronts. It’s probably the same in your town. Living here, I do know people who went from being Escalade-driving property investors to being bus-riding renters. There’s a joke from my parent’s day about someone hitting it big in Vegas; they arrived in a $16,000 Cadillac and left on a $60,000 Greyhound Bus. I suspect there’s more of that going on than might meet the eye.
November 22nd, 2008 at 5:25 pm
@PM: Should have mentioned I live well outside of the tourist area, about 20 miles NE of Disney, near UCF. Any effect this far out is not from tourists, but could very well be the effect of living near a university.
Everything is so conflicting. You hear the new World of Warcraft sold 2.4 million copies in the first 24 hours (at 50 bucks each), then hear Best Buy report massive sales drops.
Is the Seismic shift in consumer behavior a shift to looking for better deals online vs a shift in not spending at all? Comscore says not, but Comscore also said Adsense was losing ground last year. Google’s numbers didn’t agree.
Are those retailers doing the worst those who sell products people don’t mind buying online and can find a better deal on? Most clothing retailers beat expectations, because although you can do it buying clothes online isn’t a good idea if you want to try something on first. Restaurants seem to be busy, but Circuit City is under and BBY took a huge hit. Home Depot and Lowes held up relatively well because, again, a lot of that stuff you just don’t buy online. I think I posted this elsewhere, but I’ve never minded paying a few bucks extra at BBY (vs online) for the ability to have something “right now”. Lately I’ll just buy online, for less, and wait.
Amazon’s next report will be very very interesting…
November 22nd, 2008 at 5:30 pm
I was in a old-school Wal-mart, not one of the supercenters, and saw 6 Wii’s in the case. I have never seen these actually on the shelf in the two years they have been out, but I am not a huge shopper either, so could be my fault.
After tortured two minutes, bought it. What the hell, right?
But maybe this is what a depression looks like. People may just quit buying all this crap. Of course I totally needed mine and my family could not have lived without it this xmas.
November 22nd, 2008 at 6:06 pm
I see no way to avoid a very long recession or depression. If someone could show me a scenerio that will avoid severe long recession or depression I would like to see it.
The problem is…there are too many problems.
A market crash
An energy shock
Insolvent banking system
Stronger dollar
Housing Collapse
Credit Crisis
Derivitive Bomb Ticking
Total Debt highest in history
Stagnant Wages
US debt will reach post WWII levels
Recessions in other countries
Most of the problems above we have already had in one form or another as isolated events. They would cause a period of slower growth, a policy response from the fed or fiscal, or a recession. Now we have all these problems and more at once. We also have neutered FED and fiscal policy thus far has made matters worse.
What would you do?
Here is mine:
#1) Create a US Bank for direct lending to business (Later to be sold to the public)
#2) Pass legislation to cap credit card rates at 7% over 10yr T (the end of predatory lending)
#3) Repeal Bankruptcy Legislation
#4) Trash Sarbanes Oxley
#5) Monetize debt, bringing lower dollar and inflation. Yes interest rates will rise and china will
be pissed but thats what you get for pegging the dollar. This will help exports and obviously debt.
This will hurt housing prices but inflation will help, maybe offset. Higher Int. rates will help savers too.
#6) Recap the banks the proper way: Wipe out equity, senior debt haircut to equity, take preferred
equity stakes and wipeout management. Plan in place to remove taxpayer money later.
#7) I need a rally in corporate bonds to remove stress. What to do! All naked CDS’s are cancelled.
The unintended consequences there could be ugly, but its going to be ugly anyway(already is) so
lets get some benefit out of it.
#8)Very strong immigration policy: we need pressure on wages, this will do it.
#9)Raise income taxes, eliminate capital gains taxes.
#10)Corporate Tax credits(not just depreciation) for capital goods purchases.
#11) Big Corp. Tax credits for education and training.
#12)Outlaw all political contributions. Campaigns will be funded by a small federal tax
on each taxpayer. It will be Equally distributed among 3 candidates that can show the most
supporting signitures on a “petition to run” . The signitures must be verified by a voter
regristration ID and must be collected within a designated period of time. Voters can
sign multiple multiple petitions, but only once . Now that’s change! This will go a long
way towards developing a true fix to the healthcare, health insurance, and legal system
mess that we are in now. Get the power back to the voters for goodness sakes!
#13) Spend 500 billion on infrastructure.
#14) The biggy:
THE WORLD ENERGY STABILIZATION ACT
Spend 500 billion or whatever is necessary on an alternative energy bill that will
remove the US dependence on foreign oil in 15 years. Just the passing of this bill
will cause oil prices to plummet . The unintended consequence of this will be a
very destabilized Russia and Middle East. This is a big problem because we want
to cut our military expenditures. All hell is going to break loose when we develope
Alt. Energy Tech for our own use as well as selling it to the rest of the world. What would
have to happen is economic developement aid (and trade) from the world economic powers in
return for peace in the region and terrorism controls. They won’t really have a choice; either
let your country implode or grab a piece of world economic growth and prosper.
The Oil Co’s and Auto Co’s will be a big part of this program.
How are we going to pay for all of this? GDP will explode, driven by cheap energy, advances
/ investment in food and water technology in the Middle East (sold by the U.S.) The
middle class will grow due to the training and education tax credits. Huge savings in military
expenditures. Americans, stung by the memories of 2008 will save more. This will result
in investment in productive enterprise rather than paper flow. The implications of a world
that is not strangled by fossil fuels is truly fucking mind bogeling. Thats how we pay for it!
The only way this could happen is item #12 needs to be first.
I am not an economist and my program might destroy the world, but hey; I did stay at
a Holiday Express last night.
November 22nd, 2008 at 6:37 pm
Very interesting read in the Boston Globe on what a 2009 depression might look like:
http://www.boston.com/bostonglobe/ideas/articles/2008/11/16/depression_2009_what_would_it_look_like/
November 22nd, 2008 at 7:15 pm
@Markaz3: C is under attack, period. Gasparino’s wonder is very revealing. Anyone with a sense of history and the connection JPM has with the City of London begins to understand why “miracle worker” Jamie Dimon (the financial world’s worst liar) stands relatively unscathed. Your bringing up the $120+ billion black hole, AIG, raises the issue of the bailout’s lack of transparency. Truth is no one in Washington wants you to know most of the money is going to bailout London’s offshore financial centers, where the preponderance of OTC derivatives originate. You asked for the slap…
@CPJ13: Agree with you, but on your last point, the fastest way to bring balance back to our economy is something like HR 3400 … but funded 10-100 times more than the bill proposes
@DP: There is one scenario that’s good for the dollar (assuming no radical change in the present, grotesquely imbalanced financial/economic arrangement): WWIII.
@BKM: #12 needs to be first? Most voters simply have been too dumbed-down by the Tory press to be reliable agents of change. You got it right with #1 … and there’s no need to privatize a reconstituted BUS at any time.
November 22nd, 2008 at 8:02 pm
CPJ13 Says: “We can’t run around creating more ’services’ for the next twenty years; and it’s going to be a slow slide into a prolonged depression until we find some way to invest in actually creating, manufacturing, and providing something tangible to the rest of the world.”
I’m in agreement – but remind you that we installed factories on foreign lands, and those foreign workers work cheaper. Thats a real problem going forward. The establishment is
counting on those new workers wanting our way of life. The establishment is also counting on those workers and factories buying outside their own countries manufacturing. We shall see how the game plays on.
BKM that was some plan.
:-)
November 22nd, 2008 at 8:24 pm
>> 2) Our society being more technologically advanced and savvy today will figure out a way to make this less severe.
That *might* make it tougher. Why? Technology sets the bar higher and higher.
- It takes more and more years of education for someone to contribute something “new” to the world. E.g., there’s some biotech company in CA that offers to model the effect of your compound proposals and , if those results appear promising to you, lease you (on a per compound, per batch, or per week basis) a lab to test the real compounds. All the mixing and testing is automated. With this scheme, your company’s “worker education distribution needs” morph from a “squat pyramid” into…an “hourglass” (no one in the middle).
- It’s easier than ever to offshore.
On a tangent, after years of tuition increases, American workers start off with a high cost basis. They can’t afford to accept offshore wage levels without first discharging their student loans in bankruptcy (which they can’t do right now). “Going away for college” and spending on dorms will become a luxury. … What concerns me *most* about this is: how will the next generation of filmmakers get the material to create the next Mr. Blutarsky?
November 22nd, 2008 at 8:45 pm
DP – Those are great data points. That’s why I love BP. You get so much great data from people thinking about the market in different ways and with different backgrounds too. Same goes for DeadHobo and everyone else.
I think where the confusion is around talking about the real economy experience of looking for a place to hang out on Friday nite, versus how the equity markets are interpreting past and forward looking economic indicators.
The equity markets can receive BBY CEO’s lower revenue and earnings projections for 2009, attach solid growth in years 2-10, apply the average PE multiple for BBY over the past 5 years, and determine that BBY is cheap. In this example, the rough and tumble 2009 gets diluted. And BBY looks like a buy.
In Barry’s original case, the S&P earnings of $45-$50 for 2009 only take into account the seismic shift in demand, and lower costs for inputs, commodities, etc. By now, they should also be taking into account at some other impacts of the real economy, like headcount reductions, exchange rate shifts, etc. 2009 numbers don’t get the benefit of future years.
Barry is applying 10x-12x PE multiples. Given that other big bear markets saw 8x-9x multiples in environments with higher unemployment, much higher interest rates, and less political momentum behind large fiscal stimulus packages, that’s conservative but fair. Andrew Doherty from Morningstar would agree.
Here’s the thing: Barry’s saying FAIR VALUE of 500 to 600. Not “THE BOTTOM”, but fair value. The reason I don’t buy that is because history tells us that in the aftermath of the three largest crashes (’29, ’65, Japan ’89), the market overshoots by as much as 50% of fair value. That would imply at the number Barry threw out, we would have to go as low as 250.
Regardless, if you took the nasty 2009 earnings and applied a 5 yr average PE, not the compressed 10x-12x, then you might conclude that $50 x 17 = 850, and you’d be legging in now.
I’m also trading the volatility for beer money to keep the old lady off my back.
November 22nd, 2008 at 9:41 pm
This is very scary reading…
November 22nd, 2008 at 9:52 pm
@ Greg0658:
I agree with the necessity of what you mentioned – and that it must be on a much larger scale. However, this investment in our own national infrastructure can be dumbed down to taking money from one pocket and placing it in the other, no? We’re funding our infrastructure projects – with wages and payments going to American corporations, and the American worker – but how are we paying for this?? By borrowing overseas. Thus, our interest payments are still being sent overseas. This plan is good, and would significantly shore up the jobs market on the ‘ground’, but doesn’t address our ballooning current account and trade deficits.
We need to focus simultaneously on pulling ourselves out of this (relatively) short-term problem – the re/de/pression – while making meaningful investments in industries that will have medium and long term impact on our massive debt-to-GDP imbalance. In order to do this, we need to both a) export more [alternative energy, technology], and b) import less [OIL]. Any immediate investment in infrastructure/jobs without addressing those two pressing needs would ultimately fail to keep this nation solvent in the long run.
Not to mention SS and the Medical entitlement programs… but we’ve got to start with the debt/GDP and trade imbalances first.
November 22nd, 2008 at 9:56 pm
My apologies – that was in response to RiskAverseAlert.
November 22nd, 2008 at 10:23 pm
Thanks for the good read tonight… Now I get to lay in bed with my eyes open all night and my mind racing…. ;)
November 23rd, 2008 at 1:57 am
With respect. Santoli has been a stubborn bull and has tried to discredit every idea about the downtrend. When I spoke with him on show about credit a few months ago, he could not comprehend an unemployment rate above 6%-6.5%. No matter what info I sent to him or the several time we spoke on different ideas, he was happy to provide a a snappy comeback, always fighting the obvious.
Notice that even in this look into the abyss, his final line quoted is looking for a hopeful bounce…
When he eventually gets bearish, I am all in….To his credit, his writing is gorgeous. Might I suggest that he use a chartbook to report finance rather than a thesaurus.. There is only one Abelson anyway..
A
November 23rd, 2008 at 8:21 am
Actually, wrt the $45-50 earnings estimate, S&P itself is projecting this. Go to the XL spreadsheet of quarterly earnings at their website and look only at “As reported” earnings (That is, actual reported earnings for tax purposes) and the “Top down” estimates as opposed to the “Bottom up” estimates, which are averages of analysts estimates (Exactly!!)
And, voila, there’s your estimate. I agree with BR, we may get a nice bounce but we will for sure reach new lows before this is over.
November 23rd, 2008 at 8:55 am
Also, to repeat an earlier post in a different thread, US Companies have the best profit margins ever by manufacturing in Asia. But of course there are no sales because all the jobs are in Asia.
Over-simplified perhaps but I’m convinced there is a need for a radical re-think, especially now that Wall Street has confirmed systemic stupidity is possible.
November 23rd, 2008 at 11:21 am
Ah the great God Technology. Surely if we can just double our transistor count one more time, we will have a computer that can tell us all what to do, and make everything great and glorious once again. Finally a real god!
uh, yeah. Good luck with that.
From the ‘We should have figured this out a long time ago department’: Technology creates tools. Tools are only as effective at creating results as the hand guiding them. Technology can minimize the number of hands doing the driving. Is that what you want? Tough it’s what you’ve got.
Actually, technology is going to amplify this downturn, big time, already has in fact. This is actually the beginning of the first real downturn in the global village brought to you by… the good folks at TUA –Technology Uber Alles. The first truly global societal crisis. Welcome to the 21st century brought to you by TUA
American beliefs about technology are among the most confused beliefs we have. We endlessly laud our technology while paying our technology innovators less than the garbage man. We endlessly laud ‘entrepeneurship’ while failing to note the distressing frequency with which corporations, and middle management reap the benefits created by those entrepeneurs. We offshore our technology development fantasizing that we will still retain the power attendent to those who control technology.
Anybody know who Leo Farnsworth was? No of course you don’t. He invented television believing it would usher in a golden age of knowledge and wisdom (not money). He died penniless, the profits and control of his invention having been commandeered by David Sarnoff at CBS. Farnsworth was a technological innovator, running what we would today call a ‘startup’ in the ’20′s. Sarnoff was a corporate insider extremely adept at manipulation and the uses of power. Who runs the world now, the descendents of Farnsworth, or the descendants of Sarnoff?
November 23rd, 2008 at 12:15 pm
Keep in mind that stocks seldom sell for low multiples of trough earnings. For example, in 2001, S&P 500 GAAP and non-GAAP profits fell 51% and 31%, respectively. Taking the average daily price for the whole year (1194), the S&P 500′s P/E was either 48.4 or 30.7, depending on which flavor of earnings you prefer.
November 23rd, 2008 at 3:31 pm
VFTW,
not that it much matters, though, with this: “Anybody know who Leo Farnsworth was? No of course you don’t.” take it easy. anyone who’s read MAD Magazine more than three times, had access to a set of Encyclopedias, and a Spirit of Inquiry–stumbled across the Reality of ol’ Leo, and some else..
November 23rd, 2008 at 5:12 pm
Great Depression:
GNP dipped 33% by end of 1933 from 1928 highs.
International trade dropped by 66% over the same period.
1929 stock market valuation was disconnected from underlying economy: at least 45% overvaluation.
Weak Fed took policies which increased deflation.
“Global” economy was essentially just US and Europe.
2008 “Depression”
Economic bubble created by extreme US credit bubble.
Minor stock market overvaluation relative to economy.
No protectionist measures on trade- so far.
Much stronger global economy than in 1929.
Global Keynesian response to downturn.
I see S&P breaking 700 in 2009, economic recovery beginning 2010.
November 24th, 2008 at 10:58 am
“Predictions are hard to make, especially about the future.” Yogi Berra
There sure are a lot of crystal balls around here.
November 24th, 2008 at 1:36 pm
Heh!
Someone filled my crystal ball with mud a long time ago, but since everyone else was pulling predictions out of their various orifices, I thought I’d take a shot.