Financial Crisis

[lannarebirth]

It's going to go one of two ways; bottom retest. or new highs like you won't believe. I've still got $SPX 587 on my screen, but Ben's got more money than I do. Though it looks like up. I'll probably be short within a week or s

o.

[Chaimai]

It looks like the "Financial Crisis" thread still has a while to run....

Surely not ! If Real Madrid have £136 million to burn on 2 prima donnas then all must be well with the world and there was me bunkering down for another 18 months of hard grind. Like Fagin, I may have to review the situation.

Edited June 11, 2009 by Chaimai

[teletiger]

"the earnings of the S&P 500 went down to an astonishing $7.21 last week, having lost $7.67 from the month before when earnings were $14.88, which is down by half in One Freaking Month (OFM)!

And this last batch of Bad News On The Earnings Front (BNOTEF) is at the tail end of a long string of lower and lower earnings since the end of 2007, and this latest drop in earnings is down from January, when earnings were $45.95, which were down from this time last year when earnings of the S&P 500 were $62.28, which is down from September 2007 when the earnings of the S&P500 were over $85.00!

The really eye-popping result is that with the S&P 500 selling at 940, this means that the index has an astonishing price-to-earnings ratio of 130! Hahaha! Insane!

http://www.atimes.com/atimes/Global_Economy/KF12Dj01.html

"The Federal Reserve can’t keep monetizing debt, that is, printing money in order to buy securities. The perception that it is coming close to the end of its tether is the proximate cause of the jump in interest rates."

http://blog.atimes.net/?p=1045

You keep tucking it away Lanna. You're closer than you think.

Regards.

[teletiger]

Oh dear:

"The world economy will contract by 3% this year, far more than the 1.75% drop it predicted earlier this year."

http://news.bbc.co.uk/2/hi/business/8095702.stm

Regards.

[Abrak]

Have a look, it is a bit sad actually...

That video is not sad, it is depressing.

It says and I quote (I watched it three times to make sure one of the most respected economists in the world said such a stupid thing) in reply to something like 'we have seen many economists say this is an asset bubble that might even cause a recession' he replies 'I guess I dont agree with your premise... we have never seen a nationwide decline in house prices'.

Not only is this totally wrong as anyone who had read Shiller would know it is also incredibly misleading. It isnt really much of an economic argument (or any argument at all imho) for why prices are going to go up anyway although it is an economic argument for why they will go down (rational disequilibrium). The only sensible thing he could have said based on historic prices is that based on historic analysis of the last 130 years US prices had never been so high relative to income (Shiller) for which there is a decent argument there should be some correlation (and there is).

Most O Level students know there is a long term correlation between house prices and income per household, Shiller plotted it back 450 years for Amsterdam. I simply refuse to believe that Bernanke is ignorant of this stuff. It makes one dream up conspiracy theories.

[lannarebirth]

"the earnings of the S&P 500 went down to an astonishing $7.21 last week, having lost $7.67 from the month before when earnings were $14.88, which is down by half in One Freaking Month (OFM)!

And this last batch of Bad News On The Earnings Front (BNOTEF) is at the tail end of a long string of lower and lower earnings since the end of 2007, and this latest drop in earnings is down from January, when earnings were $45.95, which were down from this time last year when earnings of the S&P 500 were $62.28, which is down from September 2007 when the earnings of the S&P500 were over $85.00!

The really eye-popping result is that with the S&P 500 selling at 940, this means that the index has an astonishing price-to-earnings ratio of 130! Hahaha! Insane!

http://www.atimes.com/atimes/Global_Economy/KF12Dj01.html

"The Federal Reserve can't keep monetizing debt, that is, printing money in order to buy securities. The perception that it is coming close to the end of its tether is the proximate cause of the jump in interest rates."

http://blog.atimes.net/?p=1045

You keep tucking it away Lanna. You're closer than you think.

Regards.

I used to be a permabear who got caught up in "real" earnings, but there's no money in that. The "earnings' are whatever they say they are and what people with their fingers on their mouse are prepared to believe. Still, as Honest Abe once said, "you can't fool all the people all the time".

[Abrak]

The really eye-popping result is that with the S&P 500 selling at 940, this means that the index has an astonishing price-to-earnings ratio of 130! Hahaha! Insane!

http://www.atimes.com/atimes/Global_Economy/KF12Dj01.html

"The Federal Reserve can’t keep monetizing debt, that is, printing money in order to buy securities. The perception that it is coming close to the end of its tether is the proximate cause of the jump in interest rates."

I use the S&P earnings numbers quite a lot so I am quite familiar with them. If you want a more jaw dropping number the earnings are actually forecast to decline so based on 3rd quarter numbers the S&P500 is on 3800x. But that is the beauty of the bottom of the market no earnings so does it matter if you are on 4500x. For the record the number is very distorted by 4Q 08 financials that resulted in a 4Q 08 EPS of -23.2 so when that falls out numbers will come down to an uncomfortable level like 50x or so.

Also December 2010 is about 36 which puts the market on about 26x. I tend to look at the rolling 10 year moving average (which will probably be approximately the same in 10 years time in real terms - its falling now and inflation is anybody's guess depends on chopper). That number is about 55.

Actually most of the market move can be explained by the rise in inflationary expectations and fall in real interest rates without assuming any change in earnings. Theoretically valuations should reflect real rates so while the stock market looks expensive on a PE basis on say 17.5x 10 year MVA versus historic, bonds are only yielding a real interest rate of about 1% using inflationary expectations on 10 year TIPs. Average real interest rates over the last 140 years have been 2.97%.

Edited June 11, 2009 by Abrak

[lannarebirth]

Have a look, it is a bit sad actually...

That video is not sad, it is depressing.

It says and I quote (I watched it three times to make sure one of the most respected economists in the world said such a stupid thing) in reply to something like 'we have seen many economists say this is an asset bubble that might even cause a recession' he replies 'I guess I dont agree with your premise... we have never seen a nationwide decline in house prices'.

Not only is this totally wrong as anyone who had read Shiller would know it is also incredibly misleading. It isnt really much of an economic argument (or any argument at all imho) for why prices are going to go up anyway although it is an economic argument for why they will go down (rational disequilibrium). The only sensible thing he could have said based on historic prices is that based on historic analysis of the last 130 years US prices had never been so high relative to income (Shiller) for which there is a decent argument there should be some correlation (and there is).

Most O Level students know there is a long term correlation between house prices and income per household, Shiller plotted it back 450 years for Amsterdam. I simply refuse to believe that Bernanke is ignorant of this stuff. It makes one dream up conspiracy theories.

Anyone who has lived for a long time in California will be familiar with housing bubbles. This is the third one I've seen in my adult life. How it customarily goes is like this. When it peaks you see a 20% pullback from the highs, then 6-10 years of zero price appreciation (while everything else except housing inflates). In the final year you see a 5%-20% price dip when those that MUST sell for whatever reason do. Then the next bubble begins.

It used to be a wonderful place to live, once.

[AlexLah]

Ok all, just found this piece of an article that gives hope (again....)

Let's see what going to happen in the next three months.

[flying]

Ok all, just found this piece of an article that gives hope (again....)

Let's see what going to happen in the next three months.

Oh............. Haven't you heard?

Yes the bottom is in...literally!

The most accurate indicator has shown the truth.

http://www.cnbc.com/id/31102443

[AlexLah]

Jeez I am so slow, ha ha ha!

Already 12 posted that........I must have been ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ

Anyways question for the US peeps here. The unemployment insurance/benefit pays out max 26 weeks right?

So after 26 weeks those people still without a job are they no longer counted as unemployed? And where do they go from there?

[lannarebirth]

Jeez I am so slow, ha ha ha!

Already 12 posted that........I must have been ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ

Anyways question for the US peeps here. The unemployment insurance/benefit pays out max 26 weeks right?

So after 26 weeks those people still without a job are they no longer counted as unemployed? And where do they go from there?

I'm way out of the loop Aex, but it used to be 26 weeks, then one could get an extension of some kind. In an economy like this there's probably a couple of years to be had of such extensions and special congressional actions. Just guessing.

[flying]

Yes UE is 26 weeks but in times of high unemployment it could be extended to a full year.

At least it was ....I will ask as I know someone who is on it now due to lay offs

Edited June 11, 2009 by flying

[Abrak]

Let's see what going to happen in the next three months.

Look there's a green shoot.

I have always said that it is illogical to argue against green shoots because if you believe in them long enough they will eventually appear (unlike little green goblins). The problem is 3 months is going to tell you nothing because even I can tell you what is going to happen over the next 3 months which is that numbers are bound to improve.

This is a combination of a number of factors.

1. Most importantly we are coming to the end of the inventory cycle - even in the event demand halves in a recession this event leads to a bounce in trade and production.

2. Rising inflationary expectations and lower real interest rates raising markets and wealth

3. Same factor makes cash less attractive and spending more

4. Some numbers being so bad they must go up (US cars running 28 years replacement)

I know some people on this board dont even believe there is such a thing as an inventory cycle but it is very important - when demand collapses companies like Toyota Thailand or Honda UK simply stop production until inventories which have obviously built up fall down to meet new demand levels. Both Toyota and Honda have reopened their plants in the last three weeks, it does not necessarily mean that there has been an increase in demand. (The reason recessions are called V shaped is because the opposite is generally true - at their end there is pent up demand plus low stocks which means over production and very rapid recovery and hence the W.)

That is why W shaped recessions are extremely common - there were 6 in the last century nearly as many as V shaped recessions I believe. By 'W' I mean a recession is not officially over until you have seen a quarter of growth so one quarter (rather than a month or two) of growth followed by a resumption of recession.

The numbers are going to come right for quite some time but I wonder to what extent they are an illusion. The one thing Helicopter Ben cant really get away from in this whole trick to reflate the bubble that apparently never existed is this. Nominal interest rates have risen on the 10 year UST from 2.06% to 3.86% or almost double this year to the highest levels since the beginning of the recession in Jan 08 (now if you think about it is a bit weird - an economic recovery on a doubling of interest rates - Ben is playing a very dangerous game).

Now I assume lending premiums to consumers will have risen. Helicopter Ben is an economist so he may believe that people borrow on the basis of real interest rates rather than nominal (discounting the diminution in the inflationary value of their debt). Personally I dont, which makes me think that borrowing and investment are not going to increase much and although there wont be much saving, people will pay off debt which amounts to the same thing. So that anything appearing to be a V over the next six months may well turn into a W or even an L after revision.

[Abrak]

Here's a really interesting link. It really shows that Alan Greenspan knew exactly what he was doing in regards to interest rates and the asset bubble. Essentially it is a paper by Alan Greenspan to the Federal Reserve Board on how he is propping up growth through Mortgage equity withdrawals which he estimates which he estimates boosted US annual growth approx 1% p.a. in the 1990s and 2% p.a. (inc recession) in the first 5 years of 2000.

http://www.federalreserve.gov/pubs/feds/20...0/200720pap.pdf

Anyway at least take a look at the front cover. To the extent that I am just ignorant and everyone knows about this I apologize. To the extent they dont, I guess they ought to.

To be honest, I have seen these numbers before and I even knew they came from the Fed (I posted a chart with them earlier in the thread.) I just didnt know they were authored by Greenspan and published in 2007. So he knew there was no real growth in the US between 2000-2006 all along because he wrote the report. But the Fed is forecasting 4.5% p.a. real growth 2011-2015 must be a new bubble somewhere?

[AlexLah]

About the interest rate, has the average rate not been around 5% during the last ten years? Maybe the forecast in GDP growth includes war spending and other silly things like estimated rental income on houses. I had a look on some job data on the gov. site and saw something funny.

Almost all sectors there are job losses except in healthcare and government......... Inflationary expectations, hmmmmmm, would that be the dollar loosing a lot more value against some other important currencies or actually an increase in the supply and velocity what is very unlikely when you look at the situation as wages are not increasing and people are spending less.

Edit: Hey this is kinda cool, I made the 2000 reply and now page 100, ha ha ha.

Edited June 11, 2009 by AlexLah

[flying]

I just didnt know they were authored by Greenspan and published in 2007. So he knew there was no real growth in the US between 2000-2006 all along because he wrote the report.

He knew many things

"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

Alan Greenspan

[midas]

IMF ups 2010 growth view; W.Bank cuts it for 2009

NEW YORK (Reuters) - The International Monetary Fund has revised its 2010 growth forecast sharply upwards.........

But underscoring the opacity of the outlook, World Bank President Robert Zoellick said the global economy is set to contract by close to 3 percent this year, worse than the IMF figure and its own previous estimate of a decline of 1.75 percent.

These latest forecasts highlight the difficulty of predicting the timing of recovery,

but investors are keen for further signs the economic slump is abating.

http://www.reuters.com/article/hotStocksNe...E55A0Q920090611

[flying]

The problem is 3 months is going to tell you nothing because even I can tell you what is going to happen over the next 3 months which is that numbers are bound to improve.

You should be a very rich man shortly then.

[midas]

Let's see what going to happen in the next three months.

Look there's a green shoot.

I have always said that it is illogical to argue against green shoots because if you believe in them long enough they will eventually appear (unlike little green goblins). The problem is 3 months is going to tell you nothing because even I can tell you what is going to happen over the next 3 months which is that numbers are bound to improve.

This is a combination of a number of factors.

1. Most importantly we are coming to the end of the inventory cycle - even in the event demand halves in a recession this event leads to a bounce in trade and production.

2. Rising inflationary expectations and lower real interest rates raising markets and wealth

3. Same factor makes cash less attractive and spending more

4. Some numbers being so bad they must go up (US cars running 28 years replacement)

Abrak your 4 reasons are interesting but Nouriel Roubini has 9 reasons why his

view is not the same as yours.......

His point number 7 is very different to your number 2 and certainly not within a 3 month timeframe

-he still sees deflationary forces.

Even I cant agree with your number 3 because I dont believe there is enough confidence

for consumption to be strong i.e. the " wealth affect " is far too weak from maxed out credit

cards and homes with negative equity.

Roubini: Those Are Yellow Weeds, Not Green Shoots

http://blogs.wsj.com/economics/2009/06/09/...t-green-shoots/

[Abrak]

The problem is 3 months is going to tell you nothing because even I can tell you what is going to happen over the next 3 months which is that numbers are bound to improve.

You should be a very rich man shortly then.

And there's another prediction I can comfortably counter. For the foreseeable future I wont be a very rich man.

But that green shoot thing, it is a very safe bet. In fact its just amazing they have taken so long. For instance the Toyota Thailand plant was closed far longer than expected.

Take this chart for instance.

Another very green shoot. That USLLI is the US Long Leading Index and the has data which goes back 75 years (issued by the ECRI). Now after a quarter of rising that has been followed by the end of the recession (ie a quarter of growth (doesnt mean it wont go back into recession)) everytime in the past 75 apart from once and that was the Great Depression. But this is another Great Depression you say? Back then while the USLLI numbers were heading up, present numbers were heading down - I see present numbers as basically flat at a very low base.

If there isnt economic growth in 4Q in the US, I would be very surprised as I suspect would be the markets. In fact the consensus (here 54 economists) is the end of the recession in the 3rd quarter which may prove right. Of course employment is a lag indicator and by a year or four (only when they were being crushed by China last recession).

[badge]

It's going to go one of two ways; bottom retest. or new highs like you won't believe. I've still got $SPX 587 on my screen, but Ben's got more money than I do. Though it looks like up. I'll probably be short within a week or s

o.

agreed. I see no reason why today couldnt mark a bit of a correction in equities. Not sure about new yearly lows though

[Abrak]

I agree with Roubini in that it is a simple fact that there are very deflationary forces out there if you are essentially a Kenesian and see excess supply and too little demand and there are some very inflationary forces out there in the form of QE etc if you are a monetarist. There is no point in quoting one intelligent economist on one side when I can simply quote another "The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation." And this guy actually runs the Fed! I could show you charts of last months commodity prices rises or economies contracting at horrendous rates with massive inflation like Zimbabwe or Latvia.

The fact is that very intelligent economists (I prey that isnt an oxymoron) simply dont know what the end game is going to be. (So obviously I dont have a clue.) I actually see that as a good sign (half ecos seeing inflation, half seeing deflation) it sort of implies things might be on track. Even the recent rise in inflation expectations only looks like a correction of an overly deflationary 0% view.

The other fact is that at the moment to a large extent markets (rather more than me) see inflation coming back and have stopped worrying about deflation so much. You can measure inflation expectations through TIPs versus bond yields and they have moved on a 10 year basis from 0 to almost 2%. This is the opposite of last year when expectations fell from over 3% to 0% in the first quarter. This has a massive impact on things like equity valuations whose earnings are assumed to move with inflation and bonds whose earnings dont. It also has an impact on house price expectations and with real interest rates also falling, consumption.

Theoretically if nominal 10 year bond yields have almost doubled you would expect that people would deposit more so spend less but people borrow long and deposit short so the Fed has intervened at the short end to keep bond yields at close to zero so I expect deposit rates havent gone up much (or possibly at all). The yield curve is at a record steep level (another green shoot and another bank bailout).

By 'wealth effect' I didnt mean that people will start mortgage equity withdrawals just that now that fear and chaos seems to be ending, some people can put away the shotgun take the money from under the bed and spend it. Considering according to Greenspan the US didnt actually grow between 2000-2006 without MEW and I dont think Ben has enough puff to totally reflate the bubble - because either nominal rates will be too high or real rates negative in which case the dollar totally collapses - chances of a meaningful real recovery are next to zero.

[midas]

Another very green shoot. That USLLI is the US Long Leading Index and the has data which goes back 75 years (issued by the ECRI). Now after a quarter of rising that has been followed by the end of the recession (ie a quarter of growth (doesnt mean it wont go back into recession)) everytime in the past 75 apart from once and that was the Great Depression. But this is another Great Depression you say? Back then while the USLLI numbers were heading up, present numbers were heading down - I see present numbers as basically flat at a very low base.

I have to disagree with you here also because I dont believe you can compare any moment over the

past 75 years with now. The system that relied so much on credit is facing the impending withdrawal of $2.7 trillion.

This would surely have a huge dampening effect ?

" Whitney said available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010. "

"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy," Whitney said.

http://in.reuters.com/article/rbssFinancia...G41956120090310

[quiksilva]

Interesting closing line from Roubini's blog quoted above...

Unless these structural weaknesses are resolved, the global economy may grow in 2010-2011, but at an anaemic rate.

Hardly what one could call cut your wrists, live in a cave, pessimism is it?

So what if they are addressed, even if only half heartedly?

[Abrak]

Actually that point about the US$2.7trn withdrawal is a very important one and has been puzzling me for a long time. The numbers dont really add up. You see that figure is assumed to be taken up by the 'consumer' according to the CBO and that is rubbish because if he saves he doesnt spend and to be honest if he saves he is going to pay back debt at higher interest rates.

So you want to know how this magical trick is going to pulled off. Just look at this chart.

This is the yield curves. Note the 3 month is at zero and well the 10 year is at 3.86%. Deposit rates short term 0 to 3 months are 0.5% - 1.0%. So here's the deal the Fed intervenes at the short end and keeps rates zero (ZIRP). As a result you have the steepest yield curve ever. The banks have short term liabilities but lend long. Hence not only do mortgage rates go up with long term bond rates (great for spreads) but they buy say 10 year USTs at 3% spread risk free. Which is actually better than giving a mortgage with a 4.5% spread.

Now in theory not matching your assets with your liabilities is just another bit of bad banking but I suppose we should expect that. Now this is just a theory but it is fairly standard bank bailout practice (and I bet you will find it in Bernanke writings) and it would appear pretty logical. And it looks like a hedge funds wet dream.

Incidentally, if anyone else has a better idea how to finance the deficit I'd like to hear it.

Edited June 12, 2009 by Abrak

[flying]

The problem is 3 months is going to tell you nothing because even I can tell you what is going to happen over the next 3 months which is that numbers are bound to improve.

You should be a very rich man shortly then.

And there's another prediction I can comfortably counter. For the foreseeable future I wont be a very rich man.

Now if I could say that I can tell you whats going to happen in the next three months I would put my $$$ where my mouth is & I would be ............If I or my crystal ball was correct that is.

Truth of the matter is your experienced in what has happened in the past....same as all of us yes? Perhaps even very well versed in financial markets as so many here seem to be. ( not myself I have always said )

But none of us can say for certain what will occur in the next 3 months or the next 3 days. If we could we would be rich wouldn't we?

Dont mean to pick at your statement but for well over a year now we have seen so many say the same. Yet all they have proven is none know for certain where this is headed as none have been down this particular road before. That sadly has become painfully evident this last year.

[midas]

The problem is 3 months is going to tell you nothing because even I can tell you what is going to happen over the next 3 months which is that numbers are bound to improve.

You should be a very rich man shortly then.

And there's another prediction I can comfortably counter. For the foreseeable future I wont be a very rich man.

Now if I could say that I can tell you whats going to happen in the next three months I would put my $$$ where my mouth is & I would be ............If I or my crystal ball was correct that is.

Truth of the matter is your experienced in what has happened in the past....same as all of us yes? Perhaps even very well versed in financial markets as so many here seem to be. ( not myself I have always said )

But none of us can say for certain what will occur in the next 3 months or the next 3 days. If we could we would be rich wouldn't we?

Dont mean to pick at your statement but for well over a year now we have seen so many say the same. Yet all they have proven is none know for certain where this is headed as none have been down this particular road before. That sadly has become painfully evident this last year.

Yes..........Jim Cramer comes to mind " "Your money is safe in Bear Stearns "

[Abrak]

Dont mean to pick at your statement but for well over a year now we have seen so many say the same. Yet all they have proven is none know for certain where this is headed as none have been down this particular road before. That sadly has become painfully evident this last year.

Ok and I dont mean to pick on yours. But just because some people have got it wrong in the past year doesnt mean you should turn a blind eye when some obvious pointers start staring you in the face. Now maybe it doesnt change your view but please take note.

(1) That lead indicator index above is exactly that it shows lead indicators of growth. It is up 4 months in a row. Up 3 months in a row has been enough to pinpoint EVERY end of every recession in the last 75 years apart from the Great Depression. This is not a price chart this chart - the index and economic growth are inherently correlated and have been over many years.

(2) Of 54 economists polled by WSJ about 85% believe that the recession will have ended (or the US will have seen 1Q of growth) by the year end so to back my prediction of things getting better in the short term would be utterly pointless. Short term economic forecasts are not entirely random walk (they are a bit like weather forecasts)(unlike perhaps the gold price) they have some reasoning.

(3) I also genuinely believe you dont realize how bad some of the numbers are. If you are going to be permanently bearish of US car sales or think they will fall further you have to start assuming that there will be say 30% less cars on the roads in 10 years time with 10% more people. Sales per capita are the lowest since WW2 - did people have cars before then? Actually the number of cars have gone up in every single year except one for the last 50. But even if you assume the same number of cars on the road in 10 years time, sales have to increase at least 50% from current levels on a monthly basis.

Edited June 12, 2009 by Abrak

[churchill]

Quantitative stealing?

That's a lot of money .

http://ftalphaville.ft.com/blog/2009/06/12...ing/?source=rss