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Monday, August 17, 2009

Is This the Start of the Big One?

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I don't believe in market calls, and trying to time turns is a perilous game. But most savvy people I know have been skeptical of this rally, beyond the initial strong bounce off the bottom. It has not had the characteristics of a bull market. Volumes have been underwhelming, no new leadership group has emerged, and as greybeards like to point out, comparatively short, large amplitude rallies are a bear market speciality.

In addition, this one has had some troubling features. Most notable has been the almost insistent media cheerleading, particularly from atypical venues for that sort of thing, like Bloomberg. Investors who are not at all the conspiracy-minded sort wonder if there has been an official hand in the "almost nary a bad word will be said" news posture. Tyler Durden has regularly claimed that major trading desks have been actively squeezing shorts. There have been far too many days with suspicious end of session rallies.

The fall in the markets overnight, particularly the 5.8% drop in Shanghai, seems significant in combination with other factors:

More bank woes. We may be two thirds of the way through the losses, but it could also be as little as half. And despite the stress test baloney, the banking system is undercapitalized by a large margin. Even if the remaining writedowns are smaller in absolute terms than what is, past, they dig deeper into depleted equity bases. Colonial Bank, a $25 billion bank taken out last Friday, was deemed well capitalized until recently. We noted its much bigger neighbor, $140 billion Regions Bank, similarly deemed to be well capitalized, has effectively said it is insolvent How many other banks are broke save thanks to overly permissive accounting? And as we have noted before, the IMF in a study of 124 banking crises, found that regulatory forbearance, which is econ speak for letting the halt and lame limp along rather than taking them out, is far more costly, both in terms of lost growth and size of the ultimate bank recapitalization, than earlier action.

Consumers tapped out. The lousy retail sales report was a reminder of a rather central fact most have chosen to forget.

Foreclosures set to rise. We are not having a housing bounce. Some markets may be close to a bottom, but foreclosures grind on. Even if some local markets are at their nadir, there is so much overhang, between continuing mortgage stress and pent up sales, that much appreciation near term is unlikely. The record of past severe financial crises is that real estate takes over five years to bottom.

Fed in a box. Some e-mail chat pointed out a key fact: the term structure of US funding has gotten very short term. We have become in some ways like a massive bank, borrowing short and lending long. This means the idea of allowing rates to rise on the short end, which has to happen unless we stay in Japanese ZIRP land indefinitely, will be more disruptive than the Fed seems to appreciate.

More AIG losses, I am told more AIG losses are in the offing. There is still unused money out of the total alloted to the rescue, so any eruptions here may not require further official action, but it would have a bad impact on the collective mood, and further taint any efforts to shore up the financial system.

Lack of political leadership. The health care fiasco is going to be a defining event for Obama, in a negative way. His inability to respond effectively to simply absurd distortions of his plan and of the record of public supported programs overseas (including that many are government funded but still privately run, for instance) may dispel the illusion that he is or can be an effective leader. His banking policy, which is vital to recovery, became hostage to Geithner and Summer's deep loyalty to the industry, and his lack or interest in rocking any boats. All Team Obama has done on the banking front is write a lot of blank check, hold some bogus "stress tests" in lieu of doing the real thing, and raise a stink on a few symbolic issues to try to paper over the failure to embark on real and badly needed reforms.

Ed Harrison has called him a black Herbert Hoover. If the economy takes another down leg, it will further confirm his inability to do anything other than compromise and try to spin it as success. The confidence game worked when he was a new President, but nice talk and not much action is already wearing thin. We could use someone at the helm who is willing to plot a course and stick with it, and instead what we have is someone long on charisma and short on resolve.


UrbanDigs said...

CMBX's, ABXs started to act up a bit after a nice run as credit improved big time over the course of the past 5 months. No way it could last forever. I actually thought the sucking in optimism growth phase would have to last longer, and bring us higher as this rally seemed unstoppable.

Whole loan books, commercial, HELOCs, financed PE LBO deals, jumbo/prime, etc.. people just act like little kids, out of sight out of mind, that these problems just went away all because of a few FASB acct tweaks and fed credit liquidity swap programs. Eventually it will come out. Whole loan books especially. Sure they dont need to be marked to market, but we all know the marks carried are out of whack with actual value. I think it is not mgmt discretion when to adjust marks as these books start to non perform.

Fundamentals just got disconnected with the stock markets flawed version of reality. again. Like it did in OCT 2007 and in MAY 2008. stocks were very wrong both times. they can be wrong again. Watch credit. Thats all I have to say.

As money flies to treasuries and dollars, another round of deleveraging (this time in favorable conditions where you can take profits as opposed to pressure conditions last time), I wonder how corporate bond spreads will look if this continues. Will that feed on itself?

Alfred said...

In its second quarter 10-Q Goldman listed 17 accounting changes that is up from six in the third quarter ending August 2008. This is an example of blatant disregard for investors. How can anybody make an investment in a public company that changes accounting rules like others their shirt?

There is something that is on my mind for quite a while. Unfortunately it has not been resolved yet. So I put the question to you in the hope you can help me. Its about Goldman's 10Q for the second quarter:

In cash flow from operating activites position 'trading assets at fair value' jumped to $172 billion in 1H09. It was only $28 billion a year earlier. During the nine months ending August 2008 it was $37.9 billion. In October, 2008 Goldman applied FASB accounting change FAS157-3 to its 10-Q. Third quarter ending Aug. 2008 was Goldman's worst quarter.

Does anybody know detail information about this accounting position, 'trading assets at fair value'? Why is it part of the cash flow statement if it is fair value? Its obviously not a cash position, is it?
If I am right and it is not a cash position does it fall into the category of non-current assets, and if so is it added back to the income statement?

I am asking because it could have made a huge contribution to positive earnings results during the last three quarters. As I mentioned already Goldman's financial health was reastablished after FAS 157-3 accounting change in October 2008.

If you could just point me in the right direction I'd greatly appreciate it.


Leo Kolivakis said...

It remains to be seen whether this is "the big one" or just another gut check selloff. If they keep buying the dips, stocks will head higher. One thing to note: VW and Lego crushed their numbers. If confidence is so low, why are people buying cars and toys?

Troy Ounce said...

The Fed said in the August meeting: "In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability."
But the US government & Fed have only 2 tools left: manipulation & declare war to Canada or whoever is closest and create a shock wave.
Whatever, we should buckle up!

Anonymous said...

I love you and all, but the last person to plot a course and stick with it was your personally favorite President, George W Bush, and I don't believe that his plan was highly regarded by the end. It would only make sense that the next president would be all about negotiation and nothing about fundamental principles...

Anonymous Monetarist said...

Sure would seem to be a D-thang...

As Dalio recently said in Barrons' :

'There are too many nonviable entities. Big pieces of the economy have to become somehow more viable. This isn't primarily about a lack of liquidity. There are certainly elements of that, but this is basically a structural issue. The '30s were very similar to this.

By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% -- and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today's TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.

At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn't get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.

In the U.S., a Democratic administration replaced a Republican one and there was a major devaluation and reflation that marked the bottom of the Depression in March 1933. '

The bullisht crowd wants to jump up and down about 1938 fast-forwarding over the earlier part of that decade ... this seems premature.

Even see 'em pulling out 1907.. an analogous event to today if we didn't have the Fed ...

patrick neid said...

"Lack of political leadership. The health care fiasco is going to be a defining event for Obama, in a negative way. His inability to respond effectively to simply absurd distortions of his plan and of the record of public supported programs overseas (including that many are government funded but still privately run, for instance) may dispel the illusion that he is or can be an effective leader."

His plan? Like most Congress people he has no idea what is in the plan and its footnotes. He is not writing it. The reason he is having major problems with it, deservedly so, was having tried to rush it through Congress on a trust me basis. Thank god the people you dislike called the Dems out on this BS. Maybe, just maybe if we take some time and discuss every paragraph we can get a good reform package. While you may embrace government intervention where you deem it, many of us loathe it as a first, second or even third step.

Anonymous said...

Decisive leadership?

I've said repeatedly: we need a Roosevelt... either Teddy or FDR would do. But that is not what we have.

danps said...

That's an absolutely brutal takedown of Obama, Yves - but hard to argue with.

LeeAnne said...

"Ed Harrison has called him a black Herbert Hoover."

What's the difference between a 'black Herbert Hoover,' and a Herbert Hoover, or a Lincoln or a Roosevelt for that matter?

The remark and repeating it is jarring; it just calls attention to the fact that Harrison is black.

Its very annoying (distracting from the point that's being attempted). Is this necessary? It compromises everyone, readers and writers alike.

PascalBMontreal said...

I agree 100% with every word, Yves. Obama was all about hope. He is now all about deception and cynicism, and he asked for it.

We needed resolve and vision. We have more of the same: public-to-private wealth transfers, window dressing, incredible (yet empty in terms of real meat) speeches, etc.

And Yves: we ARE in ZIRP world. Make no doubt about it. The short end will remain low. The main question is how incredibly deep the Govt Bond market really is, which will indicate wehere the long end is going. Given poor equity and real estate market potential, I guess the demnand for bonds is close to infinity at all horizons, hence very low interest rates are there to stay, with no inflation.

The elepehant in the room is debt burdens at ALL levels - households, govt, etc. As long as the deleveraging process has not run its full course, we will see no viable recovery. My take is for a viable recovery in 2015, since Obama seems to want to stretch the hurting by NOT bringing the deep structural reforms to financial markets (and to many other parts of the economy) that are so badly needed to bring about the long run growth momentum we need (not artifiacially supported by unsustainable steroids).

The US has become a captured democracy, to use Acemoglu's words!

Kelli K said...

I think you're being a little oversensitive. Harrison is a respected team member and for a long time I had no idea what his background or phenotype was, nor does anyone care. I'm not even sure who on the NC team is Canadian and who is American. Does it matter?

Obama is the New Hoover. Is that better? He's also the New Carter. You're right, the color of his skin is irrelevant. The content of his character much more so.

jm said...

Obama as a second Hoover, rather than a second FDR? I was telling friends that six months ago. I wish I could say that it's nice others are coming to the same conclusion. Sometimes one would be much happier being proven wrong.

FairEconomist said...

Hoover was a good president who did a lot of the right things, but not *enough* of the right things for the crisis he faced. Carter was a very sharp guy who pushed for farsighted policies like energy independence but who couldn't manage his image or sell the policies to the American public. Obama, who is great at PR but is pursuing a course only moderately better than Bush, is a lot like Hoover but not like Carter *at all*. Great at image, weak at policy.

dogeatery said...

AsaAs a progressive who voted Nader out of principle, I can't say I'm too surprised by Obama's lack of substantive action, but the fact that it looks like he's caved on his only reform principle, the public option, shows what a "leader" he actually is. He'll dress it as "compromise," never minding that 46 million Americans will continue living in fear of every toothache.

The big conservative criticism of Obama turned out to be true: Al flash, no substance.

/bangs head into wall

"DoctoRx" said...

IMO Obama has the same charisma as a slick pitchman.

He's a front for Big Finance.

Re BO and health care, any White House worth caring about would have presented a plan to Congress. This business of multiple plans is at best a rookie mistake.

What about the LBJ analogy: enlarged social programs at home while ramping up a to date marginally successful land war in Asia?

Re the stock market, my review of the correlation of the leading indicators suggests that by the time they are as bullish as they are now, the stock market trends down over the next months to year or more. IMO most stocks are fundamentally overvalued given their inherent riskiness and the sad fact that the insiders run the companies with their interests first and outside shareholders' interest last.

1/2&1/2 said...

since we're on the quibble on one's skin color (since all of us in America are still obsessed with the surface of things):

the fair Mr. O is not all black. as he described himself, he's a "mutt". for most of us born pre-1970, that is not an important distinction. but ask any teenager or 20-something living in NY/SF/LA anywhere (especially those with mixed racial heritage) and they'll tell you much differently.

why is this important? because there may be a point sometime soon where Mr. O is going to have to start making decisions from the mutt within to prepare for the future instead of continuing repeating past mistakes from both pure sides of his ancestry, otherwise his real *base* -- those youth -- will begin to question whether the system that their role model succeeded in is worth even keeping around for the next generation of american babies.

and if he doesn't know that now, hopefully his daughters will save the day...

...take it for what's it worth...

whitey_b said...

Please stick to listing links, if this is the kind of "analysis" that you are providing on your blog.

Not much value otherwise.

Patrick said...
This post has been removed by the author.
SiriusPsycho said...

I'll dare to suggest that today's market is simply to squeeze dollar shorts and make some money.......and goose the dollar.

BTW, I agree that calling Obama a "black" anything adds no information about him, but only calls attention to the endemic tendency that still resides even in the best and brightest of us, to think that noting skin colors adds important descriptive or evaluative information -- it doesn't, unless you're a census taker.

Brick said...

I don't think it will be the big drop that many are expecting and the reason will be sentiment amongst a minority of the economy. I see evidence that the upper echelons of society are in recovery with remuneration and even house prices seeing some slight recovery. This will skew statistics, mask many problems and it will take much further hardship on the rest of the economy before this sector declines. Where this segment of the economy goes so will stocks regardless of the building imbalances.
I do think you have missed some important criteria of your list though and it is these that will eventually tell. House prices will not rise significantly until more modest wages rise, despite the average American itching for house prices to start climbing again. The important criteria you missed out was that equity withdrawal which accounted for probably above ten percent of consumer spending is not coming back soon because banks are currently taking huge hits of this kind of debt. We also have those who have not paid their mortgage for over a year finally being foreclosed which will also hit consumer spending. Lastly on the consumer spending side we have discretionary spending being redirected towards the auto industry. Cash for clunkers still requires buyers to get into more debt and the interest rates being charged could well mean further losses down the line.
The elephant in the room for me though is tax receipts which I expect to fall away even more significantly than forecast as middle class families suffer from salary squeezes and redundancy. This is important in relation to container traffic which has shown a marked change over the last month from imports having crashed to both imports and exports having crashed. This suggests to me a greater need for government deficit at a time when GDP might suggest reduced need for foreigners to buy the debt and QE is coming to an end. Eventually once more money will cycle from stocks, to commodities to government debt, taking weaker banks down and painting red ink all over balance sheets.

VA Doc said...

Yves, well written and demonstrative of some backbone - sadly missing in the electorate today.

Criticize the chosen one (BO) and the hard left jumps to claims of racism. May they keep doing so, as it is yet another evidence of the fraud that this president and his team are, and exposes the empty core of their beliefs.

The promises of yesterday's campaign are coming up empty; I'm an independent who was fooled into voting for BO - never again will I align myself with the hatred and deception of the hard left.

LeeAnne said...

Yes it does matter; 'black' as in 'black Herbert Hoover' was discordant, begging an explanation.

The explanation is that Harrison is black. The remark as stated would not have been considered quotable had it not been made by a 'black' man.

MAG said...

VA Doc,

You might want to check up on some of your terminology. I know that Fox and their cohorts like to pretend that Obama has something to do with the "hard left," but in reality only a very small portion of the actual left was ever fooled by Obama. For the record, there is no left in mainstream American politics. Hit the books a bit before you start throwing around meaningless epithets.

Lavrenti Beria said...

A fine summary!

Perhaps the most telling point is your evaluation of the political aspect. This clown has proven himself in just instance after instance to be the very converse of every hope he encouraged the American people to develope about him. He presented himself as a kind of blank slate on which one could write what ever one wished - Hitler, interestingly, did exactly the same thing during election campaigns in early 1930s Germany - and now all they have for their naivete is the underlying blank slate. And that's all they'll ever have. Barak Obama is a disaster and he's been a disaster from the very outset.

What ought to painfully clear to anyone with half a brain in this country is that our present system, so thoroughly corrupted as it is, simply will not respond to electoral sentiment. The Democratic Party has a veto proof margin in the Congress yet cannot pass a health care bill. The franchise has been reduced to an abstraction. Mass demonstrations and the general strike are now the only devises that remain to a people that have had their democracy stolen from them. If todays's market developments in fact auger a second downleg in both the market and the economy, there will come a point where public will grasp fully what the reality is that faces them. Then, all the emptiness that has been American politics since at least the 1970s will be in for a rude shock.

bob goodwin said...

I prefer the analogy of bush/obama to pierce/buchannan. seeming opposites who did exactly the same as each other and leading to crisis

Bob_in_MA said...

One reason I think this may be a big leg down is that now all sorts of people are focusing on the unsustainable debt levels, and that's a story that is neither going to go away, or be solved by dead cat bounces in GDP or industrial production.

I also think that the recovery in assets (equities, bonds, housing in the UK) was not only self-sustaining and self-confirming, but actually was aiding the economic stats, like consumer spending.

If assets reverse, they will now have the reverse effect on retail sales, etc.

Alexandra said...

LeeAnne said..
"Ed Harrison has called him a black Herbert Hoover."

What's the difference between a 'black Herbert Hoover,' and a Herbert Hoover, or a Lincoln or a Roosevelt for that matter?

The remark and repeating it is jarring; it just calls attention to the fact that Harrison is black.

Its very annoying (distracting from the point that's being attempted). Is this necessary? It compromises everyone, readers and writers alike.
Have you ever wondered whether or not the (predominantly white male) elite knew that this crisis must be coming?
If they did know that this crisis was coming, why did they push for an inexperienced young black guy to be at the helm in such a critical time?
Do you really think it is Obama who calls the shots?
'nuff said.

SocialismSucks said...

The die was cast when Obama nominated Geithner in early December. That single action meant that the whole ballgame was going to be a giant fix. Obama is indeed a frontman for the Oligarchy...like the rest of our recent presidents. Apparently a candidate can't get near the Oval Office unless he makes his deal with the Oligarchy first. Isn't that nice?

So, here we are: trapped between the banker-funded Left and the banker-funded Right. Meanwhile Liberty is going up in smoke...just as the Founders warned.

Early America was remarkable for its virulent antipathy to the bankers. The Founders (except for Hamilton) essentially declared themselves to be at war with International Finance. The money coining section of the Constitution was perfectly clear on this matter and that is why it was subverted by the bankers completely...subverted decade after decade right up to this morning's absurd comments by Federal Reserve PR flack Mishkin on CNBC.

In the old days criminal bankers were tarred and feathered. And for good reason: because their crimes can devastate entire societies. But that wisdom was all flushed down the memory hole by the powers that be and now modern America will relearn the lesson the hard way: If you, dear citizen, don't have the courage to hang criminal bankers, then criminal bankers will hang you.

And, no, this doesn't mean that the problem is capitalism. The problem is corruption.