Monday, January 21, 2008

Stock Market Crash 2008 Edition

Yesterday was one of those days I tell you! A large tree broke and fell onto the MAJOR electrical wires feeding my apartment complex at 1:45am Saturday night. The wife and I awoke to a freezing and dark apartment at around 7am. The heat here is of course electric. Nevermind that the day was freezing, around 5 degrees, the AFC title game was on at 3pm! 4 large utility trucks were out at the scene. The wife and I decided to make a day of it over at her Mom's house. The power was restored at 10pm last night. My mother in law lives all alone in a huge home, and after spending the day there, the wife and I are considering living there for a while as our lease is up in February and we do not wish to renew. Waiting out the housing bubble can be a real inconvenience!

As for the football, the Patriots show once again why they are the best team ever. The Chargers were mugging the Pats receivers, and the officials were letting it go. Dropping into a nickel coverage, things looked grim. The Pats then proceeded to run all over the Bolts using a underestimated running game. With the ball, up 21-12, with 9 minutes remaining, the Pats lined up and ran out the clock. Amazing. The Giants outlasted the Packers in a wild game. The Superbowl is set, a rematch of the week 16 meeting. I will have plenty more to say about the game later, but I am looking forward to a nice weather game!

FED Emergency Rate Cut - Will ONE Week Make Any Difference?
Amidst the global stock market slide today (US markets closed) there were calls from all over the financial world for the FED to cut rates in an inter meeting move. The FED meets next week in their regularly scheduled time. Common accepted thinking is that any FED cut will not take effect for 5-7 months after the cut. So the question naturally is, what the hell does a 1 week move up of a rate cut really help? Would 7-9 days save the world? Of course not, but the feverish calls for a emergency cut anyways puts on display the real reason a cut is screamed for. That is covered below.

Stock Market Crash 2008 Edition
If you have seen any news or checked any financial sites, you will already know that the world markets are taking a beating today while, luckily, the US markets are closed for MLK day. Here is the headline from Yahoo Finance:
AP
Stock Markets Plunge Worldwide
Monday January 21, 4:33 pm ET By Toby Anderson, AP Business Writer
Stocks Plunge Worldwide Amid Pessimism Over US Stimulus Plan
LONDON (AP) -- Stocks fell sharply worldwide Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.
U.S. markets were closed for Martin Luther King Jr. Day, but the downbeat mood from last week's market declines there circled through Europe, Asia and the Americas. Britain's benchmark FTSE-100 slumped 5.5 percent to 5,578.20, France's CAC-40 Index tumbled 6.8 percent to 4,744.15, and Germany's blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

In Asia, India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.
In Canada, the S&P/TSX composite index on the Toronto Stock Exchange fell 4.8 percent. Brazilian stocks plunged 6.6 percent on the main index of Sao Paulo's Bovespa exchange, and Argentina's benchmark Merval index fell 6.3 percent to close under 1,900 for the first time since August 2006. Japan's benchmark Nikkei 225 index slid 3.9 percent to close at 13,325.94 points, its lowest close in more than two years.

Those percentage moves down are no joke. The main line excuse being put out is that investors think a stimulus plan will be both too little (145 BILLION?) and too late (Next quarter?) to avert a Recession in the US. Sounds reasonable. Even believable. I think there is something else going on to precipitate this collapse.

What you must understand is that for years the US economy has been running in such a way that is simply unsustainable. Rapid debt escalation by the consumer was masked by rising home prices. The stock market climbed higher against all reasonable valuations. Profits and earnings were largely phantoms as it relates to the Financial Sector stocks. While personal incomes were falling, spending was increasing. A negative savings rate cannot be maintained for any time period without severe consequences. I could go on, but regular readers of this blog understand what the deal has been. What is important now, is why all the fuss all of a sudden?

Confidence and belief. If you in effect "fake it until you make it" reality can be delayed for a spell. The problem as I see it is that there are several basic facts that cannot be papered over any longer. There is now an acceptance of key problems that cannot be ignored. Easy money and bullish sentiment can do allot, but they cannot hide the truth forever. The following are the main structural issues facing the economy and the markets right now, in no particular order:
  • The housing boom had ZERO to do with demand, demographics, or supply. The mania for real estate equalled and surpassed the dot bomb stock mania for its size and silliness. The reality that there are going to be foreclosures on a scale never seen before is finally seen for what it is, the bankrupting of the US private bank sector. Thank you fractional reserve banking!
  • The world markets will not nicely and neatly decouple form the US implosion. So much of the so called worldwide boom was just the droppings of over consumption in the US. The US will not be alone in a recession.
  • The insurance taken out on so many credit contracts has been shown emphatically to be totally fake. There will be no payments when defaults occur across the bond market. The banks are in so much trouble the very fabric of the TRILLIONS of dollars of derivative contracts must now be seriously questioned.
  • The FED cannot do anything. Rates are still at all time historic lows. If low rates were a fix that would work, things would not be where they are now. The FED can provide Liquidity, but not Capital. This is the single most important concept to know as things go forward. The banking system is not faced with a lack of liquid funds to throw around, they are in many cases insolvent with no assets to match the massive losses they have incurred.

Things can change on a dime. For those of you that remember the Nasdaq crash you may recall things were going alone swimmingly until the CEO of Cisco Systems (Chambers I think) gave a somewhat cautious conference call. Within a week the total collapse of the tech house of cards was in full swing. 1 week.

So much of the last 4 years was built on the expansion of credit that would never be paid back. In a way it sums up the US economic model perfectly, all show and no go. How long can a economy make nothing, consume tirelessly, and sell off all valuable assets across the world go on? It seems we may find out.

Understand that as I write this things look pretty bleak for the stock market at tomorrow's open. Lots of things can change that. A rushed new stimulus plan on the order of say 350 BILLION may calm the markets. An emergency rate cut of 100bps may soothe some nerves for a while. The point is that once the fragile confidence in fantasy land is broken, it is not easily repaired. Major institutions will use any quick market fix to sell off positions on any rally. I truly believe we have entered into real bear stage here, and the air has been let out of the balloon.

Some people think that this blog and others like it are cheering a possible severe economic recession. That misses the point of this blog and others like it. I hate it that things are going to go south hard. I have a 401k, I do not like to see heavy losses. I fear that a bad downturn could put my job in jeopardy. I am just like anyone else scared about their economic future.

The point is that I am angry and sad that things have come to this. Wasting TRILLIONS of dollars on a nonperforming assets class like real estate will impact everyone for years to come. Dumb financial trickery through derivatives and the like have put the entire financial system at risk and I am pissed. Sometimes you have to destroy things in order to build them back up. The US economy is in need of a complete overhaul, and the sooner the better. If most people really care so much about their children as they say, they will not allow the US government, the FED, and Wall Street attempt to delay any more.

Sorry for the rant, but this stuff is exciting! After the worldwide drop today, anyone else have a funny feeling the US markets open UP around 2-3% and stay there all day? It would fit the pattern of denial we have seen for so long.

Have a good night.

29 comments:

watchtower said...

@ Getyourselfconnected,
great post!

getyourselfconnected said...

Thanks Watchtower, glad you came by!

Anonymous said...

I've never seen anything like this. The fear level right now is even deeper and wider than what I remember feeling the Friday before Black Monday in 1987.

It will be ugly tomorrow. Either the FED waits until next week to act and the market's circuit breakers go ding ding ding, or they do it and the dollar plunges. If they do it tomorrow everyone will know it IS really serious and they will know more cuts are coming. The dollar will be toast!

Greenspan should be tar and feathered!!!!

Anonymous said...

What should have happened in the seventies and numerous times thereafter is about to happern. Or will it?

During that time, I have seen time and time again, something to save the US bacon. This is what I have learned.

"The Economy" is nothing more than a giant confidence game, and has been since the end of the Brenton Woods agreement that linked currencies to gold. The gold bugs have it right, but for the wrong reasons.

Throw all economic reasoning out the window. We live in fiat land, which commands a whole set of differnt rules divorced from reality, i.e, a laboratory Bizzaro World, a Twilight Zone of mind and imagination, or a 1984 ThinkSpeak.

The economy is what we preceive it to be. This is why the Federal Reserve always talks about "expectations", e.g., "inflation expectations".

The problem is the current leadership of the Three Stooges: Bush, Bernake, and Paulson. None of them has any credibility.

The damage to the realm will be severe, since credibility once lost is hard to regain. The time a new administration is established, the damage will be done.

A recession is nothing more than a rearrangement of the deck chairs on the Titanic. The recessions of the seventies was a bear. The recessions of the eighties was a bitch. What will this one be like? I don't know, but it won't be pretty.

But take heart. The Soviet Union did not collapse, nor did the Roman Empire fall. It simply changed into something else.

I agree with your statement, "The US economy is in need of a complete overhaul, and the sooner the better." But the game is and has always been rigged to benefit those in power, economic or political. As the Golden Rule decrees, "He who had the gold, makes the rules." Unfortunately, the new game will not be any better than the last.

watchtower said...

I'm old enough to have went through the "87 Black Monday" event. One of my friends was working at a new car lot in Boca Raton, FL at the time, and he told me that after the crash, the dealership lot "foot traffic" ground to an abrupt halt .

I wonder how new car sales have been this last couple of days?

Russ DoGG said...

The exposure of this dumb financial trickery is making the financial professions lose much of the esteem they used to have. With the loss of esteem hopefully the outsized share of "pie" garnered by these financial types can be downsized as well. Downsized to a level comparable to the resst of the developed economies (Japan / Germany, etc.) Don't forget this happened under the eye of our esteemed C-Student MBA president.

I welcome the correction because it will largely relegate these types to the specialist, bit player roles that they really are, and should be, in all but strictly financial companies. Financial specialists aren't supposed to be running GM, FORD, General Electric, Boeing, Harley Davidson, Utility companies, and other productive American companies by gaming them for short-term profit maximization. Too many useful productive professions are getting short-changed by the insane greed and consumption of the financial sectors. It simply needs to be brought in line with what is more normal in the resst of the developed world.

To look at it another way- too many of the ambitious are being drawn into financial careers when we are told that the economy needs more highly-educated scientists and engineers. The economy is off-balance and needs a correction.

An overhaul of the pay scales would acomplish this nicely, thank you.

These dumb house flippers and assorted speculators need to be wiped out. The financial chicanery needs to be exposed before the JQ Public can accept that some adjustments to future behavior will be required for a successfulk future.

And personally I think its good because non-financial technical professionals, (who are responsible for the bulk of actual innovation & value creation in this economy), of all stripes will probably see improvements in their status and paychecks as societal attitudes adjust.

Russ DoGG said...

In the words of our esteemed president:

"Bring it On."

HAH! Texas Dumb*ss!

Anonymous said...

The 700 billion dollar stimulus package!!!! How in the world are we ever going to pay for that with banks already failing and being bought by foreign investors? I'm sorry, but I don't feel like having half my paycheck taken away to help pay for this! If we get taxes for this that would easily be like a hundred million dollars a year for life per person even adding in young children that don't even have jobs! And it was a spur of the moment thing that doesn't look like it will even work because the stock market gained a couple points, then dropped sharply. I'm telling you, it's a piece of chewing gum over the hole in the dike. The goverment will probabley say they have a right to take over our rights and our lives because we owe bigtime now. Great Depression #2? God help us.

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