It's Ugly Out There. What's Washington Waiting For? 34 comments
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The US stock market is off to one of its worst starts in history, credit is shrinking, and home prices are declining at rates never seen before. The current credit and housing crises have been on the front pages of even non-business newspapers since last summer. It’s a mess out there. At the same time, our nation’s leaders in Washington are still assuring Americans that they are monitoring the situation closely and will be ready to act in order to avoid any negative consequences of the current credit crisis. What are they waiting for?
Several months into this episode, the lack of decisive action is unnerving and apparent to even the most casual investor. This is a real crisis of confidence. No matter what your opinion of the proper steps, if any, that are needed, there is no denying the fact that financial markets hate uncertainty. Unfortunately, that’s exactly what they are getting.
US markets have historically been regarded as a safe haven. Investors all over the world have placed a premium on US assets knowing that when faced with crisis they can expect clear and decisive action. Following the 1987 crash, The Brady Commission was formed to root out its cause and prevent it from happening again, but this was only after the Fed took decisive action. Before the markets opened the day after the crash, the Fed had already taken numerous steps to provide liquidity and maintain confidence in the financial system. As a result, the Dow never looked back. In the fall of 1998, when faced with the failure of Long-Term Capital and its threat to the financial system, the Fed summoned the heads of all the major banks and brokers to New York to help engineer a fix. By the end of the year, the market was once again at all time highs.
In the current crisis, it seems as though the Fed and Washington's politicians have consistently underestimated its intensity, only to later be forced into action. Each time this happens, investor confidence takes a hit. While things appear to have gotten bad out there, it's not too late.
This week, the CEOs of Intel, IBM, and GE all said they don’t think the economy is in a recession yet. Economic indicators, while weak, are still not convincingly in recession mode either. In our monthly look at economic indicators for Bespoke Premium subscribers, we examine the trends of various indicators grouped according to Manufacturing, Employment, Housing, Inflation, and the Consumer, and provide charts of each indicator. Below we highlight the portion of the report dealing with the manufacturing sector (click here for charts) (pdf file).
The table summarizes the y/y change (unless otherwise noted) in each indicator. We also highlight each release to show if the report improved (green) or weakened (red) over the last month. As shown, in manufacturing, the indicators remain evenly split between growth and decline. So it's not too late, but unless decisive steps are taken to restore the public's confidence in the markets, the lack of confidence will work its way further into the overall economy. As they have done for the past 25 years, investors all over the world are looking to America for leadership now that times are rough, and unfortunately today, we’re not getting it...yet.
click to enlarge
Dear Mr. Bernanke, Dear President Bush, Dear Congress: Please Watch This Commercial
Talking the talk and not walking the walk is about the worst thing that the Fed, the President, or Congress can do. When you say that rates are going to be lower in the future or say you're going to provide an economic stimulus package, it causes economic activity to freeze until these things actually happen. Why would anyone borrow money if they know rates are going to be lower in the future. If you're going to cut rates, do it. If you're not, let the market know that you're not. This can all be summarized in the great Royal Bank of Scotland commercial below:
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This article has 34 comments:
Gold-lochs is very sick right now. I agree we need to help the patient and fast..with a good dose of anti-biotics. Less talk and more action. The faster the better....
Home prices rose at rates never seen before, cutting rates and trying to salvage prices that should never have happened isn't a solution. If prices rise artificially, the worst thing you can do is to try to keep them at artifically high (and now unaffordable) prices.
If you want the housing market to stabilize, you need to accept a severe correction in prices so people can afford them without having to leverage their entire future by using "creative" financing to have a piece of the "American Dream".
high-interest, high-risk loans. How is that the government's fault or responsibility?
But of course, we live in a Keynesian world, and the average American has the maturity level of a Power Ranger audience. Coddle we must and coddle we shall.
It is Wall Street that doesn't get it.
No matter what the Fed does, the emperor (Wall Street) has no clothes. After the foolish Fed gives Wall Street what it wants (zero Fed Funds) -- the problem will still be with us, and then Wall Street will be forced to look in the mirror at the real problem.
I agree with eponymousLTC's earlier comment 100%
Don't we all remember Alan Greenspan with his weird weird 'there is a conondrum' and we don't understand why long term rates are below the short term rates... Oh oh, that fool named Alan.
Yet the combined debt on the US economy is so large that in 2008 something like 2500 billion is needed just to pay for the interest. Since in the last seven years this total debt level has grown something like 8% Y on Y we can safely conclude: All in all interst payments are done via collecting more debt.
I guess this is just what you get when year in year out you pick up more debt at a far larger pace then the combined economy does (most lines of credit grow at two or three times the GDP growth).
After that it is only waiting for the interest clock starting to tick and all that is left is some solvency problem. (Alhough I usually refer to that as the impending tidal wave of bankruptcies.)
best to all my fellow alphas.
rr
Jeez, is anybody really waiting for the Fratboy and fascist Uncle "Dick" to do anything useful? I know, let's invade Canada. Can’t have too many useless war, can we?
When things are going great, get out of our way. When things are a little shaky, HELP!!!!!!!!!
Whatever you do, under no circumstances let home values fall to where the average responsible family in a given area can afford the average home. That would be terrible. HELP!!!!!!!!
Hurry up and send out those checks, my children will have to make them good, but I am a little tight on cash this month with 2 BMW payments and that time share in Aspen. I need some relief. HELP!!
When a friend bought 4 times the house he could afford with a 1% teaser I told him it was irresponsible, he told me that if things got bad the government would have a program to bail people out-that is what the mortgage broker told him. You know, he was right.
So much for moral hazard. Borrow against your children's future, great examples we are. Send out the checks, hurry, hurry, hurry.
so unless you are convinced that things have gotten out of control (which i doubt at this stage) one could assume that stock prices are getting hammered with an agenda here. After all, the bigger the rate cuts and the faster, the more money do the WS houses make (or the less they lose). In the long run, of course, main street will pay an even higher price.
With the bearish case (recession, credit collapse, dollar crash, liquidity crtunch, subprime, housing collapse etc.) all over the media i keep wondering whether the sky is really falling (already?) or whther this is not the setting up for a giant bear trap. current stock prices after all, by and large reflect expectations of a severe recession lasting at least 18-24 months and dragging the world massively down with it.
I just don't see it yet and i don't buy it. imho selected beaten down stocks in selected sectors are way safer an investment here than bonds
In this case, the financial system, and all economic systems will be destroyed and ruined by "NO CONFIDENCE". It will be a horrible global recession.
Anything that is down 20%, it is ridiculous. The economy is not that bad to deserve this 20% drop. Due to the everyday continiued degrading by the media and selling side analysts, they have created the FEAR, they have destroyed the CONFIDENCE of everyone. We can't underestimate these effects.
The FEAR together with NO CONFIDENCE will seriously hurt this economy and financial sector, Does Mr. Bernanke want to see this?
Do you really believe economy is linked to the market such that 20% drop in the market has to be "deserved by economy"?
Market will not go down endlessly everyday, that would really be ridiculous. It will only go down enough for equities to become cheap enough so that investors shift their resources away from defensive instruments back into more risky ones. Market came down because many felt like risk wasn't justified at these price levels. This is totally normal. If it needs to correct 20% so be it. The sooner that's over the better. The sooner it will start to climb up again as folks start to pick good cheap stocks.
Now for something else ridiculous . . . How can you say that there is no issue with bailing and bubbles? Has it really been so long now that we forgot what the latest bailout created? Where did high tech bubble come from? Where did housing bubble come from?
Oh yeah, someone wanted everybody to be confident about financial system. And I mean REALLY confident. Confident to a point where ANYONE could get a mortgage for ANY amount. No matter if they had a job, what if any credit history they had, no matter how overpriced the houses, how exaggerated the appraisals, in some cases to the point of being fraudulent. Now you want more confidence? No, we need those who allowed this to happen to pay the price for the risks they took. You might be thinking "bad, bad banker" at this point, right? WRONG.
Unfortunately this means more or less everybody at this point. No, not just the guy at countrywide, merril or citibank. YOU and ME too. YOU and I all knew this was going on and so did I. Yet we bought these securities knowing that shit will hit the fan eventually, or hoping that we will all be bailed out when it happens. Some of us didn't care much because our timeframe was longer and we don't care if the market had to correct 20% to solve this. Others hoped their timeframe was short enough so they would get out before this correction happened. Now whoever didn't get out in time is screaming "HELP" hoping that Bernanke, Washington, God or whoever will give some sort of temporary relief and that this for some reason will create a short but sharp enough bounce, just enough FOR THEM to get the heck out. Now this, my friends, is what's really ridiculous.
We need solid long term success in the market, not some short term relief rally. To get that solid success we need some basic risk-reward rules to work properly. If we bend the truth every time it hurts we will create more breading ground for scam artists who will try to become rich overnight by either taking risks they can't afford or by riding relief rallies based on inside information.
You must be on the selling side for this game is worth it for you.
The market went down almost on every day of 70% of the trading days in the past 3 months. Who will come to buy in the stock market?
With the promotion of "RECESSION is coming to TOWN" by all media and most analysts in the past 3 months, who will buy ? Who will hold?
Stock market is an indicator of the economy. Do we want to repeat the deep recession of 1931 due to the free fall of stock market?
We are already suffered by the sub-prime, do we want to suffer more in stock market, credit cards................
SHORTS ARE AXIS OF EVILS, When these shorts play the game to the very extreme, I don't think Mr. Bernanke & President Bush will sit idlely watching them destroying the economy & stock market.
No, i'm not on the short side. I'm very much long. Some of my long position has become somewhat more defensive lately, i bought some muni bonds, brk-a, etc. But obviously that didn't help me much in the last month or so. But . . . i keep this in perspective. Last month was bad. But last year was not so bad at all. I'm not going to be all upset about a given month, I don't play with the money i need next month to pay rent or something. It's there for retirement purposes if i ever actually retire. So not a big deal as far as I'm concerned. I'm even less concerned about % of trading days this or that, support levels broken or any other technical BS they come up with. So who is going to buy? I will. Who will hold? I will. Who the heck am I? Nobody. Why are we even talking about it? Just because you implied i was part of axis of evil or something :)))
Let's look at Buffet for example. Is he short? He might take a defensive position here and there, but I don't believe he is short or, by your definition, evil.
We already suffered you say? When exactly? Last year market did OK. There were some sell offs here and there but overall it was pretty flat for the year. Where is that suffering? Keep in mind i'm talking strictly wall street/investors. Of course individuals may have suffered due to loss of job or gambling on their home or something. That always happens, especially when bubbles burst. But the investor community for the most part just started to suffer about a month ago. I'm not sure we are done yet.
What are we supposed to do? I think I'll just look at some solid stocks I always wanted to buy but considered just too expensive and perhaps something will become cheap enough for me to either put new money in, or sell some defensive positions to buy those stocks or eve increase leverage if things really become cheap, as a last resort. Yes, perhaps I'll be "catching a falling knife" as they say, but I feel OK about long term holds as long as i didn't buy at the top. For some reason when i buy at the top i feel like a sucker, but that's just me. I'm sure there are businesses out there worth being invested in, both in US and abroad. Yes the market may panic and they may become another 20% cheaper. Yes maybe the economy will change such that those businesses wouldn't be "great to be invested in" anymore and you'd have to sell at a loss, but that's just the risks you are going to have to take if you want to play this game.
If you are looking for a different kind of game, like i put my money on red, if it's red, i take my money and run, if it's black, i scream "HELP", "Stimulus package", "axis of evil", etc till i get my money back . . . I'm sorry, i don't know of any such game. And If i knew, why would i share it with anyone? I'd just be busy playing it all the time getting rich :)
I care the financial stability of this economy. Mr. Bernanke's job is to maintain this stability.
Again, Shorts are AXIS OF EVILS. Don't be too GREEDY, SHORTS.
I thought recession was just a possibility at this point, not a definite. I'm not too proud, it could always be doing better, but i just don't see the end of the world here or anywhere. By your measure (stock market apparently == economy in your view) the entire world is in deep recession. And the funny thing is, a couple of months ago it was doing great. Now = deep recession. By definition, it takes time to declare that we are in recession, btw.
Is Mr. Bernanke's job to maintain stability of your personal stock portfolio or is his job maintaining economic stability? He has acted and I'm sure he will continue to do so. All of this "credit crisis" stuff will eventually pass, but it can't be painless or it will be back all too soon. There is plenty of money out there. Foreign money is coming in.
The problems in the economy are pretty clear: Slow growth (policy changes may be needed), Inflation, especially in some sectors like energy, healthcare, housing. Housing is going to improve as bubble deflates. We need policy changes in energy and healthcare. The rest of the economy looks OK. Unemployment looks good. What are you on about?
What's your problem with shorts? They are there for a reason. No worse than those who pump stocks for a living.
The HUGE 7% drop in global markets is the vote that US will face a deep recession. The global markets is forcing Mr. Bernanke to take action. Read what Mr. Bernanke said last week.
With the continued free fall of the global market, our economy and financial system will be seriously affected.
Foreign money?????? Where?????
You must be kidding, housing is going to improve, is that easy????? Why Citi & Mer wrote off billions????
Every stock exchange in this world is on FIRE. Where is the foreign money?????
I have no problem with shorts, however, when there is FEAR & NO CONFIDENCE to the very extreme, it is time for Mr. Bernanke to step in. Otherwise, there will be BANKRUPTCY in the market.
where is foreign money? look at the numbers for foreign investment in the US over the last few years. all grew dramatically. from everywhere. China, Middle East, even Russia, India, etc.
citi, mer and other wrote off billions because they made bad decisions. they took on risks that they couldn't afford to take on, because someone wanted to get rich quick. many people did. some left holding the bag. regulators need to make changes to prevent this from happening in the future. this doesn't mean "bail everybody out".
7% drop is only as HUGE as you M A K E I T T O B E. it's all in your head. you're scared. that's OK. that means i'll be able to buy shares cheaper when all of you daytraders are wiped out waiting for "stimulus package" or some other kind of a miracle. if FED just came in every time there is a drop in the market and lowered rates what would he have to do every time the market goes up? raise them back i suppose? then you will be screaming at him for "killing your rally"? how is one 7% drop any different from several days going down little by little every day? Why is it so much more painful? don't look at days look at years. and ask yourself what does helicopter Ben need to do for you now so that you'd be set in 20 years?
don't worry too much. odds are Ben WILL overreact and help you. he WILL drop money off helicopters for you. I'm just hoping he'll have enough ammo left for when there is a REAL problem. like rising unemployment, deep recession (no, not the kind that the market votes for, but the kind that's measured by a couple of qtrs of negative GDP growth).
Are you challenging the authors of this article???
Short more please tomorrow if you are a man. I doubt it.
I might buy a few quality stocks or calls on them tomorrow, but i'm more likely to wait a few days.
As for authors of the article. If you read my comments here you would notice that I am more concerned about moral hazard and less concerned with the panic. I don't think FED should change diapers for people, but I know he will, to a certain extent. When people scream that they are not being helped fast enough even with a helping and accommodating FED like the one we've got it makes me question their sanity, I'm sorry. If you are close to retirement your portfolio should have beta significantly below 1. In any event it should have beta you're comfortable with. Don't build your comfort on expectations that someone will bail you out or that price of a given asset "only goes up" or you'll end up owning 25 houses site unseen or a bunch of 0 down interest only no-doc lair loans on those houses, choice is yours.
Another 500 point drop in Japan, 2 days, they dropped 1K points. You may need your diapers to be changed, for me, I just point out the truth. The truth is do it or leave it, History will judge Mr. Bernanke's performance, not you nor me for Mr. Bernanke is facing the WORLD, not your nor me.
This is one of the most morally bankrupt things I have seen - the government and the financial players have manipulated the consumer and small investor until they can't afford to buy at the (non)inflated prices and the money flow has dwindled. Oh, no! We can't have that! So give money to them so the little guy can keep spending - no matter there is no money, we'll just print more on the value of America!
This is no answer. The real answer is to elect leaders who will keep our money in the country instead of sending over 300 billion dollars to Iraq and more to other places. Leaders who will get tough and close the borders until we get control of the illegal immigrant problem and stop that fiscal drain. Most of all leaders who will make laws to limit and control the greed of the investment community which is what got us here in the first place. Remember when you spend your little piece of America (your $800) that it is going in the pockets of the manipulators to keep their money flowing in spite of their excesses and has nothing to do with any feeling for the little guy or family. The ones giving you this are the ones who put you in the position of needing it in the first place. And it comes from the same place the money being wasted in Iraq does - the printing press.
Certainly, Stephen, the markets would respond more favorably to a Federal Reserve chairman who appears confident and purposeful in his actions rather than saying one thing and, then doing another shortly afterwards.
As far as housing is concerned, the FED aims to debase the currency enough in order to stabilize home prices in nominal terms, even though they will be falling in terms of real money (gold and silver). A real rate of inflation of 10-15% per year for a little while should accomplish that.
Don't cry over a falling stock market. It will make for a great buy in commodity stocks and the DOW should experience a decent rate of return for 2009 thanks to this rate cutting cycle and attractive P/E's. The U.S. stock market has been in a bear market since 2000. It has yet to reach its 2000 peak when priced in Euros or gold or when adjusted for inflation.
( 9 trillion dollars ) in debt. Thank you congress for a job well done.
At least the guy is the highest paid economic guru out there.