John wrote:That's happening again. If you're one of the people who have committed embezzlement or fraud, then it's time to put your affairs in order, because you're going to get caught. A lot of others will be caught as well.
At what point do we come to the conclussion that Hank Paulson, who was one of the originators of our current problems, is an embezzler? This man, IMO, has almost single handedly ruined the U.S. economy and even though he may be doing so unintentionally, it certainly appears that he's just shoveling money over to his cronies.
Could we one day soon see some sort of "perp walk" that includes the likes of Paulson and other Wall Street Execs, Barney Frank, Cris Dodd and a host of CNBC people?
Gordo wrote:Regarding the market right now. How high can it go? I think higher, maybe not tomorrow, but over the next month. People want to get back in but most are still scared. Soon they could be thinking they are missing the boat (the major indexes are already 20% above their lows). There have been some nice recent swings in the investors intelligence numbers (many more bulls, fewer bears) but its probably going to swing much further. Then we top & possibly plunge? I think next year is going to be crazy. Kaplan was recently commenting on the counter-trend rally:
In 1929-1930, there was almost no fiscal stimulus in any country, especially not in the U.S. The Fed kept interest rates absurdly high. Protectionism was rampant and worsening. Worldwide governments were terribly uncoordinated. Even in that equity-unfriendly environment, the S&P 500 rebounded by 48%. So if you're going to tell me that with a ten-trillion-dollar total global stimulus, or whatever higher number it turns out to be, combined with negative real interest rates in most countries, and all kinds of other coordinated efforts, that we are going to get a total gain in the S&P 500 which is less than we had in a similar scenario during the Great Depression, then that is not remotely plausible.
The S&P 500 surged 72% in 1932-1933. That was when FDR became President and initiated the New Deal. President Obama is acting a lot like FDR, so a gain of roughly 72% seems a lot more realistic to me than the 40% or 45% that the unhappy bad-news bears are talking about.
Sorry, Gordo, but this type of thinking is exactly what the generational crisis is out to extinquish. The market fell 90% from 380 to 42 from 1929 to 1932 and that is why it was able to bounce back in such a large manner. And remember that if the market falls 50% it must rise 100% to get back to even. That is not an insignificant fact.
As I've pointed out before, the market dropped about the same in 1973-74 as the current market has yet that market was only up 2.8 times the 1929 bull market peak (380 x 2.8 = 1064) while the high in 2007 was over 14 times the 1966 bull market peak of 995. We had a larger bubble in 1929 and 2007 and so we have farther to fall. Do you know that the current P/E ratio of the S&P 500 is over 19? You won't learn that on CNBC. Do you know that book value of the S&P 500 and Dow is still above its historical average? Do you understand that the American consumer is tapped out and afraid of losing their jobs? Do you know that banks are cutting the credit lines of consumers and companies and neither care because all they want to do is pay down their debt and/or hoard cash?
Now even if this "stimulus" works, what are the unintended consequences? Doesn't this all seem like the same approach we used to goose the economy just a few years ago; that's the approach that led to where we are now.
John wrote:If you think about it, you can see that there are many things that
are deterministic.
For example, a population grows exponentially. Isn't that a
deterministic prediction?
Somewhat. But it doesn't account for random anomalies that wipe out populations, like natural disasters. These can't be predicted, and so it ultimately makes it indeterministic. Determinism is a philosophy that everything that will ever happen is, essentially, predetermined, usually by a higher power, and that there is no free will. We only think we have free will, but nothing we ever do will change what was ordained by God (or whoever that higher power is). Because I don't believe in God, or any other supernatural force, and only accept the natural universe, I dislike anything that smacks of determinism. Yes, some things really are inevitable, based on current knowledge. One day the sun will become a red giant and destroy Earth. Barring some breakthrough in technology on a giga-scale, this can't be stopped. Of course, a black hole could come through our solar system before and destroy everything instead, including our sun before it becomes a red giant, and thus even that isn't guaranteed to happen.
John wrote:In my unpublished book, I gave a partial proof that technology also
grows exponentially.
That doesn't surprise most people, because they vaguely feel that
technology grows exponentially.
I think the technological singularity is likely, but things can come along to derail it from happening. I want it to happen, because I think it's our only chance to survive as a species in the long term.
John wrote:Prior to August, 2007, if someone had told you that the stock market
always goes up, except for an occasional minor blip or two, would you
have accepted that? It was common wisdom till then. Actually, it's
still common wisdom today, only that the blip is a little longer than
usual.
This belief is so embedded in society, that it's also common wisdom
that anyone who sells his stock is just panicking -- or worse.
I've been hearing that since I was in my early 20s, back in the mid 90s. But I always knew that another stock market crash could occur. I wasn't sure if it was necessarily inevitable, but what has happened before, at the very least, can happen again.
John wrote:So my response to you as an experimental psychologist is this: Make a
list of "deterministic" predictions that are bullish, and another
list that are bearish, and test different people to see what they're
willing to believe. My expectation is that you'll find that whether
a prediction is deterministic has nothing to do with whether it's
believed; the only thing that matters is whether it's bullish or
bearish.
Actually, I do need a thesis topic and my field of expertise is social psychology, including social cognition, which includes attitudes, perceptions, and beliefs. I think a study about something along these lines might be useful and relevant. If we are, indeed, headed for a Greater Depression, then there will be a need to understand the social processes at work (back at the time of the Great Depression, social psychology was still in its infancy--it really came into its own in the 50s as social scientists sought to understand how Hitler could have convinced so many Germans to commit/turn a blind eye to atrocities, which led to landmark studies on obedience, conformity, and social influence). So it could very well be the case that this coming era will be my bread and butter as I work my way toward becoming a professor of social psychology.
Keep in mind, even though I dislike determinism as a philosophy, because I don't like to think anything is inevitable with 100% certainty, if you simply drop the probabilistic prediction to 99.9% probability, I can more easily accept that. That's the scientist in me.
OK - I'll be nice. The market had dropped about 56% into its Oct '29 low -- not unlike our market today. Then it rallied about 40% for the next 6 months.
How could the market possibly have gone UP so much during such or horrific, depression era? PREPOSTEROUS! Hahah...
Don't mistake me for a bull, I'm a trader. Like I said, I already took profits. The stocks/sectors I trade are already up 50+%, so I don't want to be greedy, but I do think the counter-trend can go much higher. That doesn't mean I think "the" bottom is in. I predict a lot of bears that don't know how markets have traded in the past are going to end up looking very "wrong" before they look "right" again. People like Roubini will be totally discredited, before looking "right afterall".
These counter-trend rallies are how the market ensures that the least number of participants benefit. They will suck a lot of people dry.
I think its hilarious when I hear arguments that the market can't possibly go up with P/E ratios where they are. "The market" doesn't care what the P/E ratio is. Depressions have massive counter-trend rallies. P/E is a dangerous (worthless?) thing to trade on. As earnings disappear, P/E goes higher, but that ALONE is not a reason to be bearish. Its much more meaningful to use P/PE (peak earnings instead of current earnings) which is what Dr. Hussman uses. At our market Low last month, we hit a P/PE of 9. It hasn't been in single digits for a VERY LONG TIME. By the way, that P/PE 9 matches where Japan is after their horrific 20 year bear market with >80% decline. That P/PE is also below average, indicating an "undervalued" market. But please don't get me wrong, in fact John & I definitely have one thing in common - we both know things are HIGHLY likely to overshoot to the downside. That P/PE could easily go to 5 or 6, and our markets could ultimately get cut in half from current levels (possibly worse than that).
Good luck,
Gordo
freddyv wrote:Sorry, Gordo, but this type of thinking is exactly what the generational crisis is out to extinquish. The market fell 90% from 380 to 42 from 1929 to 1932 and that is why it was able to bounce back in such a large manner. And remember that if the market falls 50% it must rise 100% to get back to even. That is not an insignificant fact.
At what point do we come to the conclussion that Hank Paulson, who was one of the originators of our current problems, is an embezzler? This man, IMO, has almost single handedly ruined the U.S. economy and even though he may be doing so unintentionally, it certainly appears that he's just shoveling money over to his cronies.
To complicated with out true data. It's not that government has lacked information needed to fix the problem. It is institutionally incapable of bringing about the desired result, since the principles of profit and loss, private property and contract, enterprise and entrepreneurship, do not exist in government. Government operates with an eye to its own short-term survival, and those of its connected interest groups, and nothing else. As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system.
It is a truly great irony that the world’s banks could end up being saved not by governments, but by the synthetic CDO time bomb that they set ticking with their own questionable practices during the credit boom.
Alternatively, the triggering of default on the trillions of dollars worth of synthetic CDOs that were sold before 2007 could be a disaster that tips the world from recession into depression. Nobody knows, but it won’t be a small event.
A synthetic CDO is a collateralised debt obligation that is based on credit default swaps rather than physical debt securities. CDOs were invented by Michael Milken’s Drexel Burnham Lambert in the late 1980s as a way to bundle asset backed securities into tranches with the same rating, so that investors could focus simply on the rating rather than the issuer of the bond. About a decade later, a team working within JP Morgan Chase invented credit default swaps, which are contractual bets between two parties about whether a third party will default on its debt. In 2000 these were made legal, and at the same time were prevented from being regulated, by the Commodity Futures Modernization Act, which specifies that products offered by banking institutions could not be regulated as futures contracts. This bill, by the way, was 11,000 pages long, was never debated by Congress and was signed into law by President Clinton a week after it was passed. It lies at the root of America’s failure to regulate the debt derivatives that are now threatening the global economy.
Anyway, moving right along – some time after that an unknown bright spark within one of the investment banks came up with the idea of putting CDOs and CDSs together to create the synthetic CDO. Here’s how it works: a bank will set up a shelf company in Cayman Islands or somewhere with $2 of capital and shareholders other than the bank itself. They are usually charities that could use a little cash, and when some nice banker in a suit shows up and offers them money to sign some documents, they do. That allows the so-called special purpose vehicle (SPV) to have “deniability”, as in “it’s nothing to do with us” – an idea the banks would have picked up from the Godfather movies. The bank then creates a CDS between itself and the SPV. Usually credit default swaps reference a single third party, but for the purpose of the synthetic CDOs, they reference at least 100 companies. The CDS contracts between the SPV can be $US500 million to $US1 billion, or sometimes more. They have a variety of twists and turns, but it usually goes something like this: if seven of the 100 reference entities default, the SPV has to pay the bank a third of the money; if eight default, it’s two-thirds; and if nine default, the whole amount is repayable. For this, the bank agrees to pay the SPV 1 or 2 per cent per annum of the contracted sum. Finally the SPV is taken along to Moody’s, Standard and Poor’s and Fitch’s and the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach.
The bank’s sales people then hit the road to sell this SPV to investors. It’s presented as the bank’s product, and the sales staff pretend that the bank is fully behind it, but of course it’s actually a $2 Cayman Islands company with one or two unknowing charities as shareholders. It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable. Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders. In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too. They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were. As one part of the bank was furiously selling loans to these companies, another part was furiously selling insurance contracts against them defaulting, to unsuspecting investors who were actually a bit like “Lloyds Names” – the 1500 or so individuals who back the London reinsurance giant. Except in this case very few of the “names” knew what they were buying. And nobody has any idea how many were sold, or with what total face value.
It is known that some $2 billion was sold to charities and municipal councils in Australia, but that is just the tip of the iceberg in this country. And Australia, of course, is the tiniest tip of the global iceberg of synthetic CDOs. The total undoubtedly runs into trillions of dollars. All the banks did it, not just Lehman Brothers which had the largest market share, and many of them seem to have invested in the things as well (a bit like a dog eating its own vomit).
It is now getting very interesting. The three Icelandic banks have defaulted, as has Countrywide, Lehman and Bear Stearns. AIG has been taken over by the US Government, which is counted as a part-default, and Freddie Mac and Fannie Mae are in “conservatorship”, which is also a part default – a 'part default' does not count as a 'full default' in calculating the nine that would trigger the CDS liabilities. Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering. If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.
It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory. The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles. The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything. There will also be a tsunami of litigation, as dumbfounded investors try to get their money back, claiming to have been deceived by the sales people who sold them the products. In Australia, some councils are already suing the now-defunct Lehman Brothers, and litigation funder, IMF Australia, has been studying synthetic CDOs for nine months preparing for the storm. But for the banks, it’s happy days. Suddenly, when the ninth reference entity tips over, they will be flooded with capital. It’s possible they will have so much new capital, they won’t know what to do with it. This is entirely uncharted territory so it’s impossible to know what will happen, but it is possible that the credit crunch will come to sudden and complete end, like the passing of a tornado that has left devastation in its wake, along with an eerie silence. They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were and the taxpayers are looted meanwhile the printing presses are spewing out more dollars as I heard on PBS radio this morning.
It just scripts worse also since there so dense. The soaring U.S. debt picture, from the fiscal deficit and the national debt level; to the current account deficit and the trade deficit; portends ominously for the future of the U.S. dollar. The real challenge for the new Obama administration will be to maintain the loyalty of foreign buyers of U.S. Treasury note and bond issues, during a prolonged period of increasing supply. The above, notwithstanding, in a recent interview on CBS 60 Minutes, President Elect Obama clearly stated his three main priorities upon assuming office on January 20, 2009, to wit: arrange an additional stimulus package for the U.S. economy, engineer a bailout package for the automotive industry and create a program to forestall the proliferation of residential foreclosures. It appears that the Obama administration is about to learn the hard way that an extant chronic debt situation cannot be solved by the issuance of more debt. There clueless.
OK - I'll be nice. The market had dropped about 56% into its Oct '29 low -- not unlike our market today. Then it rallied about 40% for the next 6 months.
How could the market possibly have gone UP so much during such or horrific, depression era? PREPOSTEROUS! Hahah...
We are arguing two separate things; I was arguing for the longer term and I thought you were also referring to the long term. I agree that there is money to be made by counter rallies and I have done so earlier on in the year.
I am much more concerned with the situation now, however. In January, March, July and October I always had a feel for the panic and subsequent rebound but now I see chaos in front of me and I am starting to think that there may be nowhere to hide except in a cave with some gold and a shotgun. Previously people were panicing with good reason and I could see that there was limit to the panic, which is a buying opportunity. Now, I have no idea what to make of the Governments policy except that there will be massive unintended consequences. Unintended and unknowable, IMO.
Just imaging that you are in charge of reinflating our economy; where do you stop? How do you know if 2 trillion is enough or 5 trillion or 15 trillion or...so if you are able to reverse it isn't it likely that we then see hyper-inflation? ACtually it seems lore likely that you can't really reverse it and we still have hyper-inflation.
I suppose you just have to go on doing what you know how to do but every time I hear somebody (including me) talk about speculating on this or that and trying to make a last buck out of this market I just get a queasy feeling like we're all going doing the same sinkhole and because we're all going down together we really have no perspective of what is happening to us.
Web site reader wrote:
> question: are there any Fed (ECB,BOE) tools that specifically
> address the de-leveraging of a banks balance sheet (besides bank
> reserve requirements)? I know there are a lot of tools to inject
> liquidity, I was wondering about the oppposite?
I don't know how to answer this question, or why he's asking it. Does
anyone have any ideas?
There are a few comments. For one, It wasn't Paulson that created this mess, it was Rubin and the Clinton administration. i was looking at a graph of the trade deficit this morning and you could see where the money machine opened up wide in 1995, the year Rubin took over. The guy got Glass-Stegal overturned, then quit the treasury and took a job with Citi to sit in the background and dine with the biggest crook that ever stepped foot in NY, Sandy Weill. Citi made Bear and Lehman look like a couple of kids Kool-Aid stands. If Paulson is guilty of anything, it is not ordering Citi closed and liquidated at the end of last year, but there were too many deep political drafts to overturn that boat. Citi had $400 billion in fed funds liabilities in the summer of 2007, which means they overloaned their reach by $400 billion. They made up the bulk of the credit crunch in the US and finally it came out they were broke last month after they were almost fed an insolvent plum of Wachovia, which was very solvent in comparison to the bank that was going to acquire it I am sure that Wells Fargo let Citi know under no uncertain terms that they were going to let the world know how broke Citi was. This was with the guy that managed the Clinton miracle in the background.
I am not trying to forgive Paulson because the entire game boiled down to when in Rome do as the Romans do. I think the purpose of Glass-Steagal was to keep the resources of fractional reserve banking out of the speculative arms of leveraging minds. Clearly Goldman had some people with enough sense to realize this thing might blow up in their hands and they took the long side of some default swaps. My point is this all got started in the 1990's, which I believe John likes to point out and is a generational thing. The actions Paulson has taken is Treasury secretary have literally been under the rules of necessity. I am quite sure that he knew it was important to attempt to cover up Citi was bankrupt, else the entire world go into panic and the FDIC go irreversibly broke. I have known for a long time that this game would go on as long as the banks could pass themselves off as solvent,hence the TARP money. They will never make it, because as much as I hate to say it, 5% is a lot of interest to pay in a deflation.
For one, I am not sure with a reserve currency with no redemption that markets behave as they did back in the 1920's. I don't mean we don't end up in the crapper because it has been my contention for a long time we will. My point is that I don't know that the 2000-2002 move down wasn't the crash and the intervening rally wasn't the 45% that is mentioned. That was a jaggedy move in the Dow and to a lesser extent in the SPX, but it was a clear collapse in the Nasdaq and not so choppy. The nasdaq composite lost 80% from top tick to bottom tick and the Nasdaq 100 lost much more than that. Of the 4000 plus points the Nasdaq lost it only recovered about 1750 to 1800, which is 45%. The 2000 top was a bigger bubble than the 1929 Dow and the 2002 bottom was a bigger bubble as well. It has only been recently we have seen the SPX in the valuation area of the 1929 top based on yield, which is the only way I know to value a large portfolio of stocks.
This decline has more of a depression slant to it than a crash slant. We have been down for 13 months now, going on 14 if December doesn't finish out well and of those 13 months, 9 of them were clear losers and only 4 of them showed any kind of gain at all. All the 4 gainers were very slim gains, less than 1%, which is highly unusual at any time in history. They say this could be the worst year on record and I don't believe it is as bad as next year is going to be. I believe the SPX made lows that indicate it is going much lower, meeting the value the index had in April of 1997 on a bottom. I am a believer in time and time this time will be December 21 or January 21, but it will be the end of the line. It could be in fact sooner.
The decline in the SPX was from 1310 to 740 when you complete all of this. Some people say this is a wave 4, but a wave 4 of what? Wave 4 of wave 1? Wave 4 of wave 1 of wave 3? Wave 4 of wave 1 of wave 3 of wave 3? The later is what i would guess if I was doing EWP on this matter, but i will do just plain Gann instead. That decline was 570 points and we have marks at 190, 380, 285, 213 and 143. These are the 1/3, 2/3, 50% and 3/8 & 1/4 marks. The 50% mark would be SPX 1025 and is the strongest of the marks on a rebound. The 1/3 mark will be 930 and the 3/8 mark will be about 953. The 2002 decline failed at 955 or so, so I believe that will be the far reaches. My point here is that we have double resistance and time coming together. The downward pauses have been about 2 months every time, from mid March to mid May, mid July to mid September. Mid January is historically a trend changing time, so I bank on that time frame. WE had a crash on Obama's election and another to start on his taking over would be right on the money. The bottom close was November 20 and interday low the 21st, so why not the same on January 20 and 21? My math is we still have another year of going down minimum. Look at that 1929-1932 chart and mark time.