The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Fantastically interesting chart from technician Louis Yamada showing the details of 1938 rally and beyond.

Louise notes that “It is almost uncanny the degree to which 2002-08 has tracked 1932-38.” The structural bear market, according to her, is less like my favorite analogy, 1966-82, and more like 1929-42. (Doug Kass has also mentioned the 1938 parallel).

My own view is the current market environment is more similar from a psychological perspective  to the 1966-1982 secular Bear market than 1938. I have 2008 = 1973 in terms of depth of sell off (but twice as fast). The rally in 1974 was almost 75%.

The psychology is a factor driving the pros and mom & pop alike. There still remains excess animla spirits that may need a good ringing out, a Death of Equities moment.

The parallels to the later days of Viet Nam (Iraq) are there, the run up and down in price of Oil, Nixon (Bush) as a terribly unpopular president  — these are simply too similar to ignore.So too the massive profit destruction from highs just a few years prior.

On the other hand, the degree of despair, unemployment levels and homelessness is far far away from 1938, and much closer to 1973. Other difference: The impending entry in WWII, the massive social dislocation on Main Street, the lack of safety nets of any kind.

Regardless, it is a fascinating disucssion worth delving into further.

Here is Yamada’s chart:

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chart courtesy of Barron’s

Excerpt:

So the dot-com collapse parallels the Great Crash and its aftermath, followed by a rather nice recovery in 2003-07, similar to 1933-37. The parallels continue, with the collapse from late last year into this March tracing a similar, sickening trajectory to late 1937-38, as illustrated in Louise’s chart nearby. That drop led to a strong reaction rally, not unlike the current one, for a total gain of 60%. But that was broken into three segments: an initial rally of 46%, similar to the move from the March lows. Then we saw a 10% pullback, not unusual in a rally, then another gain of 22%.

From there comes the hard part. Starting in November 1938, there was a 22% drop, qualifying for the 20% rule-of-thumb definition of a bear market; then a rally of 26%, fitting the definition of a bull market, into the fateful month of September 1939, the start of World War II.

Then came a series of bull and bear trades — down 28%, up 23%, down 16%, up 13%, and the final decline into 1942 of 29%. After this nauseating roller-coaster ride, the market was down 41% from the 1938 highs (analogous to where we are now) to the 1942 lows.”

Interesting stuff . . .

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Previously:
Market Rally: 1974 or 1982? (May 5th, 2009)

http://www.ritholtz.com/blog/2009/05/market-rally-1974-or-1982/

S&P500 Percentage Swings (April 3rd, 2009)

http://www.ritholtz.com/blog/2009/04/sp500-percentage-swings/

1966-1982 Trading Range (December 29th, 2005)

http://www.ritholtz.com/blog/2005/12/1966-1982-trading-range/

Source:
Do Be Wary of Green Shoots
RANDALL W. FORSYTH
Barron’s May 25, 2009

http://online.barrons.com/article/SB124303129632948467.html

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Randall Forsyth elicits chuckles via his clever phrase-turning. He turns his poison pen on the ubiquitous nonsense known as “green shoots”  that has been so in vogue amongst the perma-wrong crowd:

“So, why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect. From what I’ve read, the current crop is far more potent than the commodity available in years past. How else to explain the mind-bending notion that an economy that is declining less quickly is somehow improving?”

Like all great inventions, it obvious in hindsight.

Once someone else has invented it, everyone says (or at least thinks to themselves) “How on earth did I not come up with that myself . . . ?”

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Source:
Do Be Wary of Green Shoots
RANDALL W. FORSYTH
Barron’s May 25, 2009

http://online.barrons.com/article/SB124303129632948467.html

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For those of you who are getting sick of hearing about the book, rejoice:  The new site is launching tonight.  All of the book related stuff will eventually find its way there. (Some will end up here in Books).

This is just the home page — it should populate over the next few days . . .

After this PR onslaught of the next few weeks passes, things may finally revert back to normal.

Bailout Nation

http://bailoutnation.net/

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Video-o-rama: Wall Street slumps on economic fears

Stock markets came under pressure over the past few days as skepticism crept in that economic green shoots could be withering. On top of that, fears that the the US could be facing a credit rating downgrade (are the rating agencies now relevant again?) also caused losses for the US dollar and bonds.

These issues, together with another dose of discussion about the repayment of TARP funds, featured prominently in this week’s video clips. Commentators included in the selection below include James Galbraith, Jim Bianco, Robert Shiller, Sam Stovall, Bill Gross, David Rosenberg, Jim Rogers and Steve Leuthold.

The compilation kicks off with a top-quality interview with James Galbraith, saying that the banks can hardly lose but the rest of us aren’t so lucky, and concludes with the “American Casino” movie trailer.

Yahoo Finance, Tech Ticker: Galbraith – banks can hardly lose
“Big banks have raised billions since the stress tests and policymakers are now turning their bailout affections to life insurers and automakers. Is the government trying to tell us the crisis in the financial sector (proper) is over?

“While it’s too soon to say they’re out of the woods, ‘the government has set up a situation where the banks can hardly lose’, says James Galbraith, economist, professor and author of ‘The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too’.

“Beyond the TARP funds – which Galbraith calls an ‘unproductive use of Federal borrowing’ – banks are benefiting from lending programs that effectively allow them to borrow at zero and reinvest in Treasuries at around 3%. ‘A bank doesn’t have to do anything to make money,’ he says. ‘The banks’ return on equity is going to be very good. They’re going to be able to restore their finances.’

“While this is good for banks and a justification for the sector’s recent rally, the problem is the government’s ‘free money’ program means banks have little or no incentive to do any actual lending. Combined with rising unemployment and the ongoing housing crisis, this means any recovery is likely to be muted, at best, Galbraith says. Furthermore, anyone hoping for a return anytime soon to the salad days of the mid-2000s is delusional.”

Source: Yahoo Finance, Tech Ticker, May 21, 2009.

CNBC: Geithner – banking hearing
“Treasury Secretary Timothy Geithner gives his testimony before the Senate Banking Committee on TARP.”

Source: CNBC, May 20, 2009.

CNBC: Implications of repaying TARP
“Repaying TARP and what that means, with Bob Jones, Old National Bancorp; Lou Brien, DRW Trading Group strategist; and Jim Bianco, Bianco Research president.”

Source: CNBC, May 19, 2009.

CNBC: Credit card overhaul
“The Senate voted overwhelmingly on Tuesday to rein in rate increases and excessive fees, and the House could pass this legislation tomorrow [Thursday]. CNBC’s Bertha Coombs has the details.”

Source: CNBC, May 20, 2009.

Business Week: The Fed is in no rush to raise rates
“Tame inflation means Bernanke has time. With so much idle labor and production capacity, the economy would have to grow beyond the most opimistic forecast for three years before wages and prices felt any notable upward pressure.”

Source: Business Week, May 20, 2009.

Financial Times: Robert Shiller on the outlook for house prices
“Robert Shiller of Yale University talks to Martin Sandbu about the outlook for housing and equity markets, the value of sovereign debt, and the government response to the economic slowdown.”

Source: Financial Times, May 19, 2009.

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Chairman Ben S. Bernanke
At the 2009 Commencement of the Boston College School of Law, Newton, Massachusetts
May 22, 2009
Commencement address

I am very pleased to have the opportunity to address the graduates of the Boston College Law School today.  I realized with some chagrin that this is the third year in a row that I have given a commencement address here in the First Federal Reserve District, which is headquartered at the Federal Reserve Bank of Boston.  This part of the country certainly has a remarkable number of fine universities.  I will have to make it up to the other 11 Districts somehow.

Along those lines, last spring I was nearby in Cambridge, speaking at Harvard University’s Class Day.  The speaker at the main event, the Harvard graduation the next day, was J. K. Rowling, author of the Harry Potter books.  Before my remarks, the student who introduced me took note of the fact that the senior class had chosen as their speakers Ben Bernanke and J. K. Rowling, or, as he put it, “two of the great masters of children’s fantasy fiction.”  I will say that I am perfectly happy to be associated, even in such a tenuous way, with Ms. Rowling, who has done more for children’s literacy than any government program I know of.

I get a number of invitations to speak at commencements, which I find a bit puzzling.  A practitioner, like me, of the dismal science of economics–and it is even more dismal than usual these days–is not usually the first choice for providing inspiration and uplift.  I will do my best, though, and in that spirit I will take a more personal perspective than usual in my remarks today.  The business reporters should go get coffee or something, because I am not going to say anything about the markets or monetary policy.

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Frightening!

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click for live updates

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“I don’t think we can go back to the way it was. We’re going to need to see very, very substantial change.”

-Treasury Secretary Tim Geithner

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Yet another danger of Bailouts: It invites all manner of government intervention in places that industry would prefer be left to the private sector.

The counter argument is, of course,  that the private sector already had the opportunity to align compensation with performance, and screwed the pooch on that. The misalignment — paying out ginormous bonuses based not on profits created, but on volume of risky business written, regardless of profits — is one of the underlying causes of the entire debacle.

Note that congress ordered the Treasury Secretary to come up with a compensation plan on this when they authorized the release of the second half of TARP monies.

Excerpt:

“Treasury Secretary Timothy Geithner called for major changes in compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June . . .

He said that Wall Street’s pay practices, which include big year-end bonuses, encouraged excessive risk-taking and helped precipitate the financial crisis. What’s needed is a set of broad standards that financial supervisors can use to make sure that doesn’t happen again, he said.The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to infringe compensation contracts already agreed.”

There is a simple lesson to be learned here: If you take 100s of billions in bailout money form the government, you are likely to have them intervening in all sorts of areas you would probably prefer they didn’t.

He who pays the piper calls the tune . . .

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Source:
Geithner Calls for ‘Very Substantial’ Change in Wall Street Pay
Rich Miller
Bloomberg  May 22 2009

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aCwz3Hlyo9sg

Video

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With the markets clearly getting concerned about the US$ ($ index
falling this morning to just shy of the important technical level of
80), inflation (with the CRB index now up more than 20% from its lows
and gold just $45 from $1000), and the financial condition of the US
govt and coincident rise in yields, the opinions of those in charge of
the monetary spigot become more important to listen to. There was a
stark contrast between non voting members Plosser and Rosengren in
speeches last night on the issue of inflation. Plosser ‘cautions against
complacency over inflation’ while Rosengren said he’s more worried about
deflation than inflation and he’ll ONLY (bold is my emphasis) worry over
inflation when the economy improves. How the Fed handles the unwind of
their policies, with its impact on inflation and longer term interest
rates, will IMO be the main determinant of the robustness or lack
thereof of any US recovery.

Analysis and Discussion with Tim Backshall of Credit Derivatives Research

U.S. Treasury Secretary Timothy Geithner talks with Bloomberg’s Al Hunt about the need for major changes to compensation practices at financial companies. Geithner, speaking yesterday in Washington, also said that the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

Click for Video