The "Worst Is Over" Crowd Is In for a Shock 26 comments
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This is all beginning to sound like a broken record.
With yet another intervention in place, the pundits are proclaiming that the “worst is over” again. The Fannie Mae (FNM) / Freddie Mac (FRE) deal is certainly a mega-intervention — William Poole, former President of the Federal Reserve Bank of St. Louis, believes it will cost US taxpayers $300 billion. So will things genuinely improve from here on out?
Probably not, if you go by history.
The largest previous intervention was the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. The Act, passed into law on August 9, 1989, created the Resolution Trust Corporation [RTC], a government agency that was meant to dispose of insolvent savings and loans banks. In layman’s terms, the RTC would take over banks that went under and sell off their assets — both good and bad.
According to then-Treasury Secretary Nicholas Brady’s testimony to the Senate Banking committee in May 1990, the RTC would have to sell-off somewhere between 722 and 1,037 S&L banks, which would cost between $89 billion and $132 billion. In actuality, Brady underestimated the number of banks that would need help by half — the total number that went under was 2,100.
However, Brady nailed the cost of the bailouts. By the time the smoke cleared, the crisis had cost US taxpayers roughly $100 billion. To add a little historic perspective here, consider that the two largest previous government intervening agencies — the Home Owners Loan Corporation [HOLC] and Federal Asset Disposition Association [FADA]—involved only $11 billion and $4 billion worth of sales.
Thus the RTC bailout — $100 billion — represented a nearly ten-fold increase in size from the previous largest intervention: HOLC’s $11 billion. That’s a heck of an intervention. So did it save the economy?
Nope.
The very next year after the RTC’s creation — 1990 — the US recession began in earnest. The last two quarters of 1990 and first quarter of 1991 showed negative GDP growth. Actually, it was the lowest GDP growth since the Great Depression. Nearly two million people lost their jobs. New home starts fell to their lowest levels since 1946 and auto-sales fell to a decade low.
Simply put, the intervention didn’t stave off a recession, nor did it indicate that the worst was over. Which is why I sincerely doubt the Fannie/Freddie intervention — one that is looking to be two to three times larger in scope than the RTC — will improve the state of the US economy or the stock market.
The Bear market in stocks first started out in housing. It then shifted to mortgage lenders, financial firms, auto manufacturers, and credit card companies. And now it’s shifting from Wall Street into the economy.
Housing starts have declined to a 17-year low — 1991’s recession levels. The Producer Price Index (PPI) is at a 27-year high — 1981’s worse recession. Unemployment has broken above 6%. The only reason GDP growth is still positive is because it’s been massaged with phony inflation data.
Now even the previously strong sectors — energy and materials — have come under stress. Oil and most commodities have plunged since mid-July. Smart commentators are now observing that we’re approaching, if not already in, a global recession.
And somehow the fact that Fannie Mae and Freddie Mac are now owned by the US government — putting taxpayers on the hook for hundreds of billions in losses — while still increasing their mortgage-backed securities portfolios — the same portfolios that rendered them insolvent — for another year, is going to save the US economy?
I view this rally as a selling opportunity. I’d particularly look to sell sectors that will take the brunt of a real world recession — retailers, materials, and tech.
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This article has 26 comments:
Consider a simplistic headline reader who sold his stocks in 1989 on nonsense like this and never bought them back.
The market had another 15% decline after August 1989.
GET RID OF THE CREATURE FROM JEKYLL ISLAND ONCE AND FOR ALL!!!!
Any idea of saving the Fiat System is only a desperate illusion by the insiders, who obviously have a vested interest in keeping the scam alive. Electronic funds injections into Wall Street and failing banks only serve to extend the agony. There are no 'fundamentals' available to make a recovery.
Add to this 1,620 $TRILLION in International CDO's, all of which are unpayable, makes for a grim future. Sayonara, Federal Reserve!
Wayne Blanchard
"In America, the only respectable form of socialism is socialism for the rich."
--John Kenneth Galbraith
Sep 09 03:59 PMJon T. has summed it up correctly IMO. For those who believe in buy and hold, the 1930s is proof that there times when this simply does not work. Go ahead and hold those equities and if the S&P finally bottoms south of 900, you can look forward to a doubling of your holdings during the next generation's lifetime.
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The problem I see here is that most americans were led into 401K accounts with a promise of 7% annual return over the years. I was just talking to some people at work (republicans), they are not panicking yet, they were promised that their 401K will go up over the long term. Our government will do anything in its power to prevent the stock market from a significant crash because it will mean 401K going down the pipe, the same way that healthcare, education, housing went. There will be so much intervention , it will make your head spin.
Having said that, I am short retailers and some financials. I sold all homebuilders in the recent rally. But expecting 900 on S&P is a bit extreme. Not until November, at least.
So far it seems to be an ordinary recession. We can draw some lessons from previous ordinary recessions.
The fall in the stock market from the peak of the business cycle to the market lowest level in the recession was 21.0% in the 1970 recession, 33.88% in the 1974-75 recession, 10.6% in the 1980 recession, 18.2% in the 1981-82 recession, 14.6% in the 1990 recession, 10.3% in the 2001 recession.
In terms of length, modern recessions have lasted an average of 11 months ( range is 6 - 16 months).
The stock market peaked in early October 2007 and most economist believe that the US recession started in December 2007. Therefore given the historical context I believe we should start looking for the stock market to bottom this fall or early winter and start recovering thereafter.
In summary, my educated guess for the market is another 5 - 10% to go, with a bottom within 3 - 6 months.
"With the bailout of FRE and FNM, the Reagan revolution has at last realized the robber barons' dream: privatize the profits and socialize the debts. Nicely done, fellas."
Free markets indeed!
The issuance of massive amounts of fiat money have compounded the problem...no longer is it said on USD,s :I promise to pay" What?
There is no solution to the fiat money problem at this time tbut the government could make a massive effort to raise personal savings ..this is a war! put the country on a fiscal war footing...use the savings certificate route for small investors...pull in the millions of non savers and people who have never invested...sell the general population on the idea that it is better to owe yourself .even in fiat money...than to be at the mercy of foriegn goverments and foreign iinvestors. There are many other positive choices which can be made. The American people have a great love of country...use this the greatest capital the country has!
Somewhere, closer to home, a cynical power elite is screwing the average mug. It has only been like that for the last million years.
It is a pity that the obvious & gross excesses is business & government, & society have not been purged by a world which accepts anything, as long as they get a cut.
And the troglodite is no different, to those whom he abuses.
There is no weakness we hate so in another, as that which we recognise in ourselves.
there will be one more "bounce" to sell to the next sucker.
then sell and sell all and hold for the next buy in the next decade.
nobody can argue that taking fannie and freddie into the government is good. but it had to happen because the alternatives are catastropic. will the market fall further - most likely. there is little upward fundamental strength. how far should it fall - it should fall until P/E's are under 10 as this is prudent for economic conditions where growth is not a potential.
wake up and see that 70% of GDP is created by the 95% of consumers. these poor fools are under economic stress that can only be solved if somebody hands them money. they have no savings, no ability to get more credit, a mortgage, and a SUV.
we are on the edge of destruction - but the taking over of fannie and freddie is only the symptom, not the cause.
They deserve severe punishments for the misery of many.
We have officially stalled. This is not necessarily a bad thing, since it wrings the excess out of the system. After all, people still have to buy, sell and produce. Better yet, it forces people to question their dependence on 'the system.'
"Somehow the banks will survive"
from: "A Prophetic Vision of the 21st Century," Rick Joyner, 1999
You could basically insert today's date...
query.nytimes.com/gst/...
Buy and hold can work as a strategy but the timing of the purchase makes all the difference.
Irrespective of the declines in various sectors of the US markets, the major indexes are mostly still above their troughs in late-2002 and early-2003. However, I suspect a further decline in the markets will occur until the Lehman, Washington Mutual, Fannie Mae, Freddie Mac and other issues are sorted out.