That is my new prediction based on the events of recent days. It has become clear to me that Paulson and Bernake are trying to avoid the stagnation that Japan has experienced over the past 10 years (after the collapse of their housing bubble) by deflating asset prices quickly, to pop the bubble. The Dow will not stabilize until the housing market stabilizes, and the housing market will not... [more]
That is my new prediction based on the events of recent days. It has become clear to me that Paulson and Bernake are trying to avoid the stagnation that Japan has experienced over the past 10 years (after the collapse of their housing bubble) by deflating asset prices quickly, to pop the bubble.
The Dow will not stabilize until the housing market stabilizes, and the housing market will not stabilize until the credit market stabilizes, and the credit market will not stabilize until the mess that is MER, AIG, LEH, BSC, WAM is straightened out. And even if the bubble pops it won't pop immediately, but will wind itself out over a year or two.
Banks need to recapitalize, but the Fed isn't going to help by lowering interest rates and creating another asset bubble. They're following Volker's playbook, not Greenspan's - risk a recession to eliminate asset price inflation. It will take years for BofA to absorb the Countrywide, Merrill losses, ditto JPM with Bear Stearns and (probably) the worst bank in the world, WaMu. Credit will be tight for the foreseeable future.
I stand by my prediction of a 50% drop in Manhattan real estate prices, just faster than I had previously thought since the layoffs are just beginning. Half of Bear's staff is gone, half of Lehman's will be gone, thousands of Merrill Lynch / BofA will be gone, Goldman and Morgan Stanley will not likely remain independent, also causing layoffs.
Those of you who scoff at my choice to realize my losses market losses now - most of them occurred in a 2-day period, and since they're mutual funds I couldn't liquidate them any faster. But you must remember that mutual funds don't distribute capital losses - they distribute only capital gains. Therefore, I get the benefit of the tax deduction for the loss this year, and again when the market starts going up and I reinvest in mutual funds, whose gains will be offset by these losses. Being in the 35% tax bracket, I will recover 70% of my losses in tax benefits. If you think the market is headed down further, liquidate before the distribution date.
In the meantime, I've taken what had been cash in my retirement fund, invested it in 2x bear funds, which should be going up for quite some time to come. And liquidating my property which, fortunately, is somewhere where there is still demand.
Alternative theses are entertained.
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Growth isn't coming back any time soon. IMO the possibility of a V shaped recovery is close to nil.
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Response by curiously
about 17 years ago
Posts: 91
Member since: Jun 2008
stevejhx...did you just predict the Dow back to 11,000 in a few weeks?
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Response by stevejhx
about 17 years ago
Posts: 12656
Member since: Feb 2008
"did you just predict the Dow back to 11,000 in a few weeks?"
It depends on what the government does. There are massive buying opportunities everywhere. But things need to calm down before they spiral out of control, which they seem already to be doing. The short-term solution is plain: guarantee interbank lending.
The stock market is behaving like 1929 in slow motion. We are nowhere near a 1929 scenario. Nowhere near it. Even if there is a quarter or two of negative growth - which I'm not seeing in my business at all - 1929 was a much different environment where the government shut down all liquidity and closed off imports with tariffs. We have done the exact opposite, and reacted very quickly.
All of this was precipitated by the failure of Lehman. The fear among banks is, which one will be the next to fail? So of course they won't lend to each other anything more than overnight. This is a very simple problem with a very simple short-term solution. Why the government is taking so long to fix the problem - which will exacerbate it - is beyond me.
No it's not beyond me. I forgot, we're talking about the Bush Administration, likely to go down as the single most incompetent administration ever to govern in this country, surpassing Millard Fillmore.
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Response by nyc10022
about 17 years ago
Posts: 9868
Member since: Aug 2008
As Steve alluded to earlier, there is always the possibility of interbank lending guarantees. If that happens, I think we see 11k fairly soon (couple months, if not weeks).
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Response by junkman_r_u_serious
about 17 years ago
Posts: 230
Member since: May 2008
Guaranteeing lending will help, but the crisis has moved beyond a liquidity crisis into a capitalization crisis.
Here's a good summary of the staggering amount of money that European governments may have to come up with to recapitalize their banking industries.
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Response by totallyanonymous
about 17 years ago
Posts: 661
Member since: Jul 2007
steve--how do you trade if you're on this farkakte board every 10 minutes?
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Response by TheFed
about 17 years ago
Posts: 176
Member since: Mar 2008
"I am that rare breed, a free-market Democrat, aka a Warren Buffett, Mike Bloomberg, Bill Gates Democrat. The government SHOULD stay out of the market, but it must set the rules for the market. For the past 2000 years we had boom & bust cycles. Regulation didn't cure it, it tempered it. It can be overdone, but it needs to exist.
I've always been middle-of-the-road, but sorry, I supported Hillary & wasn't going to vote for Obama, but something's got to be done. We can't keep twelve thousand trillion dollars of debt. I'll be dead when it comes time to pay it down, but for real: what are we doing for the future?"
Steve, I'm sorry but it sounds like you lost your shirt on a margin call and now you're trying to stop the free-fall in the stock market. When this first started to unfold you seemed to be singing a much different tune. Now that Lehman was "allowed" to croak you're screaming from the pulpit. IIRC, you're a major proponent of rent stabilization, something about distorting the market and subsidies I believe. It's ok to save the markets though?
You don't want the government driving us into debt? How are we supposed to keep bailing out these banks?
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Response by nyc10022
about 17 years ago
Posts: 9868
Member since: Aug 2008
JRUS, I don't disagree... but I think those moves prop the market at the expense of taxpayers. So, we get the bounce, but then we pay for this a few more years. High end investors don't really care, as they have capital gains losses to take advantage of for a decade.
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Response by stevejhx
about 17 years ago
Posts: 12656
Member since: Feb 2008
"Steve, I'm sorry but it sounds like you lost your shirt on a margin call and now you're trying to stop the free-fall in the stock market."
Not my shirt. But how could I stop the stock market from falling.
"When this first started to unfold you seemed to be singing a much different tune."
Never.
"Now that Lehman was "allowed" to croak you're screaming from the pulpit."
I ALWAYS said it was stupid.
"IIRC, you're a major proponent of rent stabilization, something about distorting the market and subsidies I believe. It's ok to save the markets though?"
I am a major decrier of rent stabilization - it distorts the market. That is a far cry from what is happening on the stock market, however, with its ability to grind the entire economy to a halt.
What got us into this mess was bad governance - they're the only ones who can get us out of it. The result of doing nothing is far worse than intervention.
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Response by 80sMan
about 17 years ago
Posts: 633
Member since: Jun 2008
Watch the settlement on the LEH Credit Default Swap auction today at 2pm. Hedge funds, asset managers and other speculators are going to have to pony up $280 billion for the "protection" they sold. Looks like the buyers are going to get 90 cents on the dollar, maybe less. So much for CDS's as "insurance". You pay the premiums and only get recover 90% when what you were supposedly buying protection for actually happened.
Bottom line is everybody is broke and all the money is being sucked out of the marketplace.
80sMan, most CDS are structured so that the payout is based on the non-recoverable portion of the debt. The initial auction for LEH debt priced it at 9.75% of face, meaning that CDS writers need to put up about 90.25% of face. If you were a holder of LEH bonds, the 9.75% you would get for your bond plus 90.25% for the CDS makes you whole. If you were a speculator and were gambling on the recoverable amount being less or more, well, tough.
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Response by 80sMan
about 17 years ago
Posts: 633
Member since: Jun 2008
junkman_r_u_serious, you're right, the buyers would be made whole under normal conditions...except that the CDS writers probably don't have 90% of the face value in cash for settlement. Which is what worries me the most. Where will the auction settle? The need to find a clearing price which might below much less than 100.
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beware the value trap
"beware the value trap"
Watch the growth trap.
http://online.wsj.com/article/SB122349368554816267.html
Growth isn't coming back any time soon. IMO the possibility of a V shaped recovery is close to nil.
stevejhx...did you just predict the Dow back to 11,000 in a few weeks?
"did you just predict the Dow back to 11,000 in a few weeks?"
It depends on what the government does. There are massive buying opportunities everywhere. But things need to calm down before they spiral out of control, which they seem already to be doing. The short-term solution is plain: guarantee interbank lending.
The stock market is behaving like 1929 in slow motion. We are nowhere near a 1929 scenario. Nowhere near it. Even if there is a quarter or two of negative growth - which I'm not seeing in my business at all - 1929 was a much different environment where the government shut down all liquidity and closed off imports with tariffs. We have done the exact opposite, and reacted very quickly.
All of this was precipitated by the failure of Lehman. The fear among banks is, which one will be the next to fail? So of course they won't lend to each other anything more than overnight. This is a very simple problem with a very simple short-term solution. Why the government is taking so long to fix the problem - which will exacerbate it - is beyond me.
No it's not beyond me. I forgot, we're talking about the Bush Administration, likely to go down as the single most incompetent administration ever to govern in this country, surpassing Millard Fillmore.
As Steve alluded to earlier, there is always the possibility of interbank lending guarantees. If that happens, I think we see 11k fairly soon (couple months, if not weeks).
Guaranteeing lending will help, but the crisis has moved beyond a liquidity crisis into a capitalization crisis.
http://www.atimes.com/atimes/Global_Economy/JJ11Dj01.html
Here's a good summary of the staggering amount of money that European governments may have to come up with to recapitalize their banking industries.
steve--how do you trade if you're on this farkakte board every 10 minutes?
"I am that rare breed, a free-market Democrat, aka a Warren Buffett, Mike Bloomberg, Bill Gates Democrat. The government SHOULD stay out of the market, but it must set the rules for the market. For the past 2000 years we had boom & bust cycles. Regulation didn't cure it, it tempered it. It can be overdone, but it needs to exist.
I've always been middle-of-the-road, but sorry, I supported Hillary & wasn't going to vote for Obama, but something's got to be done. We can't keep twelve thousand trillion dollars of debt. I'll be dead when it comes time to pay it down, but for real: what are we doing for the future?"
Steve, I'm sorry but it sounds like you lost your shirt on a margin call and now you're trying to stop the free-fall in the stock market. When this first started to unfold you seemed to be singing a much different tune. Now that Lehman was "allowed" to croak you're screaming from the pulpit. IIRC, you're a major proponent of rent stabilization, something about distorting the market and subsidies I believe. It's ok to save the markets though?
You don't want the government driving us into debt? How are we supposed to keep bailing out these banks?
JRUS, I don't disagree... but I think those moves prop the market at the expense of taxpayers. So, we get the bounce, but then we pay for this a few more years. High end investors don't really care, as they have capital gains losses to take advantage of for a decade.
"Steve, I'm sorry but it sounds like you lost your shirt on a margin call and now you're trying to stop the free-fall in the stock market."
Not my shirt. But how could I stop the stock market from falling.
"When this first started to unfold you seemed to be singing a much different tune."
Never.
"Now that Lehman was "allowed" to croak you're screaming from the pulpit."
I ALWAYS said it was stupid.
"IIRC, you're a major proponent of rent stabilization, something about distorting the market and subsidies I believe. It's ok to save the markets though?"
I am a major decrier of rent stabilization - it distorts the market. That is a far cry from what is happening on the stock market, however, with its ability to grind the entire economy to a halt.
What got us into this mess was bad governance - they're the only ones who can get us out of it. The result of doing nothing is far worse than intervention.
Watch the settlement on the LEH Credit Default Swap auction today at 2pm. Hedge funds, asset managers and other speculators are going to have to pony up $280 billion for the "protection" they sold. Looks like the buyers are going to get 90 cents on the dollar, maybe less. So much for CDS's as "insurance". You pay the premiums and only get recover 90% when what you were supposedly buying protection for actually happened.
Bottom line is everybody is broke and all the money is being sucked out of the marketplace.
http://www.bloomberg.com/apps/news?pid=20601103&sid=a7u7y24vbV38&refer=us
80sMan, most CDS are structured so that the payout is based on the non-recoverable portion of the debt. The initial auction for LEH debt priced it at 9.75% of face, meaning that CDS writers need to put up about 90.25% of face. If you were a holder of LEH bonds, the 9.75% you would get for your bond plus 90.25% for the CDS makes you whole. If you were a speculator and were gambling on the recoverable amount being less or more, well, tough.
junkman_r_u_serious, you're right, the buyers would be made whole under normal conditions...except that the CDS writers probably don't have 90% of the face value in cash for settlement. Which is what worries me the most. Where will the auction settle? The need to find a clearing price which might below much less than 100.