Will 2009 Bring Ring Three of the Financial Circus? 19 comments
-
Font Size:
-
Print
- TweetThis
2007 brought ring 1: The Housing Crisis.
2008 brought ring 2: The Financial Crisis.
2009: Recovery?
What most did not realize in 2007 was that what appeared to be a simple housing bubble was only the tip of an iceberg. Once a failure scenario begins, the other weak elements begin to appear. And just like clockwork, the shoes began to fall in 2008. First Bear Sterns because we were told they had too much packaged sub-prime loans, then after a respite – all hell broke loose – Lehman (LEHMQ.PK), AIG, banks, CDOs and leveraged instruments of destruction, liquidity, the market cratered, bailouts, interest rates fell, dollar strengthened, dollar devalued.
This is more than a typical business recession. America is in a major financial crisis – the mother of all crises. It is a common belief of the stock pumpers that all recessions are similar. I could hear their sighs of relief when NBER dated the beginning of this recession to December 2007. Now they could flood the market with charts and tables showing the lengths of previous modern recessions – it will be over soon they assure the masses. Stocks are incredibly cheap.
Are they right?
- Stocks are not incredibly cheap. Based on Friday’s close and analysts' current earnings estimates, P/E ratios are almost 20. The market is not cheap. And even if the markets do not advance, earnings will get worse as they will continue to fall. Today’s P/E ratios reflect expanding business conditions – hello, conditions are contracting.
- Will the market rally? The weight of money sitting on the sidelines is anxious to get into play. Wealth must be restored.
- Has there ever been an economic recovery when the banking system was in intensive care? Isn’t normal recovery lead by financials and commodities? Does anyone think we are close to a healthy situation in either of these two sectors?
- We have a new government arriving this month which offers hope of better times ahead. It is hard to argue that things could be worse under Obama based on the events of the final year of the Bush presidency.
- Some say the Fed has so much liquidity out there that the economy will light up like a rocket. You can almost smell the fumes. But I wonder who is going to use this liquidity? And for what would they use this liquidity? There is no economic driver. The liquidity will only keep the system afloat and that is all. It is a life ring to business, Wall Street, and the consumers who made really bad decisions. There has been too much systemic damage for a quick or rapid recovery. The losses which are continuing must work their way out of the system.
Will the equities market rise? The market does what the market does. Investors do not need to act rationally. I am indicating that the fundamentals point to a lower market than the one which exists today.
The real question is whether there will be any economic recovery in 2009.
2009 – Ring 3: The Avalanche
Have you ever seen an avalanche? I lived in South Fork, Colorado building the gold mine at Summitville. We built the infrastructure during the winter. Everyday, I drove from 10,000 feet to the mine site at 13,000 feet on logging roads. Let’s just say I have seen a few avalanches, and my truck and I got pretty beat up in one.
They start slow; you see movement in a small area. In seconds, the effects start radiating outward and downward. Soon it seems everything is in motion – and then there is calm.
Our economic avalanche will build this year. We are entering the phase of the highest destruction to business.
- You really have not heard about many businesses failing to date. We are now in a recession where for the first time in my life the GDP will go negative. Businesses will start failing at a faster and faster rate. Big and small. The market has changed. The consumer has hunkered down. Demographics have changed. This eats wealth and creates unemployment and vacant buildings.
- Have you heard of Donald Trump? Well the wizard of bankruptcy is back in play. Things are not perfect at Trump Entertainment (TRMP). But what the Donald is going through is being repeated all across America. Commercial Real Estate is losing tenants. The value of commercial real estate is determined by revenue received from the tenants. Now commercial real estate is worth less. A lot of commercial property is now underwater. Will the Fed come to the rescue of the Donald? Is he to big to fail? Would you consider a casino a bank?
- Unemployment is still growing. As the length of this crisis grows, more and more are dropping off of the end of the unemployment benefits. This adds to the cascade as Joe is not being paid anymore to watch TV. In normal recessions, unemployment grows even into the recovery. Unemployment effectively removes that person as a consumer of anything more than the basic necessities.
- Consumer credit issues have not played out. We have seen only the beginning of the credit card crisis. There will be more defaults today because the consumer is unable to bury the debt into their mortgages. The banks will eat the costs. It will make them sicker than they are today. And what about student loans?
- There still are mortgage resets coming. We are only half way through the mortgage crisis. Someone will eat the losses – either the taxpayer through direct government involvement or the lending institution or both. This will not make the banks healthier.
- Real estate will continue to decline. There is no magic way to stop the decline short of offering to purchase millions of homes – and then burn them down. I estimate that there are at least 10 million excess homes – you could attempt to solve the housing crisis with about $2 trillion. But there are other dynamics in play. Declining real estate values put a negative outlook on consumer’s investing risk appetite. Further, it literally stops people to want to own homes – renting would be cheaper.
The avalanche should recede by the end of 2009. We can then begin digging out of this mess. There was a major event. Recovery will be slow. The financial system and business will not be healthy this year. We will feel the effects for many years to come.
I am really hoping there is a commenter or author out there that can build a case for real recovery in 2009. I cannot.
Disclosures: none
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 19 comments:
" Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage po ints over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes. "
Interestingly, Martin Feldstein was recently interviewed on CNBC at which time he said he forsaw our economy being in worst shape a year from now than it is today.
My personal belief is that guys like Felstein are right, making rallies premature because at some point rallies must be supported by the prospect of growth in earnings.
It's all boiling down to perceptions with respect to the speed of implementation and effectiveness of the stimulus package being prepared by the Obama team.
There are bright people on both sides of this momentous argument, with prominent market players facing off against some top gun analysts and economists.
I guess the big questions is, to what extent have the markets already discounted these issues?
Excellent article. Thank You
It is a rational, thought out piece that keeps you right in the middle of the road. Not to bullish, not to bearish. It keeps you in the game, yet thinking of the real problems that still exist out there.
Completely refreshing.
Anyone else read the papers over the past 2 days or watch the TV?
Apparently everything is OK now in the world, country, and economy.
I can site (though I won't because I don't want to bore you), atleast a dozen different articles and 100 different "experts" who are calling market bottoms, etc.
Funny thing is, most of these people were the same people telling you to buy at DOW 14K, and keep buying all the way down.
Isn't it amazing how they can now just sit there and claim they were right all along just because the market has been going up on no volume for the past 3 weeks?
Heck we could end up 30% this year with no problem. The Federal Reserve, the Treasury and its "partner" trading desks can see to that.
Keep in mind, according to the work I have done, the 30 year continuation uptrend line for the S & P 500 is at 750 (as of 1/4/09)
Please note I make no claims that this the "end all" solution for the stock market.
Anything above 750 is considered above trend. I guess we can just go to bubble number 3, have the Fed/ Treasury push the markets up, then just as mom and pop get back in, pull the rug out and down she goes.
I just do not see why the market cannot be left well enough alone and start from 750 and return 10% / yr (with dividends) for the next 20 years, instead of up 30% one year, down 12% the next, up 8%, then down 35%.
Best of luck to all, and again, good article.
In the land of the blind a one-eyed broker is king.
. James E Gambrell
At the heart of any economic stability is employment. We won't see stabilization until we go through massive layoffs (which have not occured yet).
Great summary. I have been amazed at the enthusiasm for a three-day holiday rally on low volume. As you know from our exchanges on SA I think the Nov 20 lows are not likely to hold and the bottom (for U.S. stocks) may not come until the second half of 2009 or later. That being said, I will still keep my eyes wide open. Over the years I have learned to be ready for thge unexpected.
The stock market valuations are definately not cheap like you said. I hear lots of talk about how cheap stocks are. I don't see them except for one sector. The commodity miners and my favourite sector momentarily; gold and silver (junior) miners. They are dirt cheap if you ask me. Mind you though, they must have cash and no debt (or very very little) on the sheets.
Money on the sidelines will soon enough be flooding into this sector. I must rephrase that; proof of my portfolio shows that money IS flowing into this sector momentarily. Hoping that velocity will increase over time.
I believe that the stock market has seen one of its bottoms, but not thé bottom. 2009 could be worse if you considering the amount of leverage that is involved with commercial real estate, spurred by a 'blown out of proportions' service sector in the US.
When the demand and losses pile up in '09, the service sector has to close offices and departments, thus lowering the demand for commerical property and prime locations. Its already happening.
The late 2008 financial crash was the precursor for writedowns that will surely continue in 2009. I'll bet some of my money on that one if you will. To me thats plain logic. Surely the stock market is ahead of a lot of the doom and gloom, but having said that, we don't know what's on the books of these leveraged financials.
An example would be Goldman Sachs with years of profits without a single writedown while its competition was strapped around the neck with losses.
What I'm trying to say is that there is a lot of covering and invisibility around balance sheets. 2009 tends to be the year of the naked swimmers. The leveraged players who can't cover up the sheets anymore and need to come clean because of the fast declining commercial property valuations. Don't forget that this is another large sector that should be following next when service companies can't afford to keep their (prime) locations with a diminishing stream of revenue.
Deflation is not gone yet. More losses will follow and inflation won't solve it without consumer demand (monetary velocity). The stock market will get beaten again in 2009 is what my logical sense implies.
We will see what happens.
brgds,
RGDP 1974 -0.5; 1975 -0.2;, 1980 -0.2, 1982 -1.9, 1991 -0.2
If NGDP then last was 1949 -0.7.
Average RGDP 1930 - 2007 is 3.4 percent per year.
One standard deviation is 5.0 percent. Normal RGDP, my opinion, is 8.4 percent to -1.6 percent. Normal GDP is highly variable. An historical fact.
Major damage will be done by Democrats trying to fix the consumer debt meltdown. Major damage has been done by Democrats and subprime/MBS. Taxpayers are on the hook for billions of dollars in MBS world wide. Income redistribution on a massive scale as non Federal Tax payers get a free ride. 2009 will be a year where politicians pile on staggering public debt to fix staggering private debt. The Soviets and the Socialists couldn't pull off a command economy and neither will Obama.
"Real estate will continue to decline. There is no magic way to stop the decline short of offering to purchase millions of homes – and then burn them down."
There are so many communities I drive through in California, where I see a 7 foot wall, and rooftops...acres of rooftops, farther than the mile can see. All I can ask myself is "Why??"
how do you know this? if your hope, i can accept it as such.
i enjoyed both contributions of yours today.
Very well written and thought out. Thanks for laying out what most are not willing to hear.
The shutters felt in August 2007, with the financial markets ceizure of highly leveraged banks, book ended the last of hope for residential RE, and the beginning of the dommino effect. Anyone in RE could have described the end of the good days in the Summer of 2006 when qualified Buyers were few and far in between at almost any seller's asked, and needed, closing price. The.... "I will buy yours as soon as I sell mine"... , red flags in P & S agreements showed up everywhere.
The creative financial engineering that was allowed to mushroom off of these leveraged assets was the ticking bomb that no one was really aware of (except the bomb makers). The explosion has happened way off in the distance, but we haven't heard the noise yet (maybe just a rumble).
I agree with your assessment of 2009. As one poster above said with a 30 year, S&P trend line of 750, we could easily retrace to 1995-96 levels, when the real bang of what's happened is finally felt. This could easily bring us to a S&P of 580-625. I don't think we get there overnight, but by the Summer of 2009, when evidence of Commercial RE realities including Retail Mall failings, credit card defaults keeping Banks weak, and unemployment growing to 8 - 10% with more retail chain liquidations, The Consumer, representing 70% of the economy will be no where to be found.
Government stimulous will be what eventually gets us to establish our new economic reality as we claw our way back, but not before we feel the pain that is coming in 2009. Rebuilding our infrastructure, creating a realistic alternative energy manufacturing industry, that will not do more harm than good, and will include natural gas for autos and trucking, and redesigning our retail supply chain which will be primarily distribution and internet point of sale in nature, will all be some of the engines that drive the recovery, but not in time for 2009. IMHO wealth preservation is still the goal for 2009, minimizing further losses.