Sunday, October 12, 2008

Once More Into The Fray

Turns out the Nikkei is closed, but US markets are open tomorrow. Early news from Australia is that we're indeed seeing a bear market rally and bargain hunting to an extent. Dow futures are up around 3%.

But the remaining problems are still very much present. I seriously doubt we've hit bottom yet. Third quarter earnings are going to come in and really knock the steam out of things. There's a lot that will continue to go wrong before it goes right, and any other kind of shock right now, another round of near failures in banks for instance, might be enough to do us in.

All the problems we had three months ago are still there. Some measures are in place, and there may yet be some short-term recovery.

But I'm still betting on bad numbers in the future. This problem will keep unwinding and we're now all but out of options to deal with the next problem: massive inflation. Cleaning that up will take a long, long time. We're in for years of pain, not months.

How Bad Could This Get?

There's a still a lot of space between where we are now and a long-term outlook of a global depression. Not a much as even last week, but there's still a way out. But in the medium term things could get very, very bad.
Economists are beginning to warn of a depression-like cycle where an inability to obtain credit stalls growth, triggering more defaults and still tighter lending terms. Governments have unveiled one unprecedented move after another in the past three weeks to boost confidence and get banks back in business, yet so far nothing has been able to arrest the fall.

"There's no hyperbole that can describe it," said Kenneth Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund. "It's very, very unlikely (that the world economy will fall into a depression) but we've taken five of the 10 steps we need to get there. Hopefully we won't take the other five."

I'd argue it's more like step 7 or 8, frankly. We're deep in a spiral and the means of getting out will require far more action than has been taken even with today's EU announcements.
"With no desire to exaggerate, this might be considered the financial pre-conditions of a depression," Citigroup economist Steven Wieting wrote in a note to clients.

"Evidence suggests credit rationing is inhibiting day-to-day activities for many firms, with a harsh and worsening backdrop for consumers," he said. "Sadly, some risk exists that financial events could still unfold like a proverbial 'dam break.' This might leave policy-makers treating very serious and lasting damage to the financial system, rather than preventing further erosion."

Already, the crisis has taken a heavy toll on economic prospects. Wieting now expects nominal U.S. economic growth next year will be the weakest since 1954, with unemployment climbing to 8.5 percent from the current 6.1 percent.

And I honestly believe those numbers are far too tame. 2009 is going to be a miserable year. Remember, the same people who didn't believe the housing bubble would burst, that the banks would tumble, that Fannie and Freddie were toast, or that the credit crisis would worsen are the same people that believe 2009 is going to be the start of a massive rally in stocks.
The Dow had its worst week in both point and percentage terms and is down 40.3 percent since reaching a record high close of 14,164.53 on Oct. 9, 2007. In the last eight trading days alone, the blue chip index has lost a staggering 22.1 percent of its value.

Added up, the value of U.S. stocks has tumbled a breathtaking $8.4 trillion in the past year, as measured by the Dow Jones Wilshire 5000 index.

“These are all indicators of a bottoming process,” said David Kotok, said chairman and chief investment officer of Cumberland Advisors. “When you see this array of signs at these levels, three to six months later there was a rally under way. I am becoming very bullish strategically because I don’t think we’re going to have an inflationary Great Depression repeat.”

Keep telling yourself stocks can't go any lower, guys. Keep telling yourself this is another mild recession like 2002. Keep telling yourself this isn't a generation-defining event. Keep telling yourself capitulation selling will solve all the economy's problems.

Keep telling yourself that Dow 14,000 is just a couple of months away again if we just all clap our hands and just believe hard enough...

McSame's New Stunt Of The Week Is:

...Guess. If you said "A new shiny wrapper for his existing corporate tax cut Ponzi scheme" then you win.
Republican presidential candidate John McCain is considering rolling out a new comprehensive economic package to tackle the U.S. financial crisis, one of his closest supporters said on Sunday.

"I think it goes along the lines that now is the time to lower tax rates for investors, capital gains tax, dividend tax rates, to make sure that we can get the economy jump-started," said Republican Sen. Lindsey Graham of South Carolina.

Yes, because I know my largest problem right now as a taxpayer is capital gains on my investment portfolio. Also, I'm equally sure the only reason the Dow is plummeting is because the capital gains taxes are too high. We're all just getting crushed by capital gains taxes right now from our investments.

This plan will help out Aunt Sandy at Wal-Mart, surely.

Another Vital Step As The Clock Winds Down

While an agreement with the G7 nations to stop the banking crisis has largely failed, the EU has at least vowed to go down swinging with another necessary tactic: a five-year guarantee on interbank lending in the Eurozone.
The declaration says the governments would guarantee "for an interim period and on appropriate commercial terms" new debt issued by banks for up to five years.

"This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009," it says.

The leaders of the 15 euro-zone nations held an emergency summit Sunday night in Paris to seek European solutions to the financial crisis engulfing markets worldwide. The meltdown dominated summits around the world this weekend.

The statement also says that one way governments could save banks would include buying big stakes.

Whatever is decided Sunday will then be proposed to the full 27-member European Union at a summit later this week.

British Prime Minister Gordon Brown, who met with France's President Nicolas Sarkozy before the euro summit, said the plan "would involve not only more cash in the financial market but also a recapitalization of our banking system.

"And allied to that -- something that I believe is absolutely crucial -- to begin again the funding of businesses and mortgages with a guarantee given by governments. That can happen and will happen in the next few months," he told reporters.

Again, it's a start. Combined with the nationalization plans of the UK, at least the Euros are taking concrete action. But it should have been done months ago. And without the cooperation in this interbank lending plan from the US and Japan, it most likely is too little, too late. There's little point in guaranteeing bank lending if the banks most likely to fail -- US banks -- are left out in the cold.

There's also the nasty problem of a week before the full EU will vote on the measure. Another week could knock another 20% off world markets...and should the measure not pass, it will be catastrophic. We'll see how it goes in a few hours.

Europe it seems is battening down the hatches in the middle of the perfect storm. Call it prudence, neccessity, or protectionism, most likely it will not be enough to stop the worst of the damage.

It's Not Violence If You're The One With The Gun

Bard at Sadly, No! brings up an excellent point:
It’s quite amazing to watch the same people who pushed for concentration camps, hanging courts and genocide during the Bush years to now talk about taking up arms against the tyrannical and violent government that Barack Obama is about to unleash. There are many words one could use to describe this mentality, but I think calling them “crazy assholes” will suffice.
Bush Derangement Syndrome has nothing on the calls to kill the Muslim traitor terrorist Barry Hussein Obama.

Do any of you honestly think they will stop out of respect for the office of President?

Eight Hours And Counting

Before Asian markets open for Monday trading. Still no coordinated world action on markets, the US and Australia have gone their own way along with the UK with various different plans (all short on most details) and now the rest of Europe is trying to catch up by putting something in the hopper before the clock runs out.
European leaders met to forge a new set of measures to combat the credit freeze after their failure to act a week ago contributed to the worst sell-off in the region's stocks in two decades.

``I want Europe to speak with one voice for Europe and for the world because this is a global crisis,'' French President Nicolas Sarkozy told reporters as he greeted European Commission President Jose Manuel Barroso at the Elysee Palace in Paris. Sarkozy said he's seeking ``an ambitious, coordinated plan.''

German Chancellor Angela Merkel, whose government earlier this month rejected French suggestions to form a joint bank- rescue fund, said yesterday the euro region will implement ``the same toolbox of instruments.'' Merkel, Sarkozy and their counterparts in the 15-nation euro region are being forced to shift stance as a deepening slide in financial markets has threatened to tip Europe into a prolonged recession.

``Measures by euro-area governments to end the financial crisis have been uncoordinated and insufficient,'' said Juergen Michels, a Citigroup Inc. economist in London. ``Increasing risks of an economic disaster might force governments to set up more coordinated and more comprehensive measures.''

U.K. Prime Minister Gordon Brown met Sarkozy, Barroso and European Central Bank President Jean-Claude Trichet. The leaders of the euro nations then gathered at 5 p.m. local time. The talks come after finance chiefs from the Group of Seven nations established guidelines on Oct. 10 for combating the credit crunch, while falling short of adopting new initiatives.

The odds of something happening in time for tomorrow are almost nil. It will be another punishing week for world markets.

If a 20-25% market drop across multiple global markets one week isn't enough to motivate a concentrated, focused, and coordinated response from the G7, what will it take to do the trick? If we lose another 25% this week, will this type of massive global multi-trillion dollar response even be enough?

We've gone from 14,000+ on the Dow to 8,200 in the space of a year, with 2,000 points of that loss coming in just one week...and still the world is fiddlefarting around.

Dow 6,000, here we come?

The Damage Control Begins

With 22 days left until the election, not even the right wing numbers nerds at Real Clear Politics can see a way out for McSame at this point. This week's GOP plan, which is apparently "ludicrous happy talk of divided government through Republican control of Congress" is already being laughed off the stage by the right.

Jonathan Martin catches a new message perhaps emerging from McCain circles: The benefits of divided government.

Appearing on Fox News Sunday, campaign manager Rick Davis said:

Do we really believe that the American public is going to feel safe by having both the head of the Congress and the head of the White House from the same party that has had so many challenges with the way they've run Washington over the last couple of years?

Appearing next, Gov. Tim Pawlenty sounded the same theme:

"I don't think the country is going to like the Democratic party running the table on taxes, on education, on health care and have kind of the liberal, unchecked, imbalanced approach to all of those issues," Pawlenty said. "It's going to be bad for the country. I think having John McCain as president to balance that out and be able to work across the aisle as he has throughout his career to get things done would be a good compromise, a good balance."

If coordinated, as Martin says these comments "almost certainly" are, then we can probably expect an ad in the not-too-distant-future featuring prominently Nancy Pelosi and Harry Reid as the faces of an Obama administration. It could have an impact, since Congress' approval ratings are also in the tank, except that Dems hold a 10-point advantage in the generic Congressional vote and no one thinks they won't pick up seats in both chambers.

The Democratic landslide is coming, folks. We'll need all the help we can get in 2009. Certainly the GOP will try to put up the divided government argument once again in 2010 and argue that Obama is responsible for everything, and that the Democrats have to go.

I don't think it will work then, either.

Cramer And Kudlow Are Forgiven

Because the CNBC hosts are stable and thoughtful compared to the network's resident Village Idiot, Jerry Bowyer. Here's a guy who believes the causes of the financial meltdown are the minimum wage hike, Eliot Spitzer, Chuck Schumer, any and all market regulation in the last 80 years, Chris Cox, the media coverage of Sarah Palin, and my personal favorite, "affirmative action mortgages."

If you think any of these caused the financial crisis, please feel free to drink the NY Times Kool-Aid (ladies and gentlemen, your liberal, socialist media) and invest heavily on Monday: after all we haven't had a depression in decades!
Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago.

But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.

Now some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.

Sure. It won't be so bad! It's not even going to be a mild recession, I mean 6.1% unemployment? Hey, stocks are undervalued! When this pesky credit crisis vanishes, we'll come roaring back to Dow 14,000 and you're going to miss out! BUY BUY BUY BUY BUY!

What have you got to lose? Stock prices and home values always go up!

Australia Leads The Way

The Aussies seem to know what's at stake here. They are issuing a blanket guarantee for all bank deposits for the next three years.
The government will also guarantee all term wholesale funding by Australian banks operating in international markets and it will inject $4 billion (U.S. $2.6 billion) into residential-backed securities to help shore up the Australian mortgage market.

Compared with the United States, Australia has handed out few sub-prime mortgages, according to CNN affiliate Seven News Sydney.

Banks are heavily regulated and the country has financially benefitted in recent years from China's demand for its mineral resources, Simon Robson of Seven News told CNN.

Australia is in much better financial shape than we are here in the US, and its guarantees on deposits and wholesale funding that will help to restore confidence.

The US needs to do the same thing immediately. Raising the FDIC insurance limit to $250,000 for 15 months isn't going to work, a good 30% or more of deposits will not be covered by this. It's these long-term illiquid deposits like CDs held by older folks and small businesses that are vulnerable right now. These assets are going to eventually be moved to places where there IS full blanket protection.

In fact, all the G7 countries should offer this as of today. Those who do will be in much better shape. Those who do not will be in serious trouble as capital flows out of those countries.

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