Ok, we have some great minds here on C2 to draw from. The Fed lowering interest rates is supposed to spur consumer spending; however the consumer has been refinancing their homes in the past and continued to spend. That has saved the economy and that is now gone. The real estate market is tanking and credit is tightening, lower home values make it more difficult to get those hefty home equity loans that the consumers have been using to spend to spur the economy. The consumer price index doesn’t really show real inflation for the average person. The price of oil alone can cause a price shock recession. We have the high price of oil, huge losses on the price of homes and now the very real chance that a huge financial market collapse is just around the corner. The Fed is scared and using every monetary tool they have, the Government is scared and using fiscal policies to spur the economy. I feel there could really be a huge panic stock market melt down in the near future. I hope not. I haven’t pulled the plug yet; however I have taken some off the table and placed it in Inflation protected securities because they do well when everyone panics. Anyway, would love to hear some of the thoughts from the great minds on C2 as to where you think we are headed! Sudden market crash or not?
I don’t know about “sudden”, but I think a bear market in equities is in the cards. Overall, I think your dissertation is spot on.
Some commodity prices seem to be moderating a bit, oil in particular. But in the case of petroleum, it’s a matter of “how high, how much”. A retracement (if we see it…) to $80 crude will be seen as a major victory. However, in the context of a year ago, $80 crude would seem outrageous.
Crystal ball gazing: I think the economy is in for tough times, but it will likely be between the official “don’t worry” scenario and the “gloom and doom” scenario.
Markets will tend to tip their hand to some degree. Go with the flow. Grains are going down, most other physical commodities are also. Some might be oversold. Maybe not. But watch where they go and act accordingly. Observe, analyze, react. Hopefully in that order.
OK, I’ll bite. The key thing for me was that the Fed didn’t completely kow-tow to the market when it cut 75bps instead of the anticipated 100bps and some Fed dissenters wanted even less. I think it showed they are in charge and suggested they have finally worked out that with every cut they further undermine the dollar which in turn further stokes inflation, particularly Oil and Gold. It also suggests they will concentrate more on providing liquidity (their first and most important function, not changing rates) like their European cousins who have managed to participate in all the co-ordinated moves providing substantial capital without moving rates once.
From here on if the Fed just provides liquidity to those that need it instead of rate cuts to those that don’t, then regardless of where the market overall may be headed the trade that could emerge from it all is to be long the Dollar.
On that, Rick, the meltdown has already happened. I have never seen a market quite so cheap. Market PE is about 14 and projected EPS growth for the next 5 years is about 15% for much of the market. PEG would be less than 1. I have found very few years where the market has had a peg that low. I’d actually love to see the market head lower, but it probably won’t go much below where it hit bottom recently. It is just too cheap. Credit markets are one thing, but the refinancing of mortgages have the effect of making people feel wealthier as their monthly payments decline substantially, assuming you were not an idiot with an ARM. The data is mixed for now, and GDP for the fourth quarter was still positive. The decline in the market is for a GDP contraction in Q1. The effect of the fed’s rate cuts and the tax cut stimulus package will not be seen until Q3 when the data is released in July about what happened for Q2. I expect the data in May to be the first sign of improvement about what was going on in April. If data improves in June, the market will increase in expectation for growth in Q2 which we won’t know until July in Q3. This does not imply recession. You could almost mark it when the decline started to the bottom from November to March, but that probably won’t be a recession as it does not meet the criteria. If you read the news, the majority of Wall Street expect the second half to be better, and I agree.
1) economists and traders are seldom correct in their prognostications
2) The market has factored in most expectations of future events. In theory, today’s market reflects most facts and expectations, and it is a crapshoot to predict its future
3) All sorts of things could happen in the near futures.
Balancing the loss of consumer spending power is the fact that cheap dollars mean:
1) Americans will travel domestically rather than internationally, and foreigners will come here more
2) American exports should rise and imports should fall
Further, there are always international and domestic investors who will snap up distressed properties and investments, adding some liquidity and putting new money into deals. Also, mergers and aquisition deals will likely put money into the coffers of others.
It seems really simple when we ignore macroeconomic theory. Fact: banks have lost about $280 billion on cmo’s. $140+billion will enter the economy that otherwise would have went to non-productive spending. Each dollar gets spent and respent up to some maximum multiplier. A person paying a dollar for a hotdog puts the dollar in one person’s hand to buy from the supplier that puts it into someone elses hands for good, or to the owner of the supply store. These tax cuts are mainly what will save the economy. There is probably not going to be too many more losses or at least the big ones are over with and will wash out. It’s no secrete that unqualified people should not have been given mortgages in the first place. This is a market correction more than an economy wide problem. Those who were stupid with lending are being punished, and that is the nature of our economic system. I see $140 billion that probably has 3 times that effect on the economy. It is an easy quick fix to offset the loss of wealth. People should not depend on their house for spending cash. If you were, then you probably should not have bought. I never have, and I never will.
Furthermore, as I said, refinancing and paying down debt also increases economic output. Cheaper costs of living in the case of refinancing a mortgage, and paying down debt gets put into the credit card company’s hands that ceteris paribus would not have been available.
Nice to see some really good posts from my fellow traders. One thing is for sure that the dollar and financial markets will not go sideways from here. Beau, I don’t see where the market meltdown could have already occurred when technically we are not even in a bear market? I agree stocks are fairly cheap today. Look how long we stood at Dow 10,000 and we really haven’t come that far in all this time so they can’t be too expensive. If I have to pull that damn Dow 10,000 hat out again then I will have confirmation that things are very cheap again! If we aren’t in a bear market then things could get a whole lot more affordable though. I agree that it certainly isn’t over priced by any means and I myself still have at least 80% in stocks. I have shifted some of my stock money into good closed end stock funds because the discounts some are selling at are looking pretty attractive so it’s like buying at bear market prices today just in case it doesn’t happen. I do agree with Ross on the assessment of the news paper and most of what wall street has to say! They are wrong pretty much all of the time. I believe the only gem you are going to find in yesterdays newspaper is a cheap cubic zurconia.
I just wonder if this poor economy and stock market will last tell the Baby Boomers start pulling out their reitirement? I suspect from that point on a sideways to down market for several years.
I am familiar with several of those closed end funds you are talking about. I recently looked at MCGC, but decided its debt obligations would overwhelm its value.
If we were to look at the market as a barometer for the economy, it is a pretty decent indicator, and I am not advising my clients to bail. The market PE is historically cheap here. 14 in fact. PE in 2000 was about 25. I am careful in my analysis on that particular aspect, and my real understanding of the problem is credit, not necessarily a poor economy. Ex-housing I see solid earnings growth out of the companies that are not levered to that industry. Tech is still booming, as most of its revenue now comes from overseas. Automotive companies have started building within the US big factories because their Euro makes it too expensive not to operate in this country. I really don’t see any 100 or so billion write downs coming. Maybe 50, but the biggest ones have come and gone. BSC is out, and productive resources were put to their highest end use with JP Morgan taking over the company. Who is left? The best companies, that is who, and that is another reason to be optimistic as a lot of the prices have already hit bottom. I can tell you BSC cannot really go any lower.
This is not directed at you, Rick, but don’t leave out the hundreds of billions of liquidity injected by the Fed and the stimulus package. That probably makes up for nearly all of the actual writedowns on an economy wide multiplier basis. That move by the Fed will be seen as brilliant in the upcoming years.
I have more worries about Medicare becoming 100% of the Federal budget by 2050. I doubt I will stay in this country to wait for that to happen, and Social Security will go bankrupt sometime in 2018. These are not opinions. These are facts. The data points to it, and just like you want to turn whether the holocaust happened as a debate, you are likewise making the same stupid mistake of turning the sustainability of social security into a debate. It is not meant to be one.
Anyway. That is a bigger threat to the economy than any of this housing BS built on a house of cards through liar loans, no doc/income/asset verification.
"These tax cuts are mainly what will save the economy."
I agree with Huckabee with this one: Why are we borrowing money from the Chinese, so people can go out and and buy Chinese goods?"
These are the options I would have considered instead:
– Spend $140 billion to employ unemployed people to go and make the homes of ALL the poor and the elderly much more weathertight. Preferably, use American building materials purchased from US buildming material centers and suppliers. Weatherstrip, replace all the lights with Compact Fluorescents, put insulation in to give the home better R value, replace deteriorated.
- Spend $140 billion to make a solid American windmill industry. Right now, there is a huge shortage of suppliers, and China will be struggling just to supply themselves. Employ Americans to create an inexhaustible supply of offshore or other windmills at relatively cheap prices. And then with this huge infrastructure, we can export huge amounts of them to countries that are struggling to keep up with the demand.
Now, what will either do to our future needs for Saudi oil?
"There is probably not going to be too many more losses or at least the big ones are over with and will wash out. "
Friend, there is a possibility that the unwinding of the leverage upon leverage that may occur in the future will be economic Armageddon. You may see a ripple that is actually a tsunami still far from shore. Look at what happened to Bear Stearns in the past week+
How the crisis began (educational)
Why should we care where the market will move?
The stimulation through government spending has less of a multiplier effect than spending to, for instance, pay down debt, refinance, or purchase goods in the economy. Much of what China builds may be made in China, but it is really US companies that designed the product. And, ultimately, they are the ones that benefit short of government owned Chinese infrastructure companies.
On the leverage, $280 billion is a pretty high amount. The reason for this seizing up of the markets is almost a complete 180 from the S&L crisis. In the early 90’s commercial banks could not lend to the S&L to shore up the capital. Today, however, commercial banks are unwilling to lend because they are unsure of the counterparties balance sheet and their liquidity when it comes to lending to other commercial banks that in turn lend to smaller companies. It’s not that they don’t want to lend, but that they are unsure of the other company’s balance sheet and this creates the effect that we are seeing today. (BSC was a run on the bank, not that their positions had unwound.)
Boomers aren’t leaving, they are buying bonds with a little bit of stocks leftover, that has the effect of lowering interest rates…