Current Financial Crisis Going Into Extra Innings

In my Big Whoosh, Part 2 item from Sunday, I said Monday’s trading will hold the clue to how bad the eighth and ninth innings of this financial crisis will be.

Well… Monday’s rise followed by Tuesday’s rally and yesterday's trounce can only mean one thing: When the free market capitalist system works the way it’s supposed to, which isn’t always the way free market capitalists want it to, the free market capitalists freak out and sing “Rescue Me” to the very government they say should never intervene.

As a result, it appears that every event that can cause a serious psychological jolt to the market will be met by a government-inspired counter-action designed to create fiscal but, perhaps more importantly, psychological relief. Nothing wrong with that except if more bad news emerges (and it likely will) the rescue plan du jour will create a false sense of security and a subsequent ratcheting down of prices rather than a steep decline.

In the end, it’s all about the stock market, stupid. It is, after all, the public face of the financial fiasco. The Bear Stearns (BSC) situation is merely part of the unwinding process; we can only guess what comes next and the financial ball of string continues to be untangled.

The real moral of the story, as is often the case, is that a rise in stocks — even the biggest jump in five years — doesn’t necessarily guarantee that the game is over. Forget about what I said about the eighth and ninth innings; this one looks as though it may go into extra innings.

Batter…up!

Comments

[pickaroonwyo:]

It's the bottom of the fourth. Pinch hitting for S.I.Vehicle is the dreaded newcomer recently called up from the minors..... C.D.Swap. No pitcher has yet found an answer for him.

Citibank, Merrill, UBS and Lehman released from the majors as M.Funds juggle 1Q salary cap reports.

2008 Mar 20 08:41 AM

[Lawrence York:]

The Fed as amply dealt with the liquidy issues of the market but not the solvency issues. Leverage of course amplifies both. The reason this crisis will have many more innings is that enormous value has been lost and the Fed is betting that time will cure the problem as banks, assisted with bigger spreads, will be able to gradually write-down/off bad loans and muddle through. The only problem with that scenario is that banks play by one set of rules and brokerages another and they are interconnected in the financial system. Moreover, the US economy is teetering and more likely to be his enemy rather than his friend in the timing bet. Remember we still have GNMA losses to tabulate and that last broken leg of the stool may very well be the undoing but nobody will discuss it publically.

2008 Mar 20 09:37 AM

[Mike Stathis:]

To be a bit more cut and dry, we have a long way to go; and the direction will be a downward spiral unlike anything ever seen. Pickaroonwyo and SeriousBull are right on track.

Before it's all said and done, this fiasco is going to make the S&L crisis look like a walk in the park. There will be several bank failures. But the Fed will pump money into the system via auctions (collateralized with junk bonds). The FDIC is already beefing its staff up to handle the coming mess.

Banks won't close their doors like in the 1930s. You'll get your cash.
The only problem is that this measure will continue to destroy the dollar. And it's going to result in many many corporate bankruptcies outside of the financial sector.

Don't fall for these sucker rallies. If anything, take the opportunity to set up your short positions.

2008 Mar 20 10:41 AM

[The GreatDe...:]

Thomas Jefferson was concise in his early warning to the American nation,
“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

2008 Mar 20 10:54 AM

[Tony Soprano:]

Since there is so much angst directed toward the Fed and the US Government, I decided to listed some events, not all of them, that had dramatic ramifications on lives, cost and the psychology of our country. I started in 1906 because it’s just a little over a hundred years. As I compiled the list, I could not help but feel the great sacrifices that many American’s have made and what a resilient country, economy and government we have in American.

The 1906 San Francisco Earthquake and fire, registered 8.25 on the Richter scale; estimates range from 700 to 3,000 dead or missing, approximately 225,000 injuries and $400,000,000 in 1906 dollars.

Recession, May 1907-June 1908, 13 mo

Recession Jan. 1910-Jan. 1912, 24 months

Completion of the Panama Canal, 1914 – 27,500 workers are estimated to have died

Recession Jan. 1913-Dec. 1914 23 months

World War I -- 116,708 killed – 33 billion

Spanish influenza, 1918, killed over 500,000 people in the worst single U.S. epidemic.

Recession Aug. 1918-March 1919 7 months

Recession Jan. 1920-July 1921, 18 months

Recession May 1923-July 1924 14 months

Recession Oct. 1926-Nov. 1927 13 months

The Great Mississippi Flood of 1927, flooded 27,000 square miles, 246 killed

The Great Depression, Black Tuesday, crop prices fell by 40 to 60 percent, after the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.

The Dirty Thirties, longest drought of 20th century. Peak periods were 1930, 1934, 1936, 1939, and 1940. The "dust bowl" covered 50 million acres in the south-central plains during the winter of 1935-1936.

Labor Day Hurricane of 1935, 400 killed

Recession May 1937-June 1938 13 months

World War II – 408,306 killed – 360 billion

Wartime Controls: 1941-1945 rationed consumer items ranging from sugar to gasoline

Recession Feb. 1945-Oct. 1945 8 months

The Marshall Plan, July 1947 – 13 billion in economic and technical assistance were given to help the recovery of the European countries

Recession Nov. 1948-Oct. 1949 11 months

Korean War, July 1951 - July 1953 – 33,000 killed in action

Recession July 1953-May 1954 10 months

Recession Aug. 1957-April 1958 8 months

Recession April 1960-Feb. 1961 10 months

The Cold War, some estimates shows $8 trillion was spent, worldwide, on nuclear and other weapons between 1945 and 1996

The Cuban Missile Crisis, Oct. 1962

Good Friday Earthquake (1964) In Alaska, it was the fourth biggest earthquake recorded

Vietnam War, 1963 – 47,378 killed in action

The murder of JFK, 1963 Nov

The Gulf of Tonkin Incident, Aug 1964

The murder of Dr King, April 1968 and Bobby Kennedy, June 1968

The city riots of April, 1968 – 30 cities affected

Hurricane Camille, Aug 1969, 259 killed

Recession Dec. 1969-Nov. 1970 11 months

Stagflation of the 1970s began

Nixon first imposed wage and price controls on August 15, 1971

Oil Embargo, Oct 1973 long gas lines

Recession Nov. 1973-March 1975 16 months

Articles of Impeachment of Nixon started
(Approved by a vote of 27-11 by the House Judiciary Committee on Saturday, July 27, 1974.)

Deregulation: 1974-1992 this era began when Nixon left office

Three Mile Island nuclear power plant crisis, March 1979

Mount St. Helens eruption 1980

Recession Jan. 1980-July 1980 6 months

Prime reached unbelievable 20% in January 1981,

AIDS was first reported June 5, 1981 by the government – It is thought that more than one million people are living with HIV in the USA and that more than half a million have died after developing AIDS.

Recession July 1981-Nov. 1982 16 months

California earthquake 1983

The 87 market crash - Black Monday

California earthquake, 1989

Recession July 1990-March 1991 8 months

Iraq invaded Kuwait on August 2, 1990

The Persian Gulf War, 1991 or Desert Storm Jan 1991

Hurricane Andrew 1992 very destructive United States hurricane

The Great USA Flood of 1993

Intervention in the Former Yugoslavia,

Dot Com Bubble, climaxed on March 10th, 2000 with the NASDAQ peaking at 5132.52

9/11 Attack, 2,974 people died

Recession March 2001-Nov. 2001 8 months, Airline Industry Collapsed

Enron bankruptcy in late 2001, employed 22,000

WorldCom, July 21, 2002, filed for Chapter 11

Iraq War, March 19, 2003 – 4,000 dead

Hurricane Katrina, late August 2005, 1,836 people lost their lives

Start of the Great Housing Recession or Sub-prime Recession 2006 or 07, 08? Date to be determined.

2008 Mar 20 02:44 PM

[curious cat:]

hey tony,

that's some list. you're right about america being resilient, too.
in fact, the best thing i can say about america is that we have do overs. we let people and businesses fail and begin again. we don't have debtor's prisons and we don't shame people into committing hari kari and we don't execute them if they fail to meet their quotas. sure, there are quite a few greedy bastards that deserve to be caned, but we draw the line at water torture, so what are the chances we can whack their feet with a stick?

still, the important thing is that america promotes opportunity and enterprise. america welcomes junk bonds and cdos and all the other alphabetical financial instruments, whenever some hyped up wall street genius creates them. we welcome high risk and high leverage. we take chances that other countries cannot even begin to imagine (well, there may be a few french bankers who have an imagination.) our "no punishment" environment nourishes risk because we know that when it works, it creates inconceivable wealth and benefits for everyone.

sure, the economy suffers from time to time, as you've highlighted above, but consider that our way of life is the most advanced in the world, from the best foods and medicines to the latest clothing, cars and homes. consider that everyone in america with half a brain has access to most of the same great stuff that bill gates can get and we all live better than just about anyone else in the world. we stumble, but we get up quickly and we go on to the next great thing, which might be room temperature super conductors, super cheap energy or nanotech whatevers.

2008 Mar 21 12:59 AM