10 Points About the Markets

1) It is a wonderful thing to be the world’s reserve currency; we can milk the rest of the world until things change.  There is some push from emerging markets to have a change, but the effectiveness of that push is questionable.  Someone has to give the US an ultimatum, and no one is there yet.

2) With the decline in fixed income volatility, mortgage yields are falling.  Good for mortgages, but the real question is what happens when the Treasury starts borrowing like a maniac.

3) Many hedge funds have raised the gates.  Capital cannot easily exit.  GIven the weak balance sheets that hedge funds have, this is normal for a bear market.  The only surprise is that investors did not anticipate the troubles.

4) Perhaps the money to banks from the government is going only to relatively sound institutions.  That is consistent with the idea of making some institutions sound, and letting them buy up marginal banks.  Upshot: don’t expect an early increase in lending.

5) Analyze those that are on the other side of the table.  If they have a reputation for being smart, be extra careful.  Many municipalities and other entities lost money dealing with investment banks.  No surprise.

6) Many do not understand mark-to-market accounting.  First, GAAP is the least of the problems — collateral agreements require MTM.  Regulators can ignore MTM as they please. Second, MTM is misapplied by auditors; it does not mean “last trade,” but an estimate of where a liquid market would trade.

7) Shut the barn door after the cow has escaped.  Yes, loan underwriting standards have tightened, in the middle of a credit bust.

8) There is less cash flow to service; the financial sector should shrink.

9) S&P 500 at 600?  Not impossible, and not likely, but if profit margins crush down, possible.

10) Where could longs make money in October 2008? Nowhere.  Real bear markets crush almost everyone.

In closing, I am not concerned about the victory of Obama.  The new president will have little freedom, and will face significant unsolvable problems.

Comments

[Smarty_Pants:]

"the real question is what happens when the Treasury starts borrowing like a maniac"

Ummm ... in case you hadn't noticed they borrowed an extra $5 Trillion in the past 8 years. If that's not 'maniac' levels I don't know what is. Of course it will get worse, then everything will collapse following the hyperinflation outbreak.



"Where could longs make money in October 2008?"

Cash. Sometimes the best you can hope for is to avoid losses.

2008 Nov 05 10:53 AM

[gabe borens...:]

I must admitt ,I am getting bored and perplexed with the market bearish and the U.S derogatory remarks.
U.S will be a reseve currency for centuries to come.
For all of the criticism that the U.S is recipient of,we are the global locomotive of the global economy responsible for 70%-80% of the world trade.
More importantly ,we set the global economic trend- meaning the global economies can not escape our cyclical patterns.
In fact Europe ,Asia,and the Emerging markets,can not rebound out of economic deceleration/contracti... ,untill we do.
That is why we have witnessed a unprecedented inflows into the dollar as it is a global relative reflection of the investors' confidence in our economy.
More likely than not ,these dollar inflows will be invested in the dollar denominated assets contributing to a major rebound inthe stock market and the housing /construction sector
The major unexpected stock market recovery(I called it) ,is only the beginning of the greatest economic/market recovery in the U.S history.
The 700 billion dollars economic /rescue jolt,combined with the lower rates ,is the economic rocket propellent that will stimulate GDP growth to 5% by the second half of the 2009.
In the meantime ,we should remember that every economic turnaround was triggered by the maximum pessimism.
We are on the way to a major recovery and a mega stock market rally that will dwarf any rally observed to date.

2008 Nov 05 11:12 AM

[bricki:]

Do not underestimate the ability of the American economy and its workers to adapt to new conditions. It wasn't that long ago when we were hearing about how Japan was going to be nice to us and manage our decline. How did that work out?

Any challenge can be overcome.

2008 Nov 05 11:23 AM

[Mac77:]

"In closing, I am not concerned about the victory of Obama. The new president will have little freedom, and will face significant unsolvable problems."

Wishful thinking...Pragmatist are not inspiring but they are never dangerous. Idealist are inspiring and dangerous. Obama is an idealist.

2008 Nov 05 11:54 AM

[infp:]

The US may wobble but China could fall. China has been riding an economic boom for decades and the divide between the relatively wealthy and the poor has become extreme. Governing a divided population of 1.3 billion people will not be easy if something (global recession, peak oil, drought, etc.) slows down their economic engine.

2008 Nov 05 12:03 PM

[Pent up demand:]

Agree with Mac77. Everyone thinks "So what. Obama can do nothing with the current set of possibilities." Wrong. That is when idealist demagogues change the rules of the game to suit them.

Already the trial balloon has been floated to do a "one time" tax on 401k balances. That is the first of many ways they will be looking to further loot the country so that they have something to spend.

2008 Nov 05 12:12 PM

[Crank Monkey:]

Kiss your IRA's and 401k's goobye. The government is going to confiscate them.

2008 Nov 05 12:46 PM

[KSengineer:]

With the treasury in the shape it is, and with social security in the shape it is, and with 401k's in the shape they are, see if your concern about this new president grows a bit when he trys to nationalize your 401k.

Don't think it can happen? You might want to surf the net a little for that answer.

2008 Nov 05 12:52 PM

[Socialism c...:]

@bricki: the ability of the American worker to accomplish anything is lessened by the new Marxist government which will abscond with a goodly portion of that and waste it on its new entitlement class. Hope you read about the new Civilian National Security Force. Ask the survivors of Holocaust camps how well that mantra of "Any challenge can be overcome" rings in their ears. I'm not making light of that era -- I am all too fearful that we have just anointed another cult-like leader with very Marxist ideas. Americans voted for pocketbooks instead of principles, and they will have neither as a result -- we will be lucky to escape civil unrest and international chaos as a result.

2008 Nov 05 01:03 PM

[phdinsuntan...:]

you look depressed, make the losses and go to the beach

2008 Nov 05 01:04 PM

[Chubbs:]

Pocketbooks instead of principles? One of my guiding principles is to never let a far right wing Christian Fundamentalist extremist ignorant wing-nut anywhere nearer to the White House than the sidewalk in front.

2008 Nov 05 01:28 PM

[waf76:]

chubbs,

right on! time to realize that the country with the most religious extremists are right here in the US. if you have principles you don't need the government to dictate them to you. i have to admit the republicans most especially karl rove were genius in this regard as they are able to mobilize the entire christian evangical southern belt into voting against their own interests because they share the same "values" as their candidate....a swarm of poor people voting for things that favor the rich...truly remarkable... better to vote what's best for you.

2008 Nov 05 02:03 PM

[Tony Petroski:]

Lefties: Hurry with your Bush/Rove/Cheney bashing, you're running out of time. You guys won. Do you not have even one happy day?

2008 Nov 05 05:10 PM

[waf76:]

tony petroski,

full disclosure im independent but i did vote for obama this year...ron paul wouldve been the best choice for president...republican... have lost their way...conservatism as defined today is not the same as it once was...you're the party of big spending which is gonna pave the way for tremendous spending by democrats....just seems like the republican base is extremely wacked out rooting for their candidates regardless of common sense as if its a nascar race...just mention values, abortion and gay marriage and you got all the red states wrapped up....i know i sound cynical but Sarah Palin is pretty much the symbol of the southern belt...that im not so bright aww shucks, ra ra nonsense without any clue about world issues...frat party mentality...just look at mccain's concession speech last night...he gave a great concilliatory speech and they were all booing...they'll never be a coming together b/c the wacked out right will never tolerate a world in which their agenda isnt at the forefront....hopefully you lost the latino votes forever so we dont have to hear how Jesus told u to do this and do that....ridiculous wars and statements like the surge is working, and wmds, and axis of evil, and all this preemptive crap...we are a diminished country today b/c of u guys but we'll bring it back and u could ride our coattails...

2008 Nov 05 07:19 PM

[leh:]

Yup, waf and Chubbs are dead-on, the remaining shards of a once great party consist mostly of angry and delusional whites with a very odd sense of priorities and a completely warped idea of what's fair.

My 15-year-old daughter came home from school yesterday and reported that one of her classmates came in with a big chip on her shoulder after Obama's big night Tuesday. The problem? "Barack wants to tax the upper class." Huh? (BTW this girl's mom is a school teacher and her dad works for the state DOT as a midlevel engineer. I seriously doubt they earn anywhere near the $250K level that Faux Plumber Joe is incensed about.) How is this even an issue???

Irrational, manufactured outrage over a non-existent issue for 90%+ of Americans shows how lost the red party is. I also fail to see how increasing the tax rate on the upper 5-10% income bracket is the least bit un-American. What a bunch of spoiled, ridiculous whiners.

Get over it--Bush has trashed this economy for 8 years and we'll be spending the next quarter century trying to undo all the damage. The Republican party's turned into one very tired Limbaugh rant that no reasonable citizen is paying the least bit of attention to. The dour, sourpuss expression on the faces of many in the crowd at McCain's concession speech said it all. Time to move on.

2008 Nov 06 09:14 AM

[Pent up demand:]

You believe the 250k lie, and have the temerity to call others delusional?

Haven't you noticed yet that on the campaign trail "rich" equals 200k+ incomes, but when the tax laws are written "rich" means "does not receive public assistance (yet)"?

I agree that there has been zero fiscal discipline for the last 8 years, but I don't hear the Dems calling for cuts to anything but defense spending. Hardly models of restraint. We are all going to pay until they figure out that they cannot fix the budget on the revenue side of the ledger.

2008 Nov 06 10:30 AM

[Socialism c...:]

@waf & leh: don't try to pin the big-spending of late on Bush alone! The last two budgets have been done by a Democrat-controlled Congress. Furthermore, this mortgage crisis was DIRECTLY caused by Democrat's socialist housing policies!! I *am* extremely disappointed that the Bush admin joined up with them to do the bailout...but the root problem is Dem's interference in housing!!

Regarding the 250K tax thing -- Pent Up Demand is right on: that number is a lie, for a couple reasons. First, I doubt he'll be able to stick to it, given the economy and what he has to pay for, Universal Health Care and all that rubbish; Secondly, the *income* tax is only the beginning!! Did you not read about the proposals to seize 401Ks??? You ought to be VERY afraid for any asset you have -- this government believes anything you have "belongs to the people". It will be taken and shared. Marxist in the White House = end of personal property. Period.

2008 Nov 06 11:10 AM