Will Banks Lead the Way to 1929 Crash Part II? 32 comments
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So far we have not seen anything like the stock market crash of 1929. The stock market crash of 2008 has been unforgiving. Did we just experience a Bear Market Rally? Is the SP running out of gas?
Intel Corp (INTC) said it faces a “fragile” economy. J.P. Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Fannie Mae (FNM) and Freddie Mac (FRE) all are stepping up foreclosures on delinquent homeowners. So much for the Obama administration’s housing-rescue plan. Will the unemployment rate exceed 10%? The volatility has been great, stock investing has been tough. Is there another Black Tuesday lurking on the horizon?
Unemployment and Foreclosures
It is impossible to believe anything has been resolved in the economy until two basic issues are addressed, unemployment and home foreclosures. Many of the major banks have lifted internal moratoriums which temporarily halted property foreclosure and home foreclosures.
For example in California, notices of trustee sales, which come before a foreclosure sale, jumped by 80% to 33,178. Virginia foreclosures, Florida foreclosures, Wisconsin foreclosures and Texas foreclosures have all skyrocketed as well.
The number of foreclosures for sale have been increasing dramatically. Add to this the number of houses with adjustable mortgages resetting. Also, the number of foreclosed homes sitting on the books of major banks has been increasing dramatically.
Yes, there are bottom-fishers out there looking to buy cheap, But cheap stands the chance to get cheaper. It is simply a demand and supply issue. Simply the numbers of foreclosed properties and foreclosure properties have added to the supply. Everything is connected.
Banking recovery illusory or fleeting?
The supply of foreclosed homes & foreclosure properties will probably depress home prices more & negatively impact bank earnings as more house foreclosures are written off. If the banks lose more money we can say goodbye to the 25% gain in the stock market. Some are even saying that the stock market crash of 1929 will be considered a walk in the park to what we might face.
This is not my intention to invoke fear but rather just think. We had this great rally based on banks improving earnings. Really how can the major banks improve their earning while facing even more foreclosed homes? It just does not make sense. Who do we believe? It seems hard to believe anything. For example, when the US president bows down to the Saudi King and later we are told he did not bow. Sure the banks are making money. I guess it depends on the accounting method?
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This article has 32 comments.
The great short squeeze continues. Onward and upward...
Two months from now, he will look vindicated. Two years from now, even he will have seen the light.
But he will surely be hiding behind a new screen name by then . . .
Its funny how everyone on this site (except for Cetin) want to cry an cry that the market will soon fall. The fact of the matter is if you were on the sidelines you missed a huge rally and stand to miss more. If you cry wolf enough, you will be right at some point but if you miss a huge rally in the mean time you did yourself no justice. To those of you out there on the fence, I'm long this market and you should feel comfortable buying on dips (which are hard to come by right now).
Lets do this people...
On Apr 15 08:07 PM Rainmon wrote:
> Wall street trades on future earnings, but how far out are the bulls
> looking is the question? Plus so much money is on the sideline and
> panic buying has been going on the last 5 weeks, it is mania on the
> buy side now. Goldman's surprise was all about trading profits and
> nothing to do with banking fundamentals, when JPM reports and we
> get the bulk of earning reports soon, reality will start to set and
> this half full glass theory will be revealed for what it is, so much
> cheer leading and positive thinking (not to be confused with honest
> thinking).
To him a guy who unlikely will ever have a job , They dont matter , just so he can post on face book the world is peachy , Lets just hope Moms house is paid for or she doesnt lose her job or our friend Cetin will be living on the street, I wonder if they have wireless at his local Homeless shelter?
On Apr 15 09:58 PM Repsonsible Citizen wrote:
> Look guys this Cetin Kid is probably a 20 year college kid living
> at home , with Mom , Probably doesnt even have his own car, let a
> alone a job
> To him a guy who unlikely will ever have a job , They dont matter
> , just so he can post on face book the world is peachy , Lets just
> hope Moms house is paid for or she doesnt lose her job or our friend
> Cetin will be living on the street, I wonder if they have wireless
> at his local Homeless shelter?
Nothing here for me....
The comments of this fictitious person are designed to elicit repulsion by 1) in disagreeing with everyone...even those who disagree with one another, and 2) being mildly offensive.
It really is brilliant. Even had me going for a while.
The gov't has a leading role in the economy now unlike back then. There was no FDIC, or SEC, or US Federal Reserve, or watchdogs etc in 1929. The gov't created these agencies to protect the US from another depression.. the Gov't learned a lesson from 1929 and will not let another one happen if they can help it. They are already taking concrete steps.. just read the news.
It's true, the government hates to help out companies like AIG, or GM.. but these companies have such a huge presence that if they were to go down, they would be bring down a lot more due to synergies.
The only problem with gov't intervention is it will cause inflation in the intermediate to long term future. It's the price we pay to not have to go through another great depression.
All you pessimists need to chill out. The economy will always turn around. The 1982 recession was worse than the one we're in.. and we got out of it, as usual.
And there will always be more market corrections and recessions to come. There always will.
Buy low, sell high.
Not all banks are heavily exposed to the four horseman of the housing apocalypse (IE, LV, AZ & FL). And even some large banks are not that heavily exposed. Thus even with significantly increased credit loss exposure for mortgages, cc, commercial and other loans their net interest margin more than offsets those provisions. They won't make big money, but they will eek out small profits so long as they lend at 5+% and their cost of funds are 0.25%.
Regards
By Martin Wolf
Published: April 14 2009 21:47 | Last updated: April 14 2009 21:47
Is the US Russia? The question seems provocative, if not outrageous. Yet the person asking it is Simon Johnson, former chief economist at the International Monetary Fund and a professor at the Sloan School of Management at the Massachusetts Institute of Technology. In an article in the May issue of the Atlantic Monthly, Prof Johnson compares the hold of the “financial oligarchy” over US policy with that of business elites in emerging countries. Do such comparisons make sense? The answer is Yes, but only up to a point.
“In its depth and suddenness,” argues Prof Johnson, “the US economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets.” The similarity is evident: large inflows of foreign capital; torrid credit growth; excessive leverage; bubbles in asset prices, particularly property; and, finally, asset-price collapses and financial catastrophe.
EDITOR’S CHOICE
Lex: US bank bail-out - Feb-10Video: Martin Wolf on the slow path to recovery - Feb-16Editorial: Son of Tarp follows in father’s footsteps - Feb-10Clive Crook: A package far from tied up - Feb-10Video: Big bail-out bang whimpers - Feb-10Economists’ forum - Oct-01“But,” adds Prof Johnson, “there’s a deeper and more disturbing similarity: elite business interests – financiers, in the case of the US – played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.” Moreover, “the great wealth that the financial sector created and concentrated gave bankers enormous political weight.”
Now, argues Prof Johnson, the weight of the financial sector is preventing resolution of the crisis. Banks “do not want to recognise the full extent of their losses, because that would likely expose them as insolvent ... This behaviour is corrosive: unhealthy banks either do not lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and, as it does, bank assets themselves continue to deteriorate – creating a highly destructive cycle.”
Does such an analysis make sense? This is a question I thought about during my recent three-month stay in New York and visits to Washington, DC, now capital of global finance. It is why Prof Johnson’s analysis is so important.
Unquestionably, we have witnessed a massive rise in the significance of the financial sector. In 2002, the sector generated an astonishing 41 per cent of US domestic corporate profits (see chart). In 2008, US private indebtedness reached 295 per cent of gross domestic product, a record, up from 112 per cent in 1976, while financial sector debt reached 121 per cent of GDP in 2008. Average pay in the sector rose from close to the average for all industries between 1948 and 1982 to 181 per cent of it in 2007.
In recent research, Thomas Philippon of New York University’s Stern School of Business and Ariell Reshef of the University of Virginia conclude that the financial sector was a high-skill, high-wage industry between 1909 and 1933. It then went into relative decline until 1980, whereupon it again started to be a high-skill, high-wage sector.* They conclude that the prime cause was deregulation, which “unleashes creativity and innovation and increases demand for skilled workers”.
Deregulation also generates growth of credit, the raw stuff the financial sector creates and on which it feeds. Transmutation of credit into income is why the profitability of the financial system can be illusory. Equally, the expansion of the financial sector will reverse, at least within the US: credit growth and leverage masked low or even non-existent profitability of much activity, which will disappear, and part of the debt must also be liquidated. The golden age of Wall Street is over: the return of regulation is cause and consequence of this shift.
Yet Prof Johnson makes a stronger point than this. He argues that the refusal of powerful institutions to admit losses – aided and abetted by a government in thrall to the “money-changers” – may make it impossible to escape from the crisis. Moreover, since the US enjoys the privilege of being able to borrow in its own currency it is far easier for it than for mere emerging economies to paper over cracks, turning crisis into long-term economic malaise. So we have witnessed a series of improvisations or “deals” whose underlying aim is to rescue as much of the financial system as possible in as generous a way as policymakers think they can get away with.
I agree with the critique of the policies adopted so far. In the debate on the Financial Times’s economists’ forum on Treasury secretary Tim Geithner’s “public/private investment partnership”, the critics are right: if it works, it is because it is a non-transparent way of transferring taxpayer wealth to banks. But it is unlikely to fill the capital hole that the markets are, at present, ignoring, as Michael Pomerleano argues. Nor am I persuaded that the “stress tests” of bank capital under way will lead to action that fills the capital hole.
Yet do these weaknesses make the US into Russia? No. In many emerging economies corruption is egregious and overt. In the US, influence comes as much from a system of beliefs as from lobbying (although the latter was not absent). What was good for Wall Street was deemed good for the world. The result was a bipartisan programme of ill-designed deregulation for the US and, given its influence, the world.
Moreover, the belief that Wall Street needs to be preserved largely as it is now is mainly a consequence of fear. The view that large and complex financial institutions are too big to fail may be wrong. But it is easy to understand why intelligent policymakers shrink from testing it. At the same time, politicians fear a public backlash against large infusions of public capital. So, like Japan, the US is caught between the elite’s fear of bankruptcy and the public’s loathing of bail-outs. This is a more complex phenomenon than the “quiet coup” Prof Johnson describes.
Yet decisive restructuring is indeed necessary. This is not because returning the economy to the debt-fuelled growth of recent years is either feasible or desirable. But two things must be achieved: first, the core financial institutions must become credibly solvent; and, second, no profit-seeking private institution can remain too big to fail. That is not capitalism, but socialism. That is one of the points on which the right and the left agree. They are right. Bankruptcy – and so losses for unsecured creditors – must be a part of any durable solution. Without that change, the resolution of this crisis can only be the harbinger of the next.
*Wages and Human Capital in the US Financial Industry 1909-2006, January 2009, nber.org
THE POINT IS IT ALL DEPENDS ON THE FUTURE YOU WANT. WE WILL EITHER HAVE A BOOM BUST ECONOMY OR NOT. RALLY MEANS BOOM BUST BECAUSE WE HAVEN'T FIXED THE PROBLEMS BENEATH. IF WE FIX THE PROBLEMS BENEATH AND WANT TO GO ON A 30 YEAR RUN IT MEANS MORE PAIN NOW. I THINK THE GOVERNMENT IS ORIENTED TO BOOM AND BUST. SO IN TRUTH ALL POINTS OF VIEW COULD BE RIGHT DEPENDING ON YOUR TIME FRAME.
In the mean time, I'll enjoy another day of good old fashioned short busting!
All you renters whining about the stealing of your savings as house prices are coming down and will probably continue down to historical cheapness.
Can we stop with the right wing extremist crap. Let's all censor what the Department of Homeland Security does(didn't see any of you complain about the Left Wind Extremist documents that were released at the end of last year). Let's just study all possible threats and put some nice pink stickers on the page and say "they seem like nice people" and call it a day.
Let's make some comparisons:
1929 to 1932 Dow Jones' 91% metdown was caused by both excessive stocks speculation during the roaring 20's as they call it in almost all industries and also housing. The housing boom at that time is considered worse than this latest episode. That was the end of the world for most investors at that time. Dow Jones went down from $470 then went up from $42 in 1932 to $14,200 of 2007.
Nasdaq went down more than 78% from 2000 to 2002 due to more than excessive speculation worse than that of the 2001 to 2006 housing boom with hundreds even thousands of multiples for many tech companies. It was an another "tulip mania".
China went down 72% caused by excessive investments in it's export oriented industries that cater to US and European consumers who turned out to be over-leveraged in spending. Not bad for a young and immature market comparable to that of Dow Jones in 1929 or even to Nasdaq of today as compared to size. But they did not go as maniacally exuberant in 2002 to 2007 as that of Nasdaq of the late 1990's having learned the lessons of 2000 to 2002 tech meltdown.
This current downturn for the US has been going on since year 2000 - not 2007 as many think it is. It started with the Tech meltdown of 2000 to 2002. The rally from 2002 to 2007 was not a "bubble rally", Dow Jones, SnP and Nasdaq made "bear rallies" from 2002 to 2007. Nasdaq was not even able to leave it's own "depresion" at that time while SnP was only able to recover it's 1553 high after 5 years of slow and painful bear rally.
The bubble rally was from the 1980's to 2000 when Dow Jones went up dramatically from 1000 level to 11,750 in such a very short period of time.
Time for reconing started in year 2000.
In most cases of bubble rallies; either the stock and/or stock market pays the fine or serve the time or a combination of both.
In 1929 to 1932, Dow Jones paid the fine with 3 years downturn and 91% penalty. This time around Dow Jones is serving the time with more than 8 years penance and paying some penalty of more than 54% so far. It can go down 62.8% but more likely no more than that. Dow Jones of today is a much more mature market than that of 1929. SnP is at middle age but well diversified while Nasdaq is still young and immature (and can become vibrant and dynamic again if given the correct incentive instead of the dis-incentives the Bush administration administered over the tech industry from 2001 to 2007).
The real estate and retail industries went bubbly during 2001/2 to 2006 period. Insurance companies did get too much bubbles and so they paid the price with many of them going down more than 90%. Banking sector did not bubble but they got excessive asset exposures due to over-leveraging
IYR or real estate ETF went down 78% while the banking sector went down 85.33%.
Is 85.33% meltdown for BKX not enough?
The banks have massive cash reserves borrowed at extremely low interest rates closer to zero and lending some of them up to 30% punitive charges for credit cards. Their exposure to the gargantuan CDS assets is basically a zero-sum game, they cancel it's other out in the end with basically no loss to all participants as a whole if they all decide to just scrap all their CDS holdings. Their CDO holdings can last 10, 20, 30 years to maturity. Will those CDOs still be worthless in 10 years? Real estate prices are expected to go down further next year to sustainable price levels new-buyers can afford. How about 10 years later?
China is now in a torid Revival as they call it with more than 50% rally for Shanghai index and 80% rally for Szensen index since Oct 2008. Sooner or later, investors are going flock to China and the other developing countries that are following China's lead. Many of them will be borrowing additional capital from the banks in order to be able to create new industries for China's 1.23 billion consumers which are now being discouraged from savings and being incouraged into spending by their government with $600B stimulus package that is equivalent to $1.8 Trillion for the US in GDP terms.
Imagine how much consumer revival will be generated in the US if the Obama administration simply matched that of China's instead of the puny $787B. The US economy is in far worse shape than China, is'nt it?
Which global banks have more capital to lend to global investors willing to invest to the impending consumer boom in China that is going to equal and exceed that of the US's of the 1980's to 2000?
C, BAC, JPM, WFC, DE, BCS, HBC, UBS?
Which financial firms in the world have more experience and credibility when it comes to IPOs, Mergers and Acquisitions, etc., that are going to be dominant factors when the economy of a country goes into full gear?
GS, MS, C, JPM, UBS?
How about inflation with all those trillions of Fed Funds sloshing around all over the place? Somehow, somewhere those companies holding excessive cash reserves will have to deploy those trillions of dollars resulting in inflation if not super-inflation. What will happen to the prices of their CDOs and real-estate mortgage holdings? Real-estate will become more valuable than gold due to it's superior intrinsic value over gold.
If you are a long-term investor. Is 85.33% discount not good enought for you?
You will never be able to get that discount when the banks are not in such a big big big trouble as they are now.
Buy High sell Low? Wait for lower prices?
The risk is now to the upside rather than the dowside in the whole scheme of things to come. Waiting for 90% discount or 95% discount may be good and well done if they happen. But you might as well end up waiting forever or buying into the banking sector at 200% or more from the last low of $17.75.
This is not the end of the world. The US and European consumer boom maybe over and done, but there are more than 2 billion consumers out there in the developing countries with young and vibrant population not necessarily believing that they will have to depend on the US and share it's fate. You know how young people react to challenges in life, they fear not destitution nor death.
Huge population in the developing world the US industry can export to with consumer goods and financial expertise.
No problem with financial expertice and cash holding capacity. Only that credibility has to be restored to the banks. Thus, a full and unconditional US government support is required in order for other countries to believe in - specially China who is now starting to show misgivings to US's capacity and capability to support their trillions of dollars investment in the US.
No credibility problem with GS and MS. They are able to surmount far more risks than those planning for IPOs and M&As in the developing countries can ever imagine.
The major problem is the export of consumer goods since labor in the developing countries are basically "cheaper" now than before. Over time, their salaries are going to approach that of Western standards as they transition from developing countries to semi-developed and into fully-developed countries.
High end exports are going to recover relatively quickly since they are less dependent on production costs but rather to the prestige they provide to the emerging new rich individuals.
As for my reaction to this market, I find myself treading very carefully, since the usual trading indicators don't seem to work as well as they used to. I think anyone who plans to buy and hold for more than a day is foolhardy, regardless of what some here say. That being said, I am not convinced that the sky is falling. It's business more or less as usual, but on a larger scale than ever. Anyone who claims to know what the future holds for this market is delusional, pitching their website, or both. Shut up and trade-carefully.
Short term outlook is bleak. Mid-term looks highly inflationary. Long term (10+ years) things will correct somewhat. Taxes will reduce living standards. Entitlements will be means tested. Only the wealthy will have excellent health care. Everyone else will have a social safety net under them and mediocrity will prevail. Isn't this what fairness is all about?
On Apr 16 08:10 PM ed233 wrote:
> After having read Andy's article and watching this afternoon CNBC
> you'd think we were experincing two different worlds. CNBC showed
> the trading pit and the excitement was really astounding. Maybe that's
> what a party looks like when everybody is on speed. Anyway, we're
> seeing how propaganda can create illusions and illusions can create
> panache and of course then buy, buy, buy. It doesn't matter what
> the economy is doing just buy. For those who bought the big piggy
> banks in the US without knowing what's behind their skirt better
> bring some protective gear. Just thinking about your money. LOL
But this opacity also conceals the extent to which banks sources of income are wide and deep. So for example the last year has seen the large banks having a party in the volatile FX trades as well as enjoying hugely increased lending spreads.
Yes there are foreclosures, but great numbers of people (I should imagine a majority) who took out those risky mortgages to fill their dreams will struggle through, hang on and come out the other end of this with a stronger position - and not cost the banks money
On Apr 15 08:10 PM drbob66 wrote:
> Great, everyone is still skeptical of this rally. That's what I like
> to see.
>
> The great short squeeze continues. Onward and upward...
My second point is if China starts growing internally, they will hire in house. Bye bye exports. The only bright spot is US companies in china, like McD and YUM will be making earnings. Meanwhile in US better get used to a lesser lifestyle. I'm waiting until december to jump in.
On Apr 17 06:37 AM aarc wrote:
> The banking index BKX would never go down more than 85% from $121
> to $17.75 if the whole world, "for them", is not going to end sooner
> rather than later.
>
> Let's make some comparisons:
>
> 1929 to 1932 Dow Jones' 91% metdown was caused by both excessive
> stocks speculation during the roaring 20's as they call it in almost
> all industries and also housing. The housing boom at that time is
> considered worse than this latest episode. That was the end of the
> world for most investors at that time. Dow Jones went down from......
On Apr 17 09:54 AM ETFtrader wrote:
> I have noticed that pieces such as this one by Mr. Abraham seem to
> excite the most comment, and the strongest reactions, on this site.3
>
> As for my reaction to this market, I find myself treading very carefully,
> since the usual trading indicators don't seem to work as well as
> they used to. I think anyone who plans to buy and hold for more than
> a day is foolhardy, regardless of what some here say. That being
> said, I am not convinced that the sky is falling. It's business more
> or less as usual, but on a larger scale than ever. Anyone who claims
> to know what the future holds for this market is delusional, pitching
> their website, or both. Shut up and trade-carefully.
All my stocks are in commodities. I especially like my soy play from down there. Tech is fine but right now too clouded the direction. Banks, well there may be 2 billion people but they all make less than 1/4 of US wages. US wages going down just tells me instead of US taking world to our level, US going to world level. prepare for deflation.
On Apr 17 09:59 AM Mourning Capitalist wrote:
> I just want to have some reasonable expectations for the immediate
> to short-term future. Research, reason, and history tell me I should
> expect a large correction. Instead I see the market rallying for
> reasons the just don't seem sensible or plausible. So if anyone
> in either camp can explain to me what is happening, I welcome the
> information. Until then, I tend to agree with the author.