Open Thread: What Now?
By Barry Ritholtz - November 8th, 2008, 7:00PM
Macro Notes
We don’t want your help because maybe we don’t need itPeter Boockvar
While yesterday's US stock market close was poor, Asia and Europe didn't follow today as debt in Greece, Spain, Portugal, etc... rallied, their CDS narrowed and stocks bounced. The Greek finance minister said January tax revenues came in above expectations and that spending was below target for the month and said "that means the deficit reduction for January is well within what we have promised." The euro is rising in turn. Also helping is the story that Trichet is headed to the European Union leaders summit a day early in order to address Greece's problems even as the Greek finance...
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November 8th, 2008 at 7:12 pm
How many years will it take to get back to selling 17 million cars a years?
November 8th, 2008 at 7:26 pm
Barry,
For sanity to return, we need to start HERE:
November 7 – Bloomberg (Jeff Kearns): “Business schools must change their teaching to embrace more empirical models instead of the risk management models that failed to foresee the worst market meltdown since the Great Depression, according to Nassim Taleb, the options trader turned ‘Black Swan’ author. Universities must change because they teach mathematical theories, such as the Black-Scholes model of pricing options, that don’t express risk properly.
If this isn’t done, people won’t be able to price risk so they won’t trust the market so they won’t buy.
Mafia business technics got us here. Nothing changes until we are rid of them.
November 8th, 2008 at 7:31 pm
25+ yrs of industrial production decline and increasingly financial engineered driven bullshit for the US economy ( especially last 8 yrs under Bush ) with massive market bubbles has created systemic damage.
What is on my mind ?
It will take Obama two terms to get Americna back on track so in the interim I agree with Kunstler hat the GOP under Bush has wrecked America so Americans had better get a new “Dream” and fast.
November 8th, 2008 at 7:44 pm
Next years earnings plus or minus 50 on S&P. P/E 10?
New wave of Option ARM/ARM mortgage problems.
Still a long way down?
USA Inc still doesn’t seem to understand that if you export all the jobs to China, you create superb profit margins, but of course you have no domestic customers because all the jobs, and money, are in China. And China, like Russia, may turn nasty from a position of power and decide they don’t want your worthless bits of green paper any more.
November 8th, 2008 at 7:46 pm
I think you should get your toes out of the water.
November 8th, 2008 at 7:53 pm
As to the business school comment, Taleb is right on. How many times does Myron Scholes need to blow up before he is discredited. Random Walk and all of that other theory is b.s. in the short term also imo. There needs to be more psychology/behavior economics stressed when it comes to teaching markets.
As to the economy, I have been waiting for the election to end to see if business (restaurant) would pick up. It has not; quite the opposite, it has gotten worse.
November 8th, 2008 at 8:08 pm
I think that all the aging Supreme Court Justices should resign on January 21.
November 8th, 2008 at 8:23 pm
Looking at some long term charts today and wondering if we could actually unwind all the way back to early 1995. That seems to be around when the “irrational exuberance” began to evolve and would put SPX around 500.
November 8th, 2008 at 8:23 pm
Still hoping for token new lows, perfection would be 10-15%. I’ll be a buyer. After 30 years of trading this stuff I don’t care what the fundamentals are. Tell me the world is ending, I know I’ll do well. Without poking too much fun at fundamentalists I have never seen them to be right on the big picture. Accordingly the world is perfect or it is ending. I only seem to make money in large chunks when they tell me the world is ending.
I suppose the world may end some day but then what does it matter, my stock portfolio will be the least of my problems. Friday I bought back 1/4 position in the mutual I sold in February. We’ll see.
November 8th, 2008 at 8:25 pm
Short term, big govt pumps even more $ in all kinds of industries, insurance, auto, ah what the heck – all automotive – industries. Obama doesn’t say no to anyone.
With America taking a sharp turn to the left last week, we become more like other countries in Europe. UK, Germany, even France or Italy.
Big govt with increasing rights for the blue collar workers (eg, higher min wage, health care, can’t fire laws, unions)
Taxes become so unfair, most innovations and entrepreneurs move to India or China.
3 years from now, we have hyper inflation due to all of the $ being pumped into the economy now. 10 year T-bill rates grow to 8%. America is mired in stagflation.
November 8th, 2008 at 8:27 pm
What now? We watch Total Credit per GDP…watch and pray that as it collapses, we avoid a fate worse than the Great Depression. As of 6/30, it is at all-time high of 357%…hadn’t even started contracting yet. All we have felt so far is credit growth slowing.
http://www.comstockfunds.com/files/NLPP00000/292.pdf
November 8th, 2008 at 8:31 pm
Change will morph into “more of the same” in 6 months. After the excitement is over, after people stop blaming Bush, there will come a profound and depressing realization that our economy is in the shitter. Without bubbles, we have bubkes. It will take 20 years to rebuild our economy, and the longer they keep insolvent institutions from taking the rightful place in bankruptcy, the longer the rebuilding will take. As an aside, I believe that we should abolish most MBA programs, because time is better spent in real workforce than in classrooms. You can’t learn to fight without sparring, and you can’t learn business without being in business. Rick Wagoner, for instance, is a Harvard MBA. As such, he turned GM into a hedge fund since it was a profitable business at the time. Had the head of GM been an engineer, product development would have taken the priority. My suggestion is to have a Reverse Marshall Plan, where engineers from Germany and Japan come to our shores to TEACH US how to run companies that can manufacture cars that people want to buy. No GM/F bailout without management attrition.
November 8th, 2008 at 8:36 pm
I expect the nuts & bolts, everyday Joe & Jane’s economy to continue to worsen through sometime between April and September 2009, when the credit infusions the Fed has been pumping madly into the economy begin to have an effect. The longer that banks hang onto the cash instead of pushing it out into the larger economy, the longer the slide will be.
I expect there will be a flurry of spending incentives disguised as “tax cuts”, things like (and these are only general examples to give the flavor of things) a $15K tax credit on domestic plug-in hybrids — this assumes that the government will be a part owner in the domestic auto companies, and will push them to roll out greener models quicker. Also, similar “tax credits” on rooftop solar and wind power installations, which might provide additional activity in the moribund housing industry. And of course a generous swath of infrastructure capital spending — roads, bridges, electric transmission lines and things of that ilk.
Local governments will be waving the tax exemption carrot to foreign manufacturers, possibly with federal tax breaks geared to the number of American workers employed. This will, over time, bring back a portion of the manufacturing that we paid companies to send oversees. Now we will pay foreign companies to bring it back — but the profits will have permanently moved offshore, until such a time as we manage to grow our own domestic competition, probably a full generation in the future.
I’m expecting the L-shaped recession to be the eventual outcome in the markets, with a few performing companies managing to grow themselves up off the flatline base, eventually dragging others up as well, maybe 5-6 years down the road. The V-shaped recession is a phantasm of the remaining bulls, there is too much government debt load to permit our national economy to spring back — it just ain’t-a-gonna happen. Same thing with the U-shaped recession, for the same reasons.
If the US was the only country on the globe trying to inflate away the deflation from the trillions of imploded debt, maybe we could eventually manage to do so. But every nation is or will soon be racing to print money faster, so global stagnation-deflation for a while is gonna be the order of the day.
Traders rule, investors whither and die as they find the returns from zero-interest secure funds insufficient to live on. And a lot of toes are going to be lost along the way.
November 8th, 2008 at 8:38 pm
1) The government must invest in creating jobs. Preferably jobs that create exports.
- Manufacturing
- Infrastructure – Not much export but provides value and much needed jobs.
- New Power Sources and better technology
- More efficient current power source uses
2) Somehow the mentality must change that you have to grow revenues and profits year after year, quarter after quarter, day after day. What is wrong with doing a core value product service whatever and doing it well and making a fair profit? This mentality drives much of the worker pay, benefit, and retirement cuts. Again when workers have nothing to spend you have no customers.
3) CEO and executive pay has gotten very skewed. This also drives the “screw the worker” mentality. Those screws to the worker have driven an unbelievable share of the obscene bonus payouts to CEO’s and top executives. When the employees weren’t being screwed the customers have made up the rest.
November 8th, 2008 at 8:42 pm
@Steve B.
All we have felt so far is credit growth slowing…
I think I’ll kill myself now.
November 8th, 2008 at 8:47 pm
Steve Barry –
this is how our credit-to-GDP is going to come back to earth:
But I don’t expect it to happen this time around. We’ll get a weak recovery sometime in the 2010-2012 range and sometime between 6 and 10 years from now, after our foreign creditors have had plenty of time to insulate themselves from a large part of our toxic national debt, we will see an attack on our currency, similar to that which led to the demise of the pound sterling as an the international exchange currency.
THEN we will see the credit-to-GDP ration decline to rational levels. The USofA will be the new Iceland.
November 8th, 2008 at 8:47 pm
Car biz as run by Ford and GM: All management should be thrown out and nobody should feel sorry for any stockholders who have simply sat around while both companies lost market share year after year. Part of the problem is the supreme laziness of stockholders, but add to that the idea of just trading, buying a stock til it completes a “run” and then selling for the price difference between entry and exit, allows and encourages a stock holder “bailing” and buying something else without any emotional investment in a company. We all just want to make money on a stock move, not a dividend. Management sat on its collective butts for thirty years and produced SUVs and other monsters of the highway because they could mark up the prices without limit; in other words they went with the quick buck without a thought of the future. So now I’m supposed to somehow “support” these assholes?
Next is the UAW, a union interested only in their ill gotten perks which include laying around the shop floor doing nothing, more paid vacation days than anyone in any industry including government. Their insane benefit package adds $1100 to $1500 to the price of every car produced, meaning all American cars start with a $1500 price disadvantage. There is simply no way to make that differentiation up. In spite of year after year of expanding layoffs due to bad business the union refused to compromise. So now I’m supposed to support these assholes too?
November 8th, 2008 at 8:52 pm
OK, I’ll try one last time, if this post does not contain a url, try googling NYT iceland for the story of what life is like when a western-style economy has the credit-to-GDP balloon burst.
http://www.nytimes.com/2008/11/09/world/europe/09iceland.html
November 8th, 2008 at 8:55 pm
“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” ~ Lau Tzu
November 8th, 2008 at 8:58 pm
One positave out of all this is that there is a mass rush of illegals to disembark from the sinking ship. That is only one small plus. The large plus is that the Federal Reserve, Washington beaurecrats, and Wall Street Scammers might get purged in the long run. That is the best we can hope for as our ship goes down. God save our flag.
November 8th, 2008 at 9:08 pm
If everyone prices in the long tail event, and assuming they’re using god’s formula, then theoretically they would all share an equal piece of the pie. But that’s not how it works, if you want more than your fair share you must under price risk. Because of this competitive conundrum, the long tail players will prevail.
November 8th, 2008 at 9:13 pm
Okay, stop this crap of financial banks buying up other companies with the money given to these bailout candidates. Is this bunch of politicians really that stupid enough to allow that?
Stop the bailout talk for the Big 3. They decided their path with monster SUV’s, poor quality and bad gas mileage. Let them dig themselves out of their graves. The Far East companies knew the strategies to pursue, why didn’t the U.S. auto manufacturers?
November 8th, 2008 at 9:27 pm
We need to rethink whether this is both necessary and affordable:
World Wide Military Expenditures
Rest-of-World [all but USA] $500 billion
United States $623 billion
November 8th, 2008 at 9:29 pm
T-Bonds will be the next problem. Too much supply.
November 8th, 2008 at 9:42 pm
I have to agree with deanscamaro. This isn’t the first time the auto manufacturers screwed themselves by not taking the “big picture” into account and instead focusing on short-term priorities. I realize fully well that allowing them to fail would come with bitter economic cost, but US taxpayers should not be penalized bailing out companies that refuse to learn from their own mistakes.
November 8th, 2008 at 9:50 pm
Not a bull in sight – that is a good sign right there. Just the opposite of 1 year ago.
s&P 500? Who wouldn’t be a buyer at that price? I would put every penny I had in the market at that level and in 30 years I would be as rich as Warren Buffet. So don’t hold your breath for those bargains. Sorry folks, nobody is going to make it that easy for us.
Yes, the past decade of irrational exuberance and the speculative bubbles that occurred in rapid succession have now created a much larger sucking sound. Yes, people will be cutting way back on their purchases and companies are going to have to adjust to a deleveraged consumer, but think of the adjustments they are already making! The flexibility of our economy is on full display. The steep rise in unemployment is a sign that companies are proactively managing their fate – not waiting for the loses to mount. And more good news, many companies have entered this period with great balance sheets and they will be able to buy back shares at great prices while riding out this storm.
It is a good thing for corporate America that it entered this period after a decent run of record profits. The same cannot be said for most individuals that are entering this period with more debt and dimished wages. As they say… what was good for Wall St. was not good for Main St.
One more item: the unprecedented Govt activity is another big plus for Corp. America. The bailouts represent a shift of wealth from taxpayers to corporations. That gig is probably up for the banks but it is only beginning for the companies that build infrastructure.
So if you can get over the fear of Roubini and get into the mindset of another economist who actually trades stock for a living – John Hussman – you will see that on the whole most of pain is behind equities at this point.
November 8th, 2008 at 10:03 pm
What’s on my mind? Wow, what a question. Right now I *really* wish I’d spent the last 10 years gradually studying economics instead of “cramming” in the last few months. There’s so much I don’t know. Here’s some of the things on my mind, insight appreciated:
1. So many articles saying we will have hyper-inflation and perhaps even default on our debt / revaluation. What is the counter-argument? What would someone who believes this will all turn out ok tell me? Under what scenario do we go from where we are to NOT defaulting and/or NOT having hyper-inflation?
2. If I buy foreign stocks and foreign currencies in a US held brokerage and we *do* default, have I achieved anything? I can’t imagine us telling China “Sorry guys, we’re not paying” and China in turn honoring all those ADRs for Chinese stocks, etc. Same with GDX or GLD.
3. If I buy a TV today and the currency crashes next year, I still have my TV. If I save a grand today and currency crashes next year, will I need twice as much money to buy that same TV? Wouldn’t it be ironic if a partial hedge against all this is, “If you’re planning to make any big purchases, do it now while you can?”
4. What are the chances of another gold confiscation? Seems slim, would be the government admitting total failure on the dollar, but is even physical delivery of coin / bullion safe?
5. Will Europe come out better? I have an EC passport, does it make sense to move while dollars are actually worth something?
6. If I buy currency is that safer? How? An envelope of Euros stuffed under the mattress? Forex?
So much noise, but to my uneducated eyes it’s starting to look like either (a) things turn out ok long term or (b) you might as well buy stocks anyway because money in the bank won’t be worth anything either if (a) is wrong.
November 8th, 2008 at 10:05 pm
A righteous wind is behind the back of the bears.
November 8th, 2008 at 10:09 pm
Granted, I’m simply someone that follows economics and business out of mere curiosity…
1) Statements like this, from Bloomberg today:
“Central banks are betting that negative real interest rates will induce people to spend rather than save money that is declining in value, economists said.”
But not having a job makes it awfully hard to spend money. And their money declining in value when they have mountains of debt is asking for trouble. Ben Bernanke, of all people, should know this.
2) Credit is improving, but mostly for corporations. The Fed has stated on a few occasions that they want banks to lend, but banks seem to be using the rate cuts to increase their interest rate differentials on their lending (thus why the markets rally when bad news comes out and they expect another cut?). The Fed can cut rates all they want, but if banks don’t lend to consumers and propagate that out, you’ve really sterilized the effect of cutting interest rates.
3) I agree with the sentiment that the US really needs to diversify it’s economy. Perhaps I’m naive, but I don’t buy that the “structural changes” to the economy during the boom years is tenable. People didn’t notice because they could use their houses as ATMs. Bringing back these jobs falls into Barack Obama’s territory — though I shan’t think that China is going to be too happy about jobs going in the *reverse* direction.
4) The formation of another bubble (probably in energy) to “get us out of” the current one. As a bubble deflates you need a bigger one to replace it with.
November 8th, 2008 at 11:08 pm
Whale watching –
I think most of us choose to ignore the primary driving force behind the US market’s success over the last 30 years. That is, the participation of the general public by way of mutual fund investment (401k etc.). That never-ending trickle of “dumb money”, that peaked at over $12T, for “super-geniuses” to exploit. Those buy and hold suckers, who were in it for the long haul. That’s where support levels came from. But guess what? they’re leaving – and my spider-sense tells me they ain’t comin’ back anytime soon.
I check in at ici.org to look at mutual fund investing trends (no wonder I don’t have any friends). Much of the past action has been people shifting money (from stock funds to money market, for example), but since June $1.662T have vacated mutual funds altogether. This is the long-awaited baby-boomer liquidation and it’s just getting started…
Now add to that a 6.5% and growing unemployment rate, people struggling to stay in their homes, and a $850B “bailout plan” that most people opposed and no one (including the creators) understands. Is it any wonder you don’t hear much, “I think I’m going to increase my 401k contributions, cause P/E’s are low” talk?
Maybe this is the buying opportunity of a lifetime, but Main Street isn’t gonna buy anything Wall Street’s selling for a long time.
Every sunken ship’s got a room full of charts.
November 8th, 2008 at 11:13 pm
In days of old,
When cars were sold,
And CDOs weren’t invented,
They sold at a loss,
Employees didn’t get the toss,
And Bankrupcies were prevented.
But now it seems,
A steep discount is in your dreams,
The CEO would rather bankrupt and steal,
Than give a common man a good deal.
November 9th, 2008 at 12:27 am
“Every sunken ship’s got a room full of charts.”
I never heard that line before. The charts don’t do much good in uncharted territory. Speaking of ships, I was wondering if the Titanic had a VIX meter would it have kept her from sinking.
November 9th, 2008 at 12:37 am
What is displeasing to me is not so much the economic downturn as the government’s reaction to it. The massive debt that the politicians insist on piling on (including the Fed’s “trash for cash” program) is going to exact a heavy toll on us for a period of time that will last at least until the baby boomers begin to retire in large numbers… and that could well precipitate an even bigger financial crisis.
Furthermore, we don’t yet know the adverse outcomes that will result from all of these “backstops” and loan guarantees… we’re creating a kind of “addiction” among financial entities that are now dependent on government support. Withdraw that support, and a raft of new problems will emerge.
As for the market, I’m betting on a low of about 700 for the S&P next year. And after that – - nothing good at all for the “buy and hold” people.
November 9th, 2008 at 12:39 am
I have been managing my retirement through TIAA-CREF more aggressively the past 2 months. In fact, I purchased some Growth funds with the Dow at 8200 and sold at 9350… the specific trade neted about 10% for me. A few days later I get a nasty letter from TIAA CREF telling me that I’m over active in my Growth account and am in jeapordy of having my trading priveledges removed. In other words, I shouldn’t be buying low and selling high. Instead I should be buying and holding regardless of market conditions. Isn’t the point of trading to begin with, buying low and selling high??
These are uncertain times and the buying and holding wisdom of dollar cost averaging is just naive to say the least. I wonder what it will take for these firms to realize they need to allow their clients to be more nimble in this economy?
I consider myself a long-term investor, but in this environment, I have to be nimble if I want to protect/maximize my capital.
November 9th, 2008 at 1:02 am
My recent dark thoughts and questions:
1. when will we see the first required (public) reports on the progress and effectiveness of the bailout? Is the bailout process “transparent,” as was promised by the indignant drafters of the bailout bill?
2. will the recession/depression _really_ be different this time? (rules of thumb from last 100 years go out the window?)
3. will Obama (and seemingly all of the rest of the politico and economist ranks) adopt the “spend, baby, spend” approach, and will this insure extremely high inflation in a few years? Will the Austrian-school economists now be proven right in their long-standing predictions of easy-money government administrations driving the dollar to worthlessness?
4. how does one of modest means prepare for _that_ future?
5. because of our recent overwhelming greed, heedlessness, and ignorance, how much is the US : poorer, weaker, dumber than we imagined that we are? How much financial, political, physical, and psychic pain and suffering will it take for the people of the US to recognize and see clearly their new much-diminished position in the world?
November 9th, 2008 at 1:09 am
What am I thinking about? Another angle for getting my money from either PIMCO or Oppenheimer who sold me auction rate securities that neither company has had the balls to be responsible and redeem for all the investors they bilked. Big Cuomo swung in and hit the big underwriters over the head but left anyone who bought through a distributor hanging out to dry.
November 9th, 2008 at 1:45 am
Two items, neither of them pleasant:
1) Some foreign government will dump the treasuries they have been buying and holding. The dollar will plunge and even goods at WalMart will be unaffordable. Even if they don’t do it, they could threaten it and keep the US at bay while they carry out some military aggression.
2) Baby Boomers are aging and as they get into their 70’s and 80’s, their consumption will decrease dramatically. Add that to the lessons (hopefully) learned in the last year, and any growth from US companies will be driven by foreign consumers. Of course, the US has very little to export since most manufacturing has shifted overseas. Except for weapons, in which case see item 1.
November 9th, 2008 at 1:47 am
Al right guys. I need someone to please answer theis question for me. First I am a novice trader that has had some success trading, mostly thorugh technical analysis ( you know, the basics). But I desperately want to understand more about the macroeconomic fundamentals that all you guys are talking about.
1st, I would like some one explain to how it is detrimental to our economy to ship jobs over sees. I know this sound like a stupid question, but I need to know the exact logic of how this happens. I read on market ticker that we went from a country that actually produced goods and services, to a bunch of paper shofflers. The first he says produces wealth, the other makes us poor. So exactly how does that happen? I thought we did produce some stuff, but more than that, since we are a service economy, shouldn’t we be able to lieve off of the services we provide each to each other, ( i.e. teaching doctor visits, cooks, etc.) Where is the disperity that shipping jobs oversees is creating. And how does this relate to obscene amounts of consumer and national debt? What would have happened if we had never sent jobs overseess? What are the implications of this to our monetary policy. SO I ASK PLEASE , answer these questions, all of you sound very bright, I need some tutoring here. Also could you recommend some good books that explain credit bubbles and how industrial production, or the lack there of, affect the real economy? I figure that really grasping this, will make me that much of a better trader.
THANKS
November 9th, 2008 at 2:06 am
I should be working on my note but here goes.
1. There are a lot of great thoughts here I hope some get developed further in future blog posts.
2. Someone mentioned “cramming” in terms of learning all this stuff recently. I have been doing so as well. As a grad. student I have been sorta floating through not 100% sure on what I wanted to do – but after this crisis struck I have a much better understanding. I am passionate about learning as much about this as humanly possible and after taking so many required law courses in prep for the bar I forgot what that passion was like. In response to that
LSAT and GMAT testing, $4,000
3 years of grad school financed exclusively by loans $210,000
rekindled passion for learning caused by other people losing Billions of dollars, priceless
There are somethings money can’t buy for everything else there’s a bailout.
I kill me.
3. In my finance courses we focus exclusively on CapM. I often try to ask if 1. markets truly are efficient, and 2. is the risk correctly calculated into the price. My questions are not well received. But usually it is an appeal to authority. “The guy who invented this got a nobel prize… etc. etc who are you to say anything.” At which point I usually shut up and hope the prof. doesn’t hold that against me when grading my final.
4. On that note – In a group project for that class we are projecting out First Energy for 10 years (not to realistic) and we were able to meet with the FE CFO Rick Marsh. Pretty cool stuff I got to ask him about his risk management for over and hour. I left feeling a little nervous. He said that his Nuclear Energy plants typically have numerous 10 standard deviation events each year! He was a real nice guy and admitted their might be some problems with his models, or rather limitations. A little bit unnerving either way given my proximity to these nuclear reactors.
5. My school Case Western Reserve University (law & Biz) put on a speakers panel where 7 panelists talked about the the current crisis. I saw a video on this blog where the Yale biz guy talked about how this was a failure of the academic economists. As a good conservative I liked this point. Armed with this knowledge I proceed to listen to the Econ. people talk and say nothing at all. I asked what the purpose of an economists was if they had no clue this was coming – and further what can they say are some likely factors or problems moving forward. I tried a little tact, but the moderator had given me a “B” the semester before so I didn’t care that much. The response I got was classic: “If we had any idea what the problem or factors were moving forward, then they wouldn’t be a problem” Really? And you of course have tenure.
6. I have been ranting and raving – I apologize. I really love this site and I have been learning so much. My friends and peers are sick of me always talking economy so I am using this as a medium to share. Keep up the great work on this blog I find everything so very fascinating. Thanks again.
Ted
November 9th, 2008 at 2:14 am
eddieb,
My last post wasn’t long enough so I wanted to respond. I don’t know much at all, but I read a great article from either this site or infectious greed, where it explained why Henry Ford paid his workers so much above the going rate. 5 bucks a day as opposed to around 2.30 or so as I recall. There is more to this then what I am about to say, and obviously the economy is more nuanced now but, he paid them so much so they could afford his cars! Seems counter-intuitive but I think at least some of his logic would apply now. I wonder how many people in this country can afford a 25k new GM car? Would you even want one if you can pay 20k and get a nice big camry?
November 9th, 2008 at 2:57 am
For the near term, we have a global credit crisis to navigate. As per Satyajit Das, who knows a lot about it, we’re in for much more pain.
http://articles.moneycentral.msn.com/Investing/SuperModels/a-credit-crater-too-big-to-fill.aspx
CDS are a big component of this problem, here’s a modest proposal to tame the beast: since the majority of CDS’s bought in the last few years was mere speculation without even owning the underlying asset to insure, those who did NOT own said asset at the time of the CDS purchase should have their contracts voided. Harsh and radical, but pray tell when has it been considered sane to have 100 people buy fire insurance on the SAME house in the neighborhood huh? Betting with a security that is essentially an insurance instrument ought to be reserved for protection purposes only. Wall Street and accomplices in Congress wanted to avoid regulations? Weeeell! How about getting retroactive regulation in the kisser as a, err, shall we say deterrent? As a token of disapproval for bad behavior, hmmmm? As a reminder that it is permitted to deploy capital for productive uses too.
While this unfolds, unemployment will rise to double digits territory. It’ll be ugly, whichever way we look at it, especially with credit drought and falling home prices. The silver lining is that perennial neglect of our infrastructure can be used as an opportunity to fix it while providing jobs. Screw the squealing about the budget; we’re talking investing in ourselves here. Obama’s plan to create an Infrastructure Bank is clever: it would put knowledgeable people in charge while allowing the government to deprive Congress of yet another toy for spreading the pork instead of doing the right thing as well as the things right. Hell, he can even use a couple of signing statements if the jokers don’t want to go along. Courtesy of his soon to be predecessor.
The era of the investment banker as master of the universe is over. Regulations are on the way and they’ll be international in scope. Cries of “don’t hinder financial innovation” shall be ignored for another 70 years, as they (rightfully) were after the Great Depression. Finance must be at the service of the Economy, no the other way around.
Oil will get scarce, and we just can sit and chat awaiting for this to happen. This is a fact. If one need a bit of background (and persuasion) about this topic, chrismartenson.com has 3 excellent chapters (17a b and c) dedicated to oil in his Crash Course. A true eye opener IMO.
Hence, the next big thing that will power up our economy will be alternative energy. We’re not talking touchy-feely, tree-hugging, delta-9 THC induced wild ass dreams here. I am talking BIG bucks, mucho dinero, a mountain of moolah to be made. There is a phenomenal amount of innovation taking place right now that just need wisely invested capital and smart policies. For those who want to know more, go to tedtalks.com and search for Amory Lovins presentation on winning the oil endgame. Very instructive.
So, the near term will be tricky and dicey to go through, and there is no guarantees we’ll do so without severe dislocations economic and social. It could also take much longer than we wish. However, innovation and smart politics could go a long way to restart on the path of prosperity based on better adapted footing than growth for the sake of it and more is always better.
One thing is sure: the next decade won’t be boring.
November 9th, 2008 at 3:01 am
After a lovely evening drinking great red wines, eating super tasty italian dishes at a neighbor’s, I came home to drop Barry a first-time mano-i-mano question. Turns out he’s got an open thread…beauteous. Here goes:
If the financial and economic crisis is of historic proportions (and it is), will we emerge from it (or enter into it) with a clear thought leader who defines a new level (and generation) of financial thinkers and who leads the global economic community into new directions. Why / Why not?
November 9th, 2008 at 3:04 am
I deleted the tests
Note there is a delay from when you (I) posted comments to when they show up.
November 9th, 2008 at 3:49 am
How can saving be encouraged now at asinine rates – and how can house prices be supported anywhere except 1/2way down from excessive 7x possible earnings for a mortgage and then some – and who wants to borrow money – people want to pay off grossly excessive debt, not borrow more. The horses that can be led to water but not forced to drink, these horses don’t even exist to be led in the first place!! Even at virtual 0% interest rates, whilst old debt may be easier to service, very few will take on new floating-rate debt (knowing they’ll eventually be shafted when rates rise big-time to prevent an eventual currency crash), so then what?? It’s not ” the economy, stupid” – it’s “the yield curve, stupid”. As it widens as buyers choke, it will be the signal that…yes…this time it IS different.
November 9th, 2008 at 7:26 am
ohemingway Says:
“Every sunken ship’s got a room full of charts.”
I never heard that line before. The charts don’t do much good in uncharted territory.
There’s very little uncharted territory left. Sure a sailboat or two, an old tramp steamer go up on a reef in the Tuomotos, but that’s why you can’t insurance when you sail through those parts.
The difficulty is in knowing what chart you are looking at and that takes time. If any investor thinks they are going to jump into this shark tank and come out whole, wow. Every long term investor has been hosed several times during their learning curve. This current crisis is for some of you your first. When the next one comes you will be better prepared. That’s how the game is played.
“There are bold traders and there are old traders. There are no old bold traders”. Said by someone famous.
Keep in mind while the sky is falling all we are talking about is where to be a buyer or, for some, where to cover their shorts. You can complicate if you like but that’s it.
November 9th, 2008 at 8:34 am
Right Now the banks are using the low Fed Funds Rate to fatten the margin on their existing book of business and thus rebuild their balance sheets. It seems like at some point the balance sheets will be rebuilt and the fear will have diminished. Is Low Fed Funds going to turn on a dime from pushing on a string to wildly stimulative? After calling several false bottoms, is Ben really going to be brave enough to take the punchbowl away when that happens?
November 9th, 2008 at 9:12 am
Mark Mchugh imo your grounded.
I hope these following words are considered a headsup and not a “loose lips … ” thought.
I worry the Barrons of the world will decide WWIII would be profitable executed here in the USA. The seeds are planted for world disdain. Our cities and town with raw materials under them, but to expensive to extract with homes on them. Crumbling infrastructure better leveled with bombs prior to replacing. A people with promised retirements to expensive to honor. A people commited to values not in line with raw business; ie saving whales, coastlines and tundras. I could go on with more reasons, but excuse me for not being a vigorous salesman.
November 9th, 2008 at 9:28 am
BTW…this isn’t a “100 year storm” or a “crisis”…I call it a MORASS…”Much Ordered Return to Actual System-wide Sanity”…it is a totally logical reaction to total credit in our system going vertical over a 20 year period (thank you Greenspan). The consequences are just as severe however as an actual, random 100 year storm.
November 9th, 2008 at 10:05 am
The alphabet soup of derivatives got to go.
Greed is not GOOD!
Fear, once unleashed and further propagated, with an end to control the masses, must inevitably, when combined with greed, consume everyone.
Now, there is nothing left. NO TRUST… NO HONOR (if there every was),no compassion and no thing.
The path has been set in stone and we will stay the course to its fateful end. It’s just what we do absent wisdom.
It ain’t a good end, in the sense that we will all lead “normal” lives, that’s over. We’re never going back. We will never sell 17 million cars here again. Perhaps our children’s children will someday find some means of conveyance that we would identify as a car. Of course, that would mean they have found some inexhaustible supply of energy, which we do not have now or in the foreseeable future.
That’s the course our world will take but that doesn’t mean those of us here and now must individually hue to it’s end. Each of us, in our own small way, must find our own end, our own path to wisdom. The more truth you know, the more truth are, the better you will understand the past and comprehend the future.
November 9th, 2008 at 10:14 am
I’m thinking it’s a beautiful morning for a bike ride. Some things haven’t changed!
November 9th, 2008 at 10:17 am
Interesting question. The answer is that it’s the same set of things that have been on my mind for the past several years. Mostly, I wonder how so many people believe so many contradictory stupidities and manage to avoid killing themselves while making a bowl of Froot Loops in the morning. On the one hand, the irrationality of my fellow humans is why I trade the markets, so I have mixed feelings about a sudden mass outbreak of Reason… but then again, if man were rational in all aspects of his life, I think humans would have colonized a good deal of the Galaxy several centuries and probably millennia ago. Nevertheless, I am not the least bit hopeful (worried?) that man’s nature will change for the better in the next few years. (Ray Kurzweil thinks 2029 may be a big year in that department. I’m skeptical, but intrigued and watchful.)
I don’t know much, and the things I do know are things that most people would rather not believe. Worse, they seem willing to bear any hardship and/or inflict any misery upon others in order to avoid believing them. Chief among these unpopular beliefs, and the main one from which they all proceed is handed down from a guy much smarter than me:
One cannot say of something that it is and that it is not in the same respect and at the same time.
-Aristotle
One who truly believes this is in for no end of trouble with his fellows. It means being at irreconcilable odds with just about everyone at one time or another. Consider the sum of two and two. It is always exactly four, and most people seem to agree… until it’s time to talk about bailouts, taxes, ’spreading the wealth’, etc. Consider the slave. A person who is forced against his will to work for another is a slave, regardless of the self-serving pronouncements of some black-robed buffoon. That will be a very popular sentiment on the floor of the NYSE at 11 o’clock this Tuesday, let me tell you.
So in the coming years, I expect to continue to be endlessly fascinated and frustrated by the behavior of individuals alone and in groups. I expect to have more proof that all governments are simply large gangs of liars, thieves, and killers with legions of apologists. (Stop at any time, as I need no further proof, thank you.) I expect to see more people getting what they deserve, along with other people getting what they do not deserve, in spite of what anyone feels or thinks about either. I expect to see low prices get lower, and high prices get higher…until they don’t. In short, I expect more of the same, but perhaps from different angles, because while the landscape may look different, it is still populated by the same terrible, wonderful flawed beings. The more things Change…
Be careful out there.
November 9th, 2008 at 10:50 am
I think we are setting up for a powerful year end rally. I think the market is setting up for a powerful year end
rally.
I also think that rally will ultimately fail and the market will go much lower bottoming sometime possible in the summer or fall of 2010.
November 9th, 2008 at 11:08 am
My strategy is to take advantage of whatever presents itself. Right now, I’m watching levels on the S&P 500 and Russel 2000. There was a short c onsolidation on Thursday and Friday. Breaking out above this consolidation suggests to me a short term buying oppty with a stop loss set below the consolidation. Breaking down below it suggests a shorting oppty with a stop loss above the consolidation.
My long term view is that there is an accelaration of job/income losses to the consumer based on lack of available credit, and a consumer that is unwilling or unable to spend. This is a tsunami of poor policies, greed, and incompetent leadership trying to through water on a fire, but not recognizing that the water was, in fact, cooking oil. So, my long term bias as a trader is that we are in a sustained downtrend, and any rallies in equities are due psychological factors of fear and greed, and are fabulous shorting opportunities. I am not enjoying these trading opptys though. As many I care about are being deeply hurt by the economy’s downturn.
I am hopeful that our new President (unlike the past one who had no skills as a leader, but only as a follower of a corrupt and deceiving team) will act with integrity, although I don’t think Obama’s administration will be able to stem the tide of deceleration for at least three to four years, during which time our government will have much fewer options due to it’s enormous debt load, as well as it’s lack of income.
Fubsy
November 9th, 2008 at 11:08 am
“Every sunken ship’s got a room full of charts.”
Just to clarify, that phrase is not my creation (I wish it was). I heard Rick Santelli use it a while back and it stuck with me. I doubt it was Rick’s creation, either. I suspect it is one of those trader adages whose origin was never documented.
I just think it’s an appropriate reminder at times like this; don’t depend too much on any one form of logic. There’s way too much going on.
November 9th, 2008 at 11:17 am
I am thinking everyone is clamoring for “CHANGE”, maybe now is the time for the country and our politicians to be radical. We should all read or reread Edward Griffin’s, ” The Creature from Jekyll Island “. Otherwise, I think we are making the same old mistakes over and over again. Bailout’s are the name of the game. Abolish the Fed, Hell, abolish all debt, and lets start over. If not, follow the money trail to the annointed one’s ie, JP Morgan/Chase, Well’s, BOA and anyone else on the short list, invest accordingly.
November 9th, 2008 at 11:17 am
Wow! I just read all of these and it sounds like the world is about to come to an end. Or maybe worse: we slunk into a long downward spiral of period of nasty brutality, no-growth, no wealth creation, depression, war, poverty.
Given this preponderance of fugly sentiment, I’ve got to think “these people know somethng no one lese does because they’re sophisticated readers of the BP….OR, like the lemmings we despise, we are so much like them.
So, I think I’ll take the other side of this trade. There’s a way out. Somewhere. Somehow. I can’t see it. But I’ll naively believe there is one.
November 9th, 2008 at 11:26 am
We have $50T of debt, and $15T of GDP. The debt is increasing faster than the GDP. We can’t service the debt. The USA is a massive LBO. The only way out is a restructuring where the debt is converted to equity. For individuals, that might mean interest free mortgages and credit card debt for 5 years.
Meanwhile the market goes lower,and the gov’t will keep propping up industry that should be forced to restructure.
November 9th, 2008 at 12:01 pm
Wow great comments. I think we will bounce from here to SP 980 just before Thanksgiving, then sell off afterward and possibly test 865. Then looking for bear market rally starting second week of Dec running to Apr/July reaching 1250 sp/ 11k dow. Afterwards melting into the abyss during remainder of 09-2010 ( 600 sp?).
November 9th, 2008 at 12:12 pm
We have an economic crisis of historic proportions and the S&P 500 hasn’t even breached 800 set in October 2002, which was a mild recession. Over the next few months will likely fall 30% from here.
November 9th, 2008 at 12:50 pm
Range-bound Trader Heaven between 840 and 1000 for a while, with a possibility of a year-end rally driven by further rate cuts and monetary stimulus. A plunge in January, driven initially by further rounds of Hedge Trimming and exacerbated by the release of truly awful Q4 earnings. Hard to say how deep but I think this will be the first real panic and fear, and I’d say we see a 6 handle on the SPX.
Another range-bound trader’s market between 660 and 840 into the summer, followed by a breakout in late 2009 as inflation picks up in a big way and corporate bonds, the $ and Treasuries are pounded as interest rates and commodity prices are forced upwards. Housing prices continue to fall into 2010, then remain flat for a decade, Tokyo-style.
Some of my money is in gold stocks, some in Japanese stocks, much of it remains in cash until the lion’s share of the deflationary phase is more or less behind us.
November 9th, 2008 at 12:58 pm
What’s going on here…First Rick Santelli cites some Elliot Wave stuff in reference to the Euro and then Art Cashin mentions the Elliot Wavers on Friday. And now, we get a BR reference to the Elliot Wave crowd?!? What’s happening? Are the kooky folks who study this technical witchcraft gaining some legitimacy this year?!?!
Anyway…I’m one of those kooks and it has been an extraordinarily successful year…..
This is my call on the SP500…the 1576 high in October 2007 finished a large B wave that began in Oct 2002. Since that point, we have been descending down in a very powerful C wave that is taking on a distinct five wave looking pattern. Wave was 1576 to 1257. Wave was 1257 to 1440. Wave began at the 1440 and has not yet completed. Within that monster Wave , the Wave – I – was 1440 to 1200. Wave – II – was 1200 to 1313. Wave – III – was 1313 to 840. Wave – IV – looks complete at 1007 on Election Day. From 1007, the – I – = – V – target is 768, which would perfectly match a double bottom to 2002!
There are some accomplished and prominent Wavers that believe we have two more minor fifth waves to finish this Big Third Wave, including my mentor. I don’t share this view. In terms of duration, the – I – = – V – on the model i’m employing, comes in on December 31st, 2008!
So…freakishly enough, I have a target for the SP500 at 768 on the last day of the YEAR. How oddly predictable that would be…persistent tax loss selling and capital raising right up to the end of they year that finishes with huge technical buying at a precise double bottom to 2002 lows?
I’ll keep posting if something changes or I get price action that gives me a different view….
Have fun folks.
- AT
November 9th, 2008 at 1:02 pm
This blog Wordpress thing couldn’t interpret some of my Roman Numerals above….Wave One was 1576 – 1257. Wave Two was 1257 – 1440. Wave Three began at the 1440 and has not yet completed….
Sorry.
November 9th, 2008 at 1:37 pm
AT. Please keep on posting, I always read your technical analysis with interest when I am considering my trading strategy. Compared with a lot of people who make money doing it (e.g. the guy on Market Watch, who is terrible), you have been extremely accurate.
I am pretty much in agreement with you except on timing, although it’s possible that the anticipation of the January dump might mean that the downward wave will begin early, even before the New Year. I do not plan to be long this market beyond about 12/21 or so.
November 9th, 2008 at 2:56 pm
leftback.
Thanks for that. One other thing that we really need to pay attention to is “seasonal cycles.” With that in mind, there is very powerful evidence of seasonal cycles in the stock markets. For whatever reason, the Nov-May time frame is a terrific time to own stocks and June to October is horrendous for investors. I guess my point is that the seasonal cycle aspects of the stock market highly suggest some sort of prolonged rally at some point during the Nov-May timeframe.
I think that rally will be the Major Degree Wave Four. For instance, if we do bottom at 768, then the 38.2% retrace of the big Third Wave would take you back to 1025. A 768 to 1025 rally would be a cool 33% return that I think is worth being long for…
And in terms of Wave analysis…a rally back to 1025 for the Major Degree Wave Four would be quite interesting…because larger degree fourth waves always seem to retrace back to areas where smaller degree wave fours complete…i.e. the 1025 level would be smack dab in the middle of where this most recent fourth wave really struggled/finished.
In terms of classical charting…this view makes a A LOT of sense. Classical chartists will be ALL OVER a “double bottom” to 2002, and they’ll be ALL OVER selling any kind of rally back to the 1000 zone, which clearly was a SMACK DOWN zone for bulls.
- AT
November 9th, 2008 at 5:01 pm
What is on your minds? What are you thinking about?
What say ye?
Well, to be honest, I’m wondering why it hasn’t occurred to the U.S. government to sell some of its vast (shall we be honest and call them “excessive”?) holdings in the western U.S. to raise cash. Seems like a course of action that is almost too obvious…but certainly hasn’t happened yet.
See: Public Lands Held by the National Forest Service and the Bureau of Land Management
Someone needs to get the hook and get the Sec. Treas. off the stage. It’s simply time for a little horse trading to separate assets from a land-greedy government. No big deal.
November 9th, 2008 at 8:43 pm
yeah AT, I totally agree w/ lb, your posts are definitely worth reading..along with Steve Barry’s, I don’t know how anyone could have been caught ‘offsides’.. past that, I wonder what happened to that tweedledoosh who was trying to blame TBP ‘Bullishness’ for his getting knee-capped..
November 9th, 2008 at 11:18 pm
Massive hedge fund redemptions in the next six weeks.
November 10th, 2008 at 5:18 am
‘If a man see but 3 days ahead, he would be rich for 3,000 years’ .