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January 22, 2008 12:18 AM   Subscribe

While the US equities markets were closed on Monday for Martin Luther King Day, stock markets around the world took a nosedive, losing billions in equity; the markets in Australia, South Korea, Japan, China, Indonesia, Hong Kong, Germany, France, the UK, and more countries have dropped at least 5% each (Canada only fell 4.75%), even though most of those markets had already been seriously down for several days prior. India has been hit particularly hard, at one point down a whopping 11%, tripping their markets' automatic "circuit breakers" for a mandatory time-out period, before scraping back up to close at 8% down. US futures markets are currently predicting a 650+ point drop just at the open Tuesday morning, before even a single trade goes through.

In a bit of serendipitous timing (for us, not for him), one poor young daytrader started posting unedited videos of his daily trading activities on YouTube several weeks ago, which meant that his Sunday night breakdown and Monday night quarterbacking (both videos NSFW for language) are both online for the world to see. (He was long the futures market without stops and lost about $40k out of his $55k account.) I suspect similar sentiments to the ones he expressed in his Sunday night video are going to be echoing throughout many offices on Wall Street this week...
posted by Asparagirl (306 comments total) 35 users marked this as a favorite

 
lol
posted by Sticherbeast at 12:30 AM on January 22, 2008 [3 favorites]


Damn it. I'm going to get laid off.
posted by "Tex" Connor and the Wily Roundup Boys at 12:34 AM on January 22, 2008


Never mind Wall Street traders. They'll just park three cars in their garage instead of four, etc. The real losers are working class folks who scrimp and save against inflation, who have their retirement funds leak 10% in a few days. It's amazing that neocons rail against FDR and his New Deal policies, all while setting up the social, political and economic conditions for a new FDR, who will to have to do similar clean-up work over the next ten years.
posted by Blazecock Pileon at 12:34 AM on January 22, 2008 [14 favorites]


Oh, and did I mention that the S&P Futures market just went on lockdown a few minutes ago?

Barring a miracle -- or a big and stupid "Hail Mary play" rate cut by the Fed before the market opens -- we are about to witness the biggest stock market crash in the United States since 1987.
posted by Asparagirl at 12:35 AM on January 22, 2008


Yah, its gonna be fun. I write commentary for our group at the bank, and in a piece distributed yesterday I put a lot of blame for recent nervousness squarely on FASB 157; now that everyone's being forced to mark stuff (that's pronounced "Level 3 assets") to market instead of to model, well, things are worth less what everyone all thought they were.

And sometimes a lot less.
posted by Mutant at 12:38 AM on January 22, 2008


(The DJIA was actually a net positive in the whole year of 1987, though. But this is different! Panic! Sell! Sell!)
posted by xil at 12:40 AM on January 22, 2008


...we are about to witness the biggest stock market crash in the United States since 1987.

And panic-mongering will help...how, exactly?
posted by vacapinta at 12:42 AM on January 22, 2008 [7 favorites]


Dude, don't shoot the messenger.
posted by Asparagirl at 12:45 AM on January 22, 2008 [1 favorite]


This is awful, but this is also an honest question I'm pitching here: if you have the ability to ride out this recession for a little bit, are things going to be OK?

I have this delirious hope that this will be a nasty speed bump on the road to prosperity, and that the pain of a temporary recession will help voters pick a wiser President this coming election.
posted by Sticherbeast at 12:47 AM on January 22, 2008


his Sunday night breakdown and Monday night quarterbacking (both videos NSFW for language) are both online for the world to see

That fellow looks and acts like he's one step away from a Gamblers Anonymous meeting.

This week: A guide to the global economy!
posted by Blazecock Pileon at 12:51 AM on January 22, 2008


On the other hand, if things markedly change for the better there is some truth to the Plunge Protection Team conspiracy theories. I think the "Working Group on Financial Markets" is purely an American phenomenon, as evidenced by yesterdays carnage.

"The real losers are working class folks who scrimp and save against inflation, who have their retirement funds leak 10% in a few days."

Its only a loss if realised. Someone who is a few days away from retirement should not be in the markets, or have a relatively small amount of their net worth in the markets.
posted by Mutant at 12:51 AM on January 22, 2008 [1 favorite]


The real losers are working class folks who scrimp and save against inflation, who have their retirement funds leak 10% in a few days.

If this is a needed correction, folks with retirement funds and a longer view should be fine. After all, 1987-88 was a good time to get into the market. The losers are the daytraders and real estate speculators - the people looking for a quick buck.
posted by vacapinta at 12:53 AM on January 22, 2008 [2 favorites]


He was long the futures market without stops and lost about $40k out of his $55k account.

lol! IN THIS MARKET?

(Sorry, I had to.)

This is fun times, for those of us not in the USA. I don't know what the fuck is going to happen, but I am putting on a hard hat.
posted by blacklite at 12:58 AM on January 22, 2008


The biggest impact this will have short term is it'll force people to pick presidential candidates with experience. I'm betting Obama is crying very softly right now.
posted by seanyboy at 12:59 AM on January 22, 2008


Looks like I picked the wrong week to stop smokin'.
posted by maryh at 1:02 AM on January 22, 2008


I thought the market closes automatically once it loses 500 points in one day?
posted by Dreamghost at 1:03 AM on January 22, 2008


vacapinta writes "folks with retirement funds and a longer view should be fine."

Uhm not necessarily...it could be that they don't suffer from today too much, that much is true (depending on the contract really)....some will have to hope that in the next sampling period of the index that is connected to their return the market will have recovered . People whose returns are calculated on the final value of the stock better hope it will have recovered.

Question is how much time till the market recovers to pre-hit day, the longer it takes the worse. Day traders with expiring futures are either shivering or popping champagne.
posted by elpapacito at 1:04 AM on January 22, 2008


This is awful, but this is also an honest question I'm pitching here: if you have the ability to ride out this recession for a little bit, are things going to be OK?

Based on what I've been reading for the past few years since I started paying attention to this, I agree with the comments of Malor and others in past threads on this topic, that the answer to this is: probably no, not really, depending on what you mean by 'OK' and what you mean by 'a little bit'.

The serial bubble-blowing of the Greenspan era, in deliberate attempts to stave off the inevitable, has not made the inevitable any less so, and made the scale of the collapse ahead more devastating. Things are badly broken, and it's going to take a good few years to sort it out. The stock market dive (which is not over, I don't think, by any means) is just the hacking wet cough; in other words, a symptom of more serious problems, of which the recently-discovered-by-the-media subprime shitstorm is only one. Real estate, residential and commercial, has a long way to go down yet, and housing slumps take a long time before they bottom. Word from all quarters (but word that I've yet to read anywhere in the Regular Old Media) is that bankers are crapping their pants all over the planet.

Data point from Mish Shedlock:
Goldman estimates $200 billion in bank writeoffs are coming. We are well on the way. $200 billion in capital losses will impair $2 trillion in future lending because of fractional reserve lending. This is forward looking. Furthermore, I expect $200 billion is extremely conservative. I look for $500 billion minimum. $1 trillion, affecting $10 trillion in future lending would not be surprising if there is a cascade of derivative defaults.
Hold on to your asses, it's going to be a wild ride. I'm planning to hunker down for at least a couple of years; I reckon it won't be until around 2010 at the soonest that the background radiation will have dissipated enough to leave the Wonderchicken Fiscal Bunker.

In terms of politics, any politician elected from now through the next couple of years is going to be facing extremely negative approval ratings for a good while, because there's going to be bugger-all any of them will be actually be able to do.
posted by stavrosthewonderchicken at 1:04 AM on January 22, 2008 [9 favorites]


Barring a miracle -- or a big and stupid "Hail Mary play" rate cut by the Fed before the market opens -- we are about to witness the biggest stock market crash in the United States since 1987.

I've been saying to people for a year or so that it'll be the biggest since 1929 when it comes, mostly to watch their expressions. I'm starting to actually think it's not entirely out of the realm of possibility, though.
posted by stavrosthewonderchicken at 1:07 AM on January 22, 2008


You have to take into account that this is also a reaction to the huge growth that the markets have gone through in the latest years. Indian stocks for example have gained 50% over the last year.
posted by FidelDonson at 1:08 AM on January 22, 2008 [1 favorite]


If this is a needed correction, folks with retirement funds and a longer view should be fine

If we're headed for the kind of crash and protracted recovery that the press is readying the masses for, a longer view may not matter. When retirement funds pay out revenues from a smaller base, there is subsequently much less from which to make money and pay it out. Add rising inflation where a dollar is worth even less — for retirees, lost value is lost faster, if not permanently. That's if you were fortunate enough to save.

On the flip side, the inevitable bail-out of Wall Street will be paid for by government-signed IOUs from taxpayers, and not big business or its day traders. It seems pretty obvious the long-term losers will be working and middle-classes, regardless of whether the well-to-do have to switch from Cristal to Veuve in the short-term.
posted by Blazecock Pileon at 1:09 AM on January 22, 2008 [1 favorite]


DOOOOOOOOOM!

On a serious note, can someone explain why the failure of ambac and MBIA (bond insurers) seems to have predicated this? Those 2 failures seem to be a huge fucking deal and I can't figure out why..
posted by Lord_Pall at 1:13 AM on January 22, 2008


Also, doesn't trading halt at 10%?

So we've technically limited the total drop that a market can undergo in a single day. Psychological, but a limitation nonetheless.

Given heavy trading, what's the most it can drop in a single day? Figure 50% trading time (so 4 stops in a day 4 hours trading)

Or is that not how it works?
posted by Lord_Pall at 1:15 AM on January 22, 2008


Sorry, I messed up that link. Here.
posted by stavrosthewonderchicken at 1:17 AM on January 22, 2008


Also, aren't we all supposed to get checks for 800 dollars?
posted by Lord_Pall at 1:19 AM on January 22, 2008


"When blood runs in the streets, buy common stocks."

Some days, Mr. Market is ebullient. The sun is bright, the sky is blue, PE ratios of 100+ are just ducky, Flying Car Industries is launching its first product Real Soon Now, and the Dow is going to the moon. He tells you that it's okay to buy from him at ridiculous prices, because you can buy high, but sell HIGHER!

Some days, Mr. Market is depressed. President Bush is poisoning our precious bodily fluids, oil is going to $1000 a barrel, a dollar is going to be worth €0.01, and we'll all be eating bark and dirt and living in caves in short order. Bear funds buy private jets and name them 'Bear Air', and Barrons is full of advertisements to 'Invest like a Scottish Widow'.

We've been here before. The market will go down. The market will go up. I've posted this link before: in the long run, you can't beat stocks. And: diversify, because if you think you can predict which market segment is going to do best over the next few years [pdf], you're better than I am.

This, too, will pass.
posted by Slithy_Tove at 1:23 AM on January 22, 2008 [10 favorites]


I'm more cynical than you Slithy. I think this is a fundamental failure in regulation. Stocks are a good bet, but someone needs to keep an eye on these fuckos.

If you let them do whatever the fuck they want, we get into this mess. A clusterfuck of biblical proportions. It's not good business, it's just corruption and lies that finally came tumbling down.

When international markets are bitching about lack of oversight on the us financials, something's gotta change.

We'll see what happens though.
posted by Lord_Pall at 1:25 AM on January 22, 2008 [1 favorite]


This, too, will pass.

Eventually, yes. But some messes do take longer to clean up than others.
posted by stavrosthewonderchicken at 1:26 AM on January 22, 2008


Slithy_Tove writes "in the long run, you can't beat stocks."
The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

John Maynard Keynes, A Tract on Monetary Reform (1923) Ch. 3
English economist (1883 - 1946)

posted by elpapacito at 1:31 AM on January 22, 2008 [22 favorites]


Can someone explain to me how these loans are causing massive losses? Presumably sub-prime mortgages are still secured by the real estate that was purchased. That means that the banks are winding up with a lot of real estate in their portfolios that they need to resell. But between down payments and mortgage insurance, the banks shouldn't be taking massive hits from these, unless the bottom has really dropped out of the real estate market.
posted by Xoc at 1:42 AM on January 22, 2008


can someone explain why the failure of ambac and MBIA (bond insurers) seems to have predicated this

Quite simply, bond issuers like eg. the State of California would pay an insurance premium to eg. MBIA to "borrow" their AAA rating for our arguably non-AAA issues (California has an A+ rating now, which is close to slipping out of "investment grade").

If this "wrapping" [don't know the technical term] is lost, many holders of these bonds like pension funds will be required to liquidate these bonds due to the the codicils [again, don't know the technical term]of their investment requirements.

In short, people were buying billions of A+ (if that) offerings thinking they were AAA given the insurance, but if the end-of-the-line insurerer turns out to be "Madame Merriweather's Mud Hut in Malaysia"[1] then the entire financial system will have one big JENGA! moment and it's Chernobyl time.

oh, Asparagirl, great framing of the fpp. I had created the exact same content twice (the day trader guy is so representative) but I like how you broke everything down better.
posted by panamax at 1:43 AM on January 22, 2008 [2 favorites]


The stock market regained all of its value just 18 months after the crash of 1987. Thats not too long-term, I'd say.

I think data is better than a quote from Keynes:

1. Since 1870, stocks have had positive returns in more than 90% of 123 rolling five-year periods.

2. The after-inflation annual returns from stocks were at least 2.8% in 90% of 10-year periods, and at least 5.3% in 90% of 20-year stretches.

3. Over 20-year periods back to 1802, stocks have never generated less than 1.0% annual returns above inflation, and stocks have never failed to beat inflation over any period of 17 years or longer.

4. Over five-year periods back to 1802, stocks outperformed bonds and T-bills more than 70% of the time; over 10 years, more than 82% of the time; over 20 years, more than 94% of the time, and over 30 years, 99.4% of the time (and 100% of the time since 1870).

Given the widespread fear that we are currently at or near a market peak, Siegel provides one more important piece of data: Had one been unfortunate enough to invest $1,000 in stocks just before the six worst market crashes this century, one's long-term returns would still have prevailed strongly over bonds and T-bills

Source.
posted by vacapinta at 1:43 AM on January 22, 2008 [2 favorites]


Lord_Pall: Oh that bit's easy: No doubt you're well aware of the massive fall in the value of bonds backed by mortgages sold in the US over the last six months? Many of those bonds were only AAA rated because the issuing bank had bought insurance from one of the so-called 'monolines' which would pay out in the event of default of the underlying mortgages. In effect, these bonds got to 'inherit' the rating of the insurer.

This was a great deal for the banks, because it meant that they could sell the bonds to all sorts of institutions which are only allowed to hold AAA rated investments.

However, if the credit rating of the insurer is cut, then that cut immediately effects every single bond which bought insurance from them. All of a sudden all those institutions which thought they were holding AAA rated paper find themselves holding junk. They're not allowed to be holding junk, so barring legislative action, they're going to have to sell the bonds on the open market, probably for much less than their original value -- remember that the underlying bonds without the insurance would not have been AAA rated even under the rating agencies old, now known to be wildly over-optimistic, rating methodology: They're probably close to worthless now.

That's the optimistic outcome: If the bond insurers actually go bankrupt, then all that's left is the value of the underlying bonds. You can expect massive holes to show up in your local municipal funds, pension funds, etc etc. Local taxes will have to rise to make up the difference. I'd also expect a rash of lawsuits against the banks which sold these bonds: if successful, then the municipal funds would recover some money at the expense of the banks who are already desperately short of capital.

The USA is almost certainly already in recession. This would make the recession much worse & this is why the downgrade is such a big deal for the markets, not just because it locks in losses now that will directly affect consumers, but because it suggests that things could easily get much worse.
posted by pharm at 1:45 AM on January 22, 2008 [5 favorites]


So it sounds like people got dicked.

Was there a lack of oversight on the bond insurers?
posted by Lord_Pall at 1:54 AM on January 22, 2008


This, too, will pass.

Not for a while it won't. I'm thinking four or five years minimum.

Many US mefite's will be laid off in the coming months. So while it "passes" people are going to be facing seriously down graded lifestyles. If not worse.

I have been harping about this for five years. Much of what people could have done (shifting to Euro based money markets, etc) is too late too do. Most of you will have 201k's on Thursday not 401k's. There is not much you can do but wait it out.

I suppose you can do the usual. Stop buying shit you don't absolutely need. Pay off your credit cards and debt. Cancel your cable TV. Implement personal austerity. But honestly it's too late for riding out this downturn without sacrifice if you haven't been saving for the last year or two.
posted by tkchrist at 1:56 AM on January 22, 2008


Can someone explain to me how these loans are causing massive losses?

First, subprime is a SMALL part of the problem. This chart shows the true scope of the reset and recast waves coming toward us.

Presumably sub-prime mortgages are still secured by the real estate that was purchased.

Purchased at prices unsupportable by area incomes thanks to these suicide loan products and damn little borrower vetting!

That means that the banks are winding up with a lot of real estate in their portfolios that they need to resell.

Yup, and the more they need to resell, the lower the prices go, and the more current home-owners are put underwater. Wonderful feedback loop.

But between down payments and mortgage insurance

Down payments? LOL. The central feature of the 2003-2006 sub-prime & Alt-A boom was no down payments required!

Plus PMI coverage is limited.

unless the bottom has really dropped out of the real estate market

For about a year now the bottom has been dropping out the *lending market*. No free-money Crazy-Eddie lending, no able buyers taking out suicide loans, no sales at these inflated & unsupportable pricepoints (in the bubble areas of CA, OR, NV, MT, UT, CO, FL, VA, NY, MA et al).
posted by panamax at 1:57 AM on January 22, 2008 [2 favorites]


just 18 months after the crash of 1987

This is different. This "correction" is a retracement of the fake economy scam that has been running since at least 2003. All the corporate profits that powered the forward P/Es that propelled the market are tainted by the UNSUSTAINABLE BORROWING -- FOUR TRILLION by consumers via the household mortgage vector, TWO TRILLION by the Congress via deficit spending FY01-now).

Music's stopped now. Time to grab a chair, if you can.
posted by panamax at 2:03 AM on January 22, 2008


Implement personal austerity

I cancelled my $5/mo subscription to Bob Brinker's radio show! It was fun while the market was zooming, but he's so . . . shrill when the bears come out and play . . .
posted by panamax at 2:04 AM on January 22, 2008


This too, will pass.

Sure - in the long run we're all dead anyway - but somehow that reflection fails to be comforting.
posted by Phanx at 2:04 AM on January 22, 2008


some messes do take longer to clean up than others.

Stav, I've seen a sextupling of the price of oil in the mid-1970s, double-digit inflation and unemployment in the late 1970s, the savings and loan crisis in the mid-1980s, the abuse of options and 'portfolio insurance' in the late 1980s that caused the '87 crashette, the currency collapses in Asia in the late 1990s, and the dot.com/telecom bubble and burst in 2000-2003. All were nerve-wracking. I heard loud predictions of doom every time. Nonetheless, the US survived all of them, and so did the rest of the world. The Dow is 20 times higher than it was at the bottom of the 1970s slump. The latest turmoil seems no different than the many, many periods of turmoil that have gone before.

The long run is a misleading guide to current affairs. In the long run we are all dead.

elpapacito, Keynes was an enthusiastic speculator, although not a terribly successful one; wealthy friends had to bail him out of bad German mark positions at least once. One would expect this kind of sentiment out of someone with a speculator's outlook. This statement demonstrates the 'fallacy of the excluded middle'. You *can* have an investment horizon somewhere between 'short term', and 'after we are dead'.

I'd rather throw in my lot with Benjamin Graham and Warren Buffet, who have better records of investing success, and who definitely believe in the long term.
posted by Slithy_Tove at 2:13 AM on January 22, 2008 [5 favorites]


Friday, 18 January 2008: President Bush announces a packet of economic measures.
Monday, 21 January 2008: Worldwide markets stampede in a mass panic.

He may only have one year left, but do not underestimate his power to mess things up in the meantime...
posted by Skeptic at 2:14 AM on January 22, 2008 [4 favorites]


vacapinta writes "I think data is better than a quote from Keynes"

By analogy, even Argentina's economy is in recovery now, but that doesn't make it less miserable for these who were hit hard. Plus numbers don't adequately represent economic reality, as panamax underlined very good P/E may look fantastic, but they may as well misrepresent economy.
posted by elpapacito at 2:17 AM on January 22, 2008


Lord_Pall: Was there a lack of oversight on the bond insurers?

The bond insurers were insuring bonds worth trillions of dollars with a capital base of a few billion dollars. They could cope with the random walk of finance that would lead to the occasional bond default, but in the event of a downturn in the economy that lead to widespread default, they will go bankrupt very quickly. In effect, buyers of these bonds were making a levereged bet on the future of the US economy: small returns if it kept on growing, total loss if it had a downturn.

Many years of consistent profits blinds people to the existence of the low-probability large loss that lurks in the dark waiting to jump out and eat all their capital. "Picking up nickels in front of a steamroller" is how Warren Buffet described a different market IIRC. The mortgage-backed bond steamroller has just caught up with the markets!
posted by pharm at 2:23 AM on January 22, 2008


Stop buying shit you don't absolutely need. Pay off your credit cards and debt. Cancel your cable TV. Implement personal austerity.

That's good advice recession or not.
posted by hoverboards don't work on water at 2:23 AM on January 22, 2008 [1 favorite]


To be fair, Skeptic, the straw that broke the camel's back was Fitch's downgrading of Ambac (a bond-insurer) this past Friday afternoon -- worse, it was done in that little window of time before the equities markets closed but after the bond markets closed. That made almost everything Ambac has touched retroactively turn to shit. That's a lot of CDO's...and a lot of cities, towns, and public works projects in the US are suddenly going to find themselves unable to raise money going forward.
posted by Asparagirl at 2:25 AM on January 22, 2008 [2 favorites]


The Dow is 20 times higher than it was at the bottom of the 1970s slump

0) The Dow is 10x higher now

2) The Dow components get swapped out when they fail.

3) In 1975 what cost a quarter costs a dollar now.

The latest turmoil seems no different than the many, many periods of turmoil that have gone before.

This turmoil is a symptom. The US consumer was tapped out 25 years ago. The Reagan defense boom of the mid-80s led to recession that the PC productivity boom of the 90s -- and dramatically falling energy prices thanks to the North Sea and other non-OPEC fields coming on line -- powered us out until the housing boom of 2003-2006 propelled us to where we are now.

And where are we now compared to 25 years ago? The divide between rich and not-rich is much wider, 3/4 of this country hasn't bothered to finish college, the manufacturing we didn't NAFTA we shipped to China, Peak Oil is on us like a cheap suit, the Greenspan FICA overtaxation scheme is beginning its planned descent into net deficit, Medicare is primed to blow up in the next decade, we've just blown a trillion or so on a war in the mideast without end, home equity %s are at their lowest rates ever recorded -- quickly falling toward sub-50% -- while consumer household debt is at an all-time high.

That's the color of the sky in my world. It's a bit different from the background of this page.
posted by panamax at 2:29 AM on January 22, 2008 [17 favorites]


I'm hoping Malor chips in, his predictions are looking closer to emerging reality.
panamax highlights the confluence of the end of cheap oil, which I have been looking at and asking why isn't this pushing a recession (till now).
The US real estate market is hurting, and the UK will hurt too.
Now is really the time to make sure you have a couple of months of expenses money saved rather than buying that big shiny plasma or new SUV.
Its not likely the end of the economic world, but if you are on the receiving end of a pink slip in a few months it might feel like it.
posted by bystander at 3:02 AM on January 22, 2008


Maybe we should all pop down to our local bank and ask to see all our money.
posted by flabdablet at 3:03 AM on January 22, 2008 [9 favorites]


So the FTSE just rebounded from a 5% drop on the rumours of an emergency rate cut, apparently in addition to a cut at the end of the month.

Are rate cuts an actual solution?
posted by Lord_Pall at 3:19 AM on January 22, 2008


If I work in a safe government job, and my money's in real estate, not the stock market, is this something I should personally care about?
posted by UbuRoivas at 3:22 AM on January 22, 2008


(i mean, apart from the real estate value rising as the stock market falls)
posted by UbuRoivas at 3:23 AM on January 22, 2008


This is fun times, for those of us not in the USA. I don't know what the fuck is going to happen, but I am putting on a hard hat.

That's just bullshit, blacklite. As far as we can tell, every other Western economy is in nose-deep in shit at the moment. From your profile you are in Canada and it is unlikely that if the U.S. plunges deep into recession that Canada will coast along regardless. Is Canada not the most dependent upon the US for trade of any country in the world?

The U.S may be the start of it all, but it will fundamentally impact on most people's lives wherever you are in the world. This may not be as transparent as a day trader losing their betting chips but you can bet that almost everyone of us will feel the pain.
posted by ClanvidHorse at 3:37 AM on January 22, 2008 [1 favorite]


Ubu, in Australia in the 30's safe government jobs had work rationing (turn up and only get paid for 2 days a week, for example, in the railways) and bank withdrawals were restricted to give everyone a fair go.
Hopefully, of course, this is a 1987 style blip, but having a couple of months cash on hand would be cheap insurance against such a catastrophe.
And I wouldn't count on house prices rising with stocks falling. That only happens when there is more money coming into the system, like when the dot-com stuff left all that superannuation coming in with no place to go. If all the stock investors end up down 20% and business profits fall as well then the price of real estate is likely to stagnate or drop too.
posted by bystander at 3:38 AM on January 22, 2008


"Let me ask you, are you at all concerned about an uprising?"
posted by wobh at 3:43 AM on January 22, 2008 [2 favorites]


Commercial real estate funds in the UK have dropped precipitously, and the spread-betting markets are predicting sizable falls in the rest of the UK property market UbuRoivas.

Real estate will not be immune to any downturn: it's not a counter-cyclical investment.
posted by pharm at 3:44 AM on January 22, 2008


Addendum: I see you're in Sydney. I believe that .au has been living the high life off the commodoties boom for the last few years. Recessions == big drops in demand for commodoties. Don't expect the Australian economy to be immune.

(Even Gold is dropping at the moment, which shows how much it's been bid up by speculative forces in the market.)
posted by pharm at 3:48 AM on January 22, 2008


If I work in a safe government job, and my money's in real estate, not the stock market, is this something I should personally care about?

Yes. Less revenues to the treasury from lower corporate taxes and income taxes lead to a reduced pot for spending on government services. Even if your job is safe, the chances are that you will have reduced support around you and increased budgetary pressures and tougher decision making. That is just taking it at it's most simplistic level. There are a million and one other events and small changes that will cascade from this.

While it may not affect your ability to put bread on the table, the repurcussions of these stock market fears and the almost inevitable global slowdown will affect your life in many ways. Also, it is not the case that as stocks fall property will inevitably rise, there are many other factors to consider.
posted by ClanvidHorse at 3:49 AM on January 22, 2008


bystander: what rational person doesn't have at least a couple of months' cash up their sleeve?

and to clarify, i'm not talking about real estate as some kind of short-term managed fund that might at times be more or less profitable than stocks, but about the longer-term security of my own house, in terms of riding this out. if the value stagnates or drops a while, that's no skin off my nose, as long as i can meet the mortgage payments. the way things are, i should be able to do that even if unemployed, just by renting out one of the two bedrooms currently lying idle, so i think i'll call a big "meh" on this, coz finding tenants in this part of town is like bazookaing fish in a bucket.

so, unless interest rates skyrocket, it's still feeling pretty cozy here.
posted by UbuRoivas at 3:51 AM on January 22, 2008


anyway, as tibetan wisdom has it, if you can do something about a problem, you don't need to worry about it. if you can't do anything about it, what good is achieved by worrying?

it'll be interesting to see if any kind of global economic repositioning takes place as a result of this, by which i mean "will china continue to rise & rise?". i'm guessing that india's fucked, because it's still a total basket case, infrastructure-wise, and has really only been riding a bit of a wave of growth thanks to the outsourcing of call centres & IT work, which you'd think would be pretty vulnerable to a recession.

about time i shut up now, and listened in to people who actually know or care about economics.
posted by UbuRoivas at 3:57 AM on January 22, 2008 [1 favorite]


Less revenues to the treasury from lower corporate taxes and income taxes lead to a reduced pot for spending on government services.

We actually make a profit for the government, so we're a different kettle of fish, but yeh, less consumer spending & we could well feel the pinch.
posted by UbuRoivas at 3:59 AM on January 22, 2008


(heh - time to get my Mad Max dune buggy out of storage, and go raiding for petrol. where the hell *did* i put that feral studded leather outfit, though?)
posted by UbuRoivas at 4:02 AM on January 22, 2008


Maybe we should all pop down to our local bank and ask to see all our money.

Ah, you see, that attitude's part of the problem. It happened in the UK not too long ago, and it seems it's not over yet.

The one thing I keep in mind is that there is no reason when it comes to the markets. It's all driven by emotions, and that's why I generally stay away. The smart money's in oatmeal, or might as well be.

What will help you weather through any downturn is a belief in the Bohemian payment plan: All the money down and no payments.
posted by SteveInMaine at 4:09 AM on January 22, 2008 [2 favorites]


Hi Ubu. Agreed a government job and house with a reasonable mortgage are good places to be. Agreed some cash squirreled away is sensible.
I guess it depends on whether this is a 'sky is falling' problem or a 'I took a bath but am OK' kind of problem.
Like you I'm counting on some job and the economy still existing, but there are folk, more than usual I suspect, saying this could be a bad one.
If you were really paranoid, buy gold, pay off your debt and stockpile ammo (good advice for an Argentinian style collapse). More likely for us here is some belt tightening, less plasma or SUVs and stories in the paper about high flyers hitting hard times.
In the US, the risks and rewards are always more extreme, and I would be more concerned.
And a comment on the commodities boom, yes it has fueled spending and some overall modest tax cuts (a sandwich and a milkshake was the example) but if it finished the country would still be fine. Much more concerning would be a global recession for our services businesses, which would likely come at the same time.
posted by bystander at 4:13 AM on January 22, 2008


what's good for Halliburton is good for America
posted by matteo at 4:15 AM on January 22, 2008


Mash the reset button, pronto. Out with Bush, out with the housing Ponzi scheme, out with fossil fuels, out with flabby bodies and flabby minds, out with me-ism, out with hyper-concentration of wealth while basics of health, education, environment, infrastructure and a living wage are ignored.
It's the end of the world as we know it, and I feel fine.

In with the opposites of all of the above, natch.
posted by AppleSeed at 4:15 AM on January 22, 2008 [2 favorites]


Don't understand all this financial talk. I've always been ignorant about such things.

But in my little town, there are many manufactured housing plants. While the local real estate market (so far) has been stable, this is not so in neighboring regions, where the modulars we build are sold.

And in my little town, lots of NASCAR dads have hung up their nail guns and are tuning into the afternoon soaps. They aren't worried about their investments either. They are worried about groceries.
posted by tommyD at 4:22 AM on January 22, 2008


bystander: i can buy some extra ammo with the profit i've made from my currency trading! i have $US300 left over from my recent holiday, and the aussie dollar's just fallen 2c against the greenback! ooooh...should i hold out for further falls? i wonder what the futures market says about three crisp, clean bills?

less plasma & SUVs? meh, adbusters fan here. big believer in not buying things i don't need & cannot afford, and not taking out personal debt (other than a mortgage, which is kinda unavoidable).
posted by UbuRoivas at 4:25 AM on January 22, 2008


I imagine we're basically seeing the fall out from the fed bailing out the mortgage companies. Too many bad bailouts will kill the economy.
posted by jeffburdges at 4:38 AM on January 22, 2008


Anecdotally, I'd peg food inflation in the 20-40% range. Not just price increases, but the stealth 20% size reduction with the price remaining the same.

Doom and gloom links -
Bank of America earnings down 95%
I think BOA is a bunch of fuckos who bought Countrywide for some other fucked up sleazy plan. And it would've worked except for you pesk kids!

Actually, I don't know if BOA is hurting because of the CFC purchase, but I still think they're up to no good.
posted by Lord_Pall at 4:42 AM on January 22, 2008


Bah. Ubu is already with the program. While I have no ammo I may hitch a ride in the mad max mobile if it comes to that.
You cousins in the US watch out, I think there are plenty more of you that missed the sarcasm and do expect to have to shoot their way out. I can't see crime rates staying low if there are a lot of lay offs. But I hope they do.
I was kinda surprised after Katrina about all the retractions in the newspaper regarding early stories about violence. A lot of my friends saw it as the final evidence US society had fallen apart, but I suspect in the wash up (no pun) it probably showed there was still a lot of community spirit.
posted by bystander at 4:45 AM on January 22, 2008


bystander: find me the location of the original Interceptor, and you'll be allowed to ride shotgun even without ammo. however, your outfit will need to be tattered leather (it works best in the desert heat) and when we need to refuel, it'll be bare-knuckle fighting for you. these are my conditions.
posted by UbuRoivas at 4:51 AM on January 22, 2008 [1 favorite]


Ok, bottom-line it for me. How bad is it?

No hiring for six months? For a year?

Bread-lines? Okie migrations?

Or is it time for me to learn the Chinese for "Hey mister, wanna meet my sister?"
posted by orthogonality at 4:51 AM on January 22, 2008


I don't know much about any of this fancy finance stuff, but way down here at the scummy bottom of the capitalist feeding chain things are already plenty tight this year.

Basic food and survival costs feel like they've doubled and tripled in about 12 months.
posted by loquacious at 5:04 AM on January 22, 2008 [3 favorites]


I need my $5 back
posted by poppo at 5:06 AM on January 22, 2008 [25 favorites]


...folks with retirement funds and a longer view should be fine.

Except most retirement funds are locked-up until one reaches 65 or so. If you need to break-into your retirement funds ahead of retirement in order to keep the heat on, for instance, you lose a huge chunk of those funds right off the top in penalties and taxes.
posted by Thorzdad at 5:19 AM on January 22, 2008


When you say "squirrel away a few months of cash," do you mean under the mattress? Or in a bank? Is it safe to keep large sums of money in the bank (as opposed to investing it)?
posted by mothershock at 5:22 AM on January 22, 2008


.75 cut in fed rate.
posted by Lord_Pall at 5:27 AM on January 22, 2008


I'm glad I put all my money into sidewalk repair and bloody, gooey clean-up futures.
posted by ColdChef at 5:29 AM on January 22, 2008 [7 favorites]


First inra-meeting rate cut since immediately after 9/11. They're frightened of major dislocations. Bad sign.
posted by orthogonality at 5:31 AM on January 22, 2008


Interest rates cut to 3.5% in the US. A massive cut. It will be interesting to watch the markets over the next few hours. A rally or panic?
posted by ClanvidHorse at 5:33 AM on January 22, 2008


Yeah, everyone should sell their stock immediately. That'll help.
posted by smackfu at 5:33 AM on January 22, 2008


I'll be damned if I can find the link, but I've read that adding it all up the subprime fiasco is about the size of the S&L crisis. Of course adding it all up is the bone of contention, but at least the sizes of the core problem seem to be somewhat similar.

Food prices are scary though. Guess my Supcom rig will have to wait.
posted by Skorgu at 5:34 AM on January 22, 2008


Largest cut since 1984 I think.
posted by Lord_Pall at 5:34 AM on January 22, 2008


That explains the sudden spike to 12000 on the DJIA futures -- which pulled right back.

Bad day to be in USD, though. At 0734CST, one dollar buys you 1.455EUR, 1.957GBP, and it's 106.5 Yen and 1.029 CDN to the dollar.

I suspect those numbers will change -- that .75 cut is a panic cut saying we'll do anything to save the markets, including inflate the dollar.
posted by eriko at 5:34 AM on January 22, 2008


If the rate cut doesn't help the market, does the government just start writing checks so companies look like they're making money?
posted by Lord_Pall at 5:39 AM on January 22, 2008


Maybe we should all pop down to our local bank and ask to see all our money.

Didn't you ever see Mary Poppins?
posted by Civil_Disobedient at 5:40 AM on January 22, 2008


Also, if anyone needs a reality check, the BoA news is the most "hooooley fuuuuck" copy I've read all day.

"Fourth-quarter net income fell to $268 million, or 5 cents a share, from $5.26 billion, or $1.16, a year earlier"

Fuuuuuuuck. 95% loss. Yeah, we're all gonna feel that.
posted by Civil_Disobedient at 5:42 AM on January 22, 2008


Also, also...

"Citigroup Inc., the nation's largest bank by assets, posted a fourth-quarter loss of $9.8 billion, the biggest in its 196- year history"

Fuuuuuck.
posted by Civil_Disobedient at 5:43 AM on January 22, 2008


Yes, the banks got hit hardest by the whole mortgage-backed security thing. All those headlines from a couple of months ago are showing up in these earning statements. I don't think anyone is really surprised by that.
posted by smackfu at 5:46 AM on January 22, 2008


95% loss. Yeah, we're all gonna feel that.

A 95% reduction in profit (which is what actually happened), is entirely different from a 95% loss.
posted by Burger-Eating Invasion Monkey at 5:46 AM on January 22, 2008 [1 favorite]


Fuck. There goes the $200 in my 401k.
posted by Horken Bazooka at 5:47 AM on January 22, 2008 [7 favorites]


Can someone explain to me WHY our leaders (Rep AND Dem) are going to push "tax cuts" as a solution or hedge against the looming recession/financial "event"?
Used to be that "tax cuts" were a uniquely Republican solution to most everything, but now the lefties too want us to take our extra cash (in the form of a give-back at tax-time or something similar) and use it to "spend our way out of trouble"...
Am I nuts in thinking this is a major policy shift for Dems?
Am I nuts in thinking this is nuts?
Has this been done before? (W tossed me a check for $500 back in '02, if memory serves...)
posted by Dizzy at 5:53 AM on January 22, 2008


I thought they were bribery checks, not tax cuts.
posted by Lord_Pall at 5:54 AM on January 22, 2008 [1 favorite]


Maybe we should all pop down to our local bank and ask to see all our money.

Didn't you ever see Mary Poppins?


Fuck that, didn't you see The Wire this week?
posted by fourcheesemac at 6:01 AM on January 22, 2008


The banks are going to get hit again when credit cards blow up. Already credit card defaults are on the rise.

If consumer portfolios continue to weaken, certainly credit cards will be the next shoe to drop,'' William Fitzpatrick, who helps manage $1.8 billion at Optique Capital Management, said in a Bloomberg TV interview on Jan. 17.

Fear is driving everything down world wide. Some traders and hege funds must be making billions of dollars selling stocks short.

In a downturn, everything goes down, but quality companies will go down less and recover faster. Identifying those quality companies is what investing is all about.

Right now I'm stockpiling cash (U.S. and Canadian) in money market funds. I've got a watchlist of stocks I'm looking to buy, which includes some U.S. financials. Every day more stocks go on sale.
posted by Fuzzy Monster at 6:03 AM on January 22, 2008 [1 favorite]


I'm collecting juiceboxes and instant noodles.
posted by Lord_Pall at 6:05 AM on January 22, 2008


Fed funds rate has just been cut .75% in between meetings. Unprecedented.
posted by gen at 6:06 AM on January 22, 2008


FRB: Press Release--FOMC statement--January 22, 2008
posted by gen at 6:11 AM on January 22, 2008


Anyone want to give me a job? I work hard and I don't eat much.

Hah hah.

but seriously, anyone?
posted by Justinian at 6:13 AM on January 22, 2008


American stocks are NOT overvalued. (pdf; S&P 500 P/E in blue on bottom chart)

If the US market tanks today, consider it a BUY opportunity. If it doesn't, it's STILL a buy opportunity.
posted by ZenMasterThis at 6:14 AM on January 22, 2008 [1 favorite]


There ought to be a law (Godwin MkII) stating that nobody can express stock opinions without also publishing their personal portfolio allocation in full.

...that way you can see why they have their opinions.

Makes things a lot clearer, on those few occasions when it happens.
posted by aramaic at 6:19 AM on January 22, 2008 [1 favorite]


I would totally be worried about this if I was now, ever been, or ever expected to be, anything but poor.
posted by milarepa at 6:27 AM on January 22, 2008 [4 favorites]


Luckily, I have traded in all my dollars for bright shiny Ameros
posted by briank at 6:30 AM on January 22, 2008


Can someone explain to me WHY our leaders (Rep AND Dem) are going to push "tax cuts" as a solution or hedge against the looming recession/financial "event"?
Yes, but the answer is different for the two of them.

Democrats: Because voters like hearing "tax cut", and because the Democrats think that cutting the taxes of people with moderate or little wealth will stimulate the economy by prompting more spending.

Republicans: Because voters like hearing "tax cut", and because the Republicans think that cutting the taxes of people with great wealth will make those people wealthier.
posted by Flunkie at 6:30 AM on January 22, 2008 [3 favorites]


Interesting article from almost two years ago:

The US - a finance-based economy on crack
posted by Fuzzy Monster at 6:32 AM on January 22, 2008


*Tune*
I can't wait to get my recession Check, my recession Check, my recession Check!
*Tune*
posted by localhuman at 6:33 AM on January 22, 2008


I would totally be worried about this if I was now, ever been, or ever expected to be, anything but poor.

The prospect of having to tighten my belt, which is fairly tight to begin with, doesn't worry me at all. But quite a few interested observers are predicting that many of us in the middle won't even have belts once the dust settles, which does.
posted by The Card Cheat at 6:34 AM on January 22, 2008


Down 500 points already.

Insane.
Curbs go in at 10%, so 500 more to go.
posted by Lord_Pall at 6:34 AM on January 22, 2008


You seem to be enjoying this a little too much.
posted by smackfu at 6:37 AM on January 22, 2008 [1 favorite]


The only number going up because of that "Hail Mary" rate cut is Jim Cramer's blood pressure.
posted by Asparagirl at 6:44 AM on January 22, 2008 [2 favorites]


The prospect of having to tighten my belt, which is fairly tight to begin with, doesn't worry me at all. But quite a few interested observers are predicting that many of us in the middle won't even have belts once the dust settles, which does.

I've always felt little more than an afternoon away from fighting for a potato in the street. Sure, having to actually do so will be a shock and a new experience. But, less so for me than people who thought they could just run out the clock watching reruns of "Perfect Strangers."
posted by milarepa at 6:44 AM on January 22, 2008 [1 favorite]


It's fascinating.

I'm also profoundly angry at these fucknogs who have utterly destroyed any semblance of financial transparency or legitimate business models.

Maybe I'm old fashioned, but I like businesses that make things. They make things, sell things to other people and other businesses who then make more things. These things can be used to produce even more things, which can in turn be used to provides goods and services to both the consumer and other companies.

I like the idea of banks that make loans based off of your ability to repay. The idea of evaluating someone's financial position using research and understanding to decide whether they can handle the responsibility.

I like the idea of buying something with cash. Not gold, Not jewels, not checks, CASH.

I also like debit cards (chip and pin ones)

It infuriates me that all these sacks of shit made all this money doing utterly bugfuck crazy things with money. And they're going to get off scott free. It's a cliche thing to say, but those cocksuckers from citibank aren't going to lose their house. It's the normal folk who had 401k's, or held municipal bonds or had any iota or semblance of faith that SOMEONE, somewhere was keeping an eye on these utterly putrescent cocksuckers.

But no. We went with the gordon gecko approach of fuck you, fuck your neighbor, make synergy, sell lies, repackage lies, cut up lies, and you end up moving to fucking bora-bora scott free, leaving all of those broke and destitute motherfuckers to work at wal-mart for the rest of their goddamned lives.

It's like watching a really uncharismatic, unfunny and horrible version of Lawrence Garfield from Other Peoples Money.

So yeah, I'm having a bit of ScahedenFraude watching their shit fall apart around them.
posted by Lord_Pall at 6:44 AM on January 22, 2008 [18 favorites]


What the hell is cutting interest rates to the bone going to do at this point except add inflation on top of financial chaos due to the mortgage bubble? I am in cash except for my IRA... adding the $5000 for 2008 last wednesday doesn't seem like such a good idea now... but if inflation and a furthering weakening dollar eat up cash what the heck am I supposed to do?

I think I'm going on a bender today. Sadly, I'm not actually kidding.
posted by Justinian at 6:45 AM on January 22, 2008


Whenever the market tanks and folks freak out about how long it's going to take to clean up, I get this overwhelming sense of apathy. All the theorycrafting, the data analysis, just seems so pointless. The industrial age is going to end in the next 15 years as the age of cheap reliable oil comes to a close, and all of this will burn in the resulting fire. Percentages in a portfolio are not going to feed you when that happens. I suggest learning to grow some tasty produce in the garden instead.



/DOOOOOOOOOOM

Seriously though, all the manufacturing, transportation, hell even communication infrastructure in the world is predicated upon an abundance of cheap oil which will be Gone. Forever. Soon.

posted by lazaruslong at 6:46 AM on January 22, 2008


Oh yeah, for perspective, I'm in the UK paid in pounds at the moment. Moving to Finland in a few weeks to get paid in Euros.

Essentially, I'm somewhat out of the line of fire so it's easy to be a distant observer.
posted by Lord_Pall at 6:46 AM on January 22, 2008


And please don't take my previous comment as a dismall of the current conversation in any way, and I don't intend to derail the intelligent commentary in progress. Just sayin', you know?
posted by lazaruslong at 6:48 AM on January 22, 2008


*dismissal, natch. Although somehow still appropo.
posted by lazaruslong at 6:49 AM on January 22, 2008


Wow, I'm looking at some financial pain but even I realize that "the industrial age is going to end in the next 15 years" is out there.
posted by Justinian at 6:51 AM on January 22, 2008


NYSE invokes Rule 48.

I have no idea what this actually means, but I suspect it'll be used to rip someone else off.
posted by Lord_Pall at 6:52 AM on January 22, 2008


The market did take a nasty drop but it appears to be climbing a bit, not just spiralling ever downwards into the end of the industrial age. Google Finance ticker.
posted by ourobouros at 6:53 AM on January 22, 2008


Today, New York Stock Exchange has invoked Rule 48, which provides the exchange with the ability to suspend the requirement to disseminate price indications and obtain floor-official approval prior to the opening when extremely high market-wide volatility could cause floor-wide delays in opening of securities on the exchange.
posted by localhuman at 6:55 AM on January 22, 2008


"If you were really paranoid, buy gold, pay off your debt and stockpile ammo (good advice for an Argentinian style collapse)."

Good thing I now live somewhere that I can actually do that legally.

*watches his employee stock plan shares decline in value*
posted by drstein at 6:55 AM on January 22, 2008


I don't know if "the industrial age is going to end in the next 15 years" or not. But if you read this article and replace the words "fuel" and "calories" with...pretty much anything at all, you'll find plenty to worry about.
posted by The Card Cheat at 6:56 AM on January 22, 2008


Down 500 points already.

Insane.


You hit the nail on the head; it's emotionally driven selling, not representative of fair value at all.
posted by Mutant at 6:56 AM on January 22, 2008 [1 favorite]


NYSE invokes Rule 48.

I invoke Rule 8, and challenge for leadership of the clan
posted by poppo at 6:59 AM on January 22, 2008 [7 favorites]


we are about to witness the biggest stock market crash in the United States since 1987

Fortunately, stock markets only crash when you least expect it.
posted by b1tr0t at 6:59 AM on January 22, 2008 [1 favorite]


Mutant - given how much shit these guys have off-the-book, how can you say that?

Nobody is clean about their actual exposure to fucked loans, and all of their bastardized offspring.

Because of that, you don't know who's a legit, profitable company, and who's just selling you a sack full of exploding lepers.
posted by Lord_Pall at 7:03 AM on January 22, 2008 [2 favorites]


Some perspective: As of 9:51 A.M. The Dow is down 2.01%.

On Black Monday (Oct. 19, 1987), The Dow dropped 22.6%.

It was the largest one-day percentage drop since 1914.
Two days later, The Dow had the largest one-day percentage gain since the 1930s. The Dow went up 10.15%, bringing the Dow back above 2,000 and in line for a yearly gain.
posted by Fuzzy Monster at 7:04 AM on January 22, 2008


So yeah, I'm having a bit of ScahedenFraude watching their shit fall apart around them.

I don't understand your attitude. It seems very confused to me. If the market goes tits up, those people that you purport to care about are precisely the ones to lose everything. So, for everyone's sake, it is to be hoped that things pick up. Traders will be out buying Gucci cufflinks soon enough whatever happens.
posted by ClanvidHorse at 7:04 AM on January 22, 2008


Lord_Pall : I like the idea of buying something with cash. Not gold, Not jewels, not checks, CASH.

Fiat currency, you mean? Be careful, Ron Paul will spank you. You can't hide from him in Finland.
posted by XMLicious at 7:04 AM on January 22, 2008 [1 favorite]


Metafilter: I'm having a bit of ScahedenFraude

(Sorry, Lord_Pall, I couldn't resist ;-P )
posted by Turtles all the way down at 7:04 AM on January 22, 2008


Wow, I really spelled the shit out of that.
posted by Lord_Pall at 7:05 AM on January 22, 2008


I invoke Rule 34. Maria Bartiromo and Jesse Livermore.
posted by Slithy_Tove at 7:07 AM on January 22, 2008


This is all so much bullshit. Many institutions need to liquidate portions to raise capital all at the same time- panicky individuals dumps stocks into the correction, fueling despair, supply demand, the economy hasn't changed that much in the last month. Fuzzy Monster is quite correct. Savvy investors buy/hold. Trust me, I'm getting hammered but wrong time to shit pants.
posted by sfts2 at 7:07 AM on January 22, 2008


I just hope this doesn't affect the Super Bowl cuz I got the last twenty dollars in my savings account riding on the Giants.
posted by effwerd at 7:09 AM on January 22, 2008 [1 favorite]


嘿先生,想要满足我的姐姐?
posted by Dr-Baa at 7:09 AM on January 22, 2008 [1 favorite]


Fiat currency, you mean? Be careful, Ron Paul will spank you. You can't hide from him in Finland.

I didn't say I was a financologist... Just old fashioned.

Besides, Isn't Ron Paul crazy?

//Ducks//
posted by Lord_Pall at 7:14 AM on January 22, 2008


Heh, we've been watching the global markets plummet all of yesterday, and the Canadian Government just announced a 25 point cut in our rate, too, with further cuts to come.
posted by Phire at 7:17 AM on January 22, 2008


I love how everyone is saying it's 1990 or 1987 or 2000. The only thing that's up on my screen is Union Pacific (UNP).

It's 1896, baby! Choo choo!
posted by Pastabagel at 7:18 AM on January 22, 2008 [5 favorites]


Let's just turn this thread into a Yahoo! Finance message board. OMG MKT COMMING BACK BERNANKE RALLY LOOK OUT SHORTS BETTER COVER!!!!!!11oneune
posted by Pastabagel at 7:25 AM on January 22, 2008


the Chinese for "Hey mister, wanna meet my sister?"
You ask, we provide: "喂,先生;想认识认识我的妹妹吗?"
Bonus phrase: "得了,我承认。有中国特色的社会主义确实有优越性."
posted by Abiezer at 7:25 AM on January 22, 2008 [1 favorite]


bystander: what rational person doesn't have at least a couple of months' cash up their sleeve?

Did you see the pants-shitting going on in the Dreamhost thread over a temporary two-day $200 unexpected charge? I made some comment about people running their lives pretty close to $0 and fucking cortex tried to put me on some sort of bourgeois stake for saying that's a bad thing.

Also: personal post 1001.
posted by unixrat at 7:27 AM on January 22, 2008


So a quick headsup, everyone: how are the markets looking now? I'm presuming it's well into trading time in the Wall Street now.
posted by the cydonian at 7:28 AM on January 22, 2008


Opened low and have been climbing back up.
posted by smackfu at 7:33 AM on January 22, 2008


Dow down 152. Heaven forfend! Maybe the Fed did something right today. Who was it -- Andrew Carnegie? JP Morgan? -- who is reputed to have said simply, "Markets fluctuate, sir"?
posted by twsf at 7:33 AM on January 22, 2008


Still looks a bit unsettled.
posted by mr_crash_davis at 7:34 AM on January 22, 2008


I invoke Rule 34. Maria Bartiromo and Jesse Livermore.

Curse you. I was going to invoke Rule 34 for Ron Paul / Worf hentai.
posted by ROU_Xenophobe at 7:35 AM on January 22, 2008


I really think the shadow inflation is a completely overlooked problem. Cheaper items have been getting smaller and smaller, while raising their prices slightly, masking real rises in the cost of goods.
posted by drezdn at 7:39 AM on January 22, 2008 [1 favorite]


Ok, I don't really understand, but I'm getting a little worried. I, like most of the world, don't have a couple of months cash squirreled away. Frankly, it is pretty bourgeois to assume that every rational person does. Rationality has nothing to do with it, being poor does.
How is this going to effect poor people? People with no retirement, students, renters, people with car loans and credit cards, single parents? In layman's terms, what exactly does any of this mean?
posted by arcticwoman at 7:40 AM on January 22, 2008 [2 favorites]


My favourite thing about any bad day at the stock market is all the photos of stressed-out stockbrokers accompanying the articles...they're typically photographed with head in hands, rubbing their eyes wearily, slumped over their desks, etc. Do they get new shots each crash, or are they just stock photos? And how do we know they're not just tired?

I don't trust the media.
posted by The Card Cheat at 7:44 AM on January 22, 2008 [1 favorite]


Prediction: Everything will be fine.
posted by Alvy Ampersand at 7:46 AM on January 22, 2008


Dow down 152. That's less than 2%. Much, much better than the 22.6% drop on Black Monday.

Maybe the Fed did something right today.

As always, time will tell.

Asparagirl, you called this rate cut a "big and stupid 'Hail Mary' play." I'm curious to know why you think this rate cut is a bad idea.

What does everyone else think? Personally, I'm thinking this rate cut is good for the U.S. markets in the short term but might be bad for consumers (lower U.S. dollar, higher inflation (as drezdn mentioned) in the long term.
posted by Fuzzy Monster at 7:49 AM on January 22, 2008


So a quick headsup, everyone: how are the markets looking now? I'm presuming it's well into trading time in the Wall Street now.
posted by the cydonian at 10:28 AM on January 22


Now? It's 10:32 ET, and the markets suck. Nasdaq only down 2.31%, s&p500 down 1.76%. Down is down 1.52%. What the hell is that? It's fucking weak, is what it is.

I was promised Armageddon. I want brokers falling out of windows. I was there in 87 and I was hoping for more 3 hour delayed tape and sinister computer program trades ruining everyone's life. But nowadays we have our fancy JAva relatime screens and our fancy Warren Buffets buying up the Reading and Short Line Railroads. And do you know why he wants to do that? Because he wants to own all four, that's why. Screw the Marvin Gardens and the Pennsylvania Avenues. This motherfucker wants to charge $200.

Even Best Buy is up 1.4%. Who the hell shops at Best Buy? Assholes, that's who. You know who you are. Why yes, helpful sales person, I would like a $95 power cord with my shitty 1080i tv. Even stupid John Deere with its stupid green combine harvesters is up over 2%. People love corn, we get it.

Nasdaq down 2.31% at 10:30. Pfft. I was there for the S&L crisis and for LTCM. I was there for the Asia meltdown, and for the Argentina meltdown, and for the Russian Meltdown. I was even there for the Pets.com meltdown, and let me tell you, that shit was epic. It turned out that no one wanted pet toys at a P/E of 974. What a surprise.

So this is nothing. Seriously, what's the problem now? Something about Jim Cramer going on vacation or something and his mortgage payment got lost in the mail, and he got all upset. Big whoop. Wake me when the market, you know, opens.
posted by Pastabagel at 7:49 AM on January 22, 2008 [58 favorites]


I feel really sorry for all my friends who left uni last year and went to work in the city, they're so getting laid off. They'll be Bernards and Giles weeping bitter tears on the streets of London tonight.
posted by greytape at 7:49 AM on January 22, 2008 [2 favorites]


This is not the market crash you were looking for.
posted by malocchio at 7:52 AM on January 22, 2008 [1 favorite]


Damn, I'm good.
posted by Alvy Ampersand at 8:00 AM on January 22, 2008


lol at the people who were wrong and seemingly excited about a crash. Sucks to be you.
posted by dios at 8:02 AM on January 22, 2008 [4 favorites]


/me invests into his IRA.

You're all idiots if you get out of the market now. It is time to buy, not to sell.
posted by Stynxno at 8:02 AM on January 22, 2008 [2 favorites]


Your favorite financial Armageddon apparently sucks.
posted by The Bellman at 8:02 AM on January 22, 2008


Will the cure be worse than the disease? - The Fed needs to let a recession happen.

To Some, the Widening Crisis Seems Driven by Fear, Not Facts - "What makes this correction more dangerous, they say, is that the selling is not being driven by panicky retail investors, as it was in the collapse of the technology bubble, but by hedge funds and investment banks that find themselves saddled with illiquid securities backed by an array of valueless assets. 'What you see is not a panic of the public. This is a panic of the sophisticated,' said James Sinclair..." — that is to say, it's the hedge fund managers (those who survived and hung on to their jobs) who are panicking in order to stay employed. This drives down values for the rest of us.

I wouldn't panic yet. Even those nearing retirement need to look to the future. Just because you're retired doesn't mean you're dead. If you're retiring at 65 now, you should realistically plan so that you can live comfortably to 90. People are living longer these days. So for the elderly investor to panic and withdraw entirely from the market now is the worst course of action. 90 - 65 = 25 years. Unless the economy collapses entirely, it's unthinkable (and mathematically impossible, I think) for the market to not recoup its losses over 25 years. If that happens, your money won't be worth the paper its printed on so it won't matter where it's allocated.

So, of course, if you're not yet at retirement age, you would be extra-stupid to panic. You have 25+ years to regain your losses. In 1987, it took 18 months. In 1929, it took a decade. That is less than 25 years, for those bad at math.

Some tips:
  • Don't panic.
  • Do not keep money you may need in the short term (12-18 months) in the market. You should have 3-6 months salary saved in cash. If you are buying a house in the next 6 months, look at 6 month CDs, but generally speaking, leave your liquid money liquid.
  • You can take money from your IRA/retirement accounts penalty-free for certain things, like a first-time home purchase, edudation, or some medical expenses.
  • Do your research. Every bank these days has an investment advisor. They vary in quality from horrible to excellent. But when your teller suggests you go sit with him as you're cashing your paycheck on Saturday, consider making some time for it. Drop into a few banks where you don't have accounts and express an interest in meeting with their investment advisor. If you get a survey of information rather than relying on one particular source, you will be better equipped to read the news media between the lines, where it counts.
  • Diversify. Don't look for the next Google. Slow and steady. The stock market averages 12% growth over the past 30 years. Allocate some money for an index fund, but don't be totally risk-averse. A competent broker will explain diversification to you and do a risk profile. Just because he advocates a more risky position than you may be comfortable with doesn't mean he's a shyster trying to sell you the moon. Invest in a pyramid: a large base of slow growth, then some money in medium-risk, then a bit in high-risk high-yield. Review these allocations as you age and at every major milestone (change of jobs/promotion, birth of a child, purchasing a house, death of a parent, etc.).
  • Leave things be. They want you to believe doom and gloom and micromanage your funds because it generates churn and creates fee income for them on trades. Remember who is sponsoring the financial news you're reading. Look at the ads on cnnmoney and nytimes/business. Stock trading companies. You panic, they cash in.
  • Use the rule of 72 to gauge your return over time. If you go into CDs with your money at 4%, it will take you 72 / your rate (4%, in this case) or 18 years to double your money. That index fund at 12% will double your money in six years. It may be down at any given point in time as a function of the rolling 12 month average value, but barring a total collapse, it will rebound before you're dead of natural causes. And the difference between doubling 18 years vs. 6 years means that if you plan to retire in 30 years, say (assuming the average mefite is younger than 35), the index fund would have doubled five times while the CD would not have doubled even twice. That does not mean you would have five times or even ten times your principal in the index fund. You would have 25 or thirty-two times your initial principal. The CD leaves you with roughly 4 times what you started with. One of the biggest heartbreaks I saw during my time in finance was people who learned their finance the hard way in the depression putting all their money in CDs the day they turned 55. Meanwhile, I saw the customers on the far side of retirement (again, those who lived to 90) surviving on a dime because the day they retired they stopped earning money*. It doesn't have to be that way.
  • Yes you can save 3-6 months salary, faster than you think. What are you buying that you don't need? Can you make due with one extravagance a month, say cable internet or cable TV? Cut costs now, while you're young, because compound interest means that a penny saved now is a dollar when you retire. Better to cut costs now while you have income than be forced to do so when you are retired.
  • Breathe easy, work hard at your job, develop a craft/hobby on the weekend if only to assure yourself that you know enough carpentry/weaving/car mechanics to get a job if things get really rough. I don't think they will, and I'm pretty doom and gloom wrt to Peak Oil, but the main thing is that you feel confident in yourself and your ability to make stuff. Just keep saving. We're in for a bumpy ride, so you need to sit tight and NOT flail around. You could fall out of the boat or capsize us, bub.
  • Don't panic.

    * A CD at 4%, taxable at a 25% tax bracket yields roughly 3% after taxes; barely keeping pace with inflation now, and certainly NOT if inflation goes up due to Fed rate cuts and increasing oil prices. Those who are treading water with CDs now will start to drown.

  • posted by Eideteker at 8:04 AM on January 22, 2008 [42 favorites]


    where the hell *did* i put that feral studded leather outfit, though?

    Damn, sorry, I borrowed it. And the cleaners said they can't get out the smell of apocalyptic desperation, k sry thx. :(

    I would just like to say that while I understand that MeFi = Not My Financial Advisor, and Your Agenda May Vary and all that... I'm still buoyed by this thread; I'd rather listen to real people (ones I know to be smart, mostly) talk about this stuff than all those ratings-hungry Chicken Littles on the cable news channels.
    posted by pineapple at 8:05 AM on January 22, 2008 [1 favorite]


    I think that the rate cuts are a bad idea. Traders and financial types are a bunch of whining babies. You take away their rattle, they scream for more. They're only interested in the short term. They don't give a crap about what happens next month. So yeah, there's a correction in the market and they scream for more of the federal boob. And things get better for a little while, but then they get worse again. Isn't this, like, the third rate-cut in a row?

    I'm worried about inflation. I'm the most boring type of person, financially speaking. I take a portion of my income every couple weeks, and stick it in a high-yield savings account. The only thing I'm vulnerable to is inflation. Inflation goes up, my money is worth toilet paper, and you have a very unhappy afroblanco wishing that he had spent his money on hookers and blow instead of putting it in a now-worthless savings account. And I tell you this, when boring motherfuckers like me are worried, the whole damn country is fucked.
    posted by Afroblanco at 8:05 AM on January 22, 2008 [6 favorites]


    So far this morning the carnage is nowhere near as bad as people thought - the Fed cut this morning most certainly helped avoid catastrophe...but I think it is merely delaying the inevitable.

    Fact of the matter is this: it is a solvency crisis, not necessarily a liquidity problem. Think of it this way: yesterday the bank was willing to lend you $1,000 at 4.5%. Today they will lend money at 3.75%. That's all good, but what if:

    a) I'm so saddled with debt that I cannot take on anymore?
    b) I cannot afford to pay back the original $1,000 (insolvent), so why would I want another $1,000 loan?
    c) The bank is short on capital and its reserves won't permit further lending?
    d) The bank has the capital but doesn't trust that I will repay the loan due to being over-extended.

    Today's Fed move also forgets about the incredibly scary position of the bond markets: the two primary insurers are essentially insolvent and being downgraded as we speak. Not necessarily a problem until you realize that these bond insurers back hundreds of billions of dollars worth of debt AND with their insolvency, investors must assume the worst: that the bonds they have insured may have been poorly rated and are toxic as well.

    To reiterate - the cut this morning does not change the fundamentals of the broader economy, and that is simply: we built an asset bubble based on non-performing assets and debt. We need to weed that crap out of the financial system as soon as possible, otherwise this malaise in the marketplace will linger for a lot longer than anyone wants.

    Some big earnings reports are coming up in the next few weeks (Target, Apple, J&J, then the January auto sales, retail sales, etc.); These will provide further clues as to the true health of the economy which is, IMHO, not very good.
    posted by tgrundke at 8:05 AM on January 22, 2008 [1 favorite]


    I'll never forget after the crash of '87 when a guy died of a heart attack getting off the train on the day after and people were just stepping over him...

    This is not that.
    posted by sfts2 at 8:06 AM on January 22, 2008


    This is fun times, for those of us not in the USA.

    I take it you missed the part where the TSX tanked yesterday and the Bank of Canada cut its overnight rate by a quarter of a point last night. I know you love to shit on the U.S. and pretend that Canada is vastly different, but quit it already.
    posted by oaf at 8:06 AM on January 22, 2008 [1 favorite]


    Wake me when the market, you know, opens.

    goatse?
    posted by geos at 8:07 AM on January 22, 2008


    Market is flattening out:

    DOW JONES INDUSTRIAL AVERAGE INDEX -68.04 (-0.56%)
    NASDAQ COMPOSITE INDEX -28.38 (-1.21%)
    S&P 500 INDEX -6.76 (-0.51%)
    NYSE COMPOSITE INDEX (NEW METHODOLOGY) -107.91 (-1.23%)

    as of 11:10 am EST.
    posted by GrammarMoses at 8:11 AM on January 22, 2008


    Asparagirl, you called this rate cut a "big and stupid 'Hail Mary' play." I'm curious to know why you think this rate cut is a bad idea.

    IANAsparagirl, but I'll take a stab at it:

    The Powers That Be have been running the markets et al for the last decade in a "We must never let them feel pain" type of situation. Every downturn is immediately attacked with easy money, rate cuts, and if those don't help - bubble shifting.

    Many people believe that this is a bad thing - bad practices need to be punished, pain does need to be felt. The Invisible Hand does need to be poked every once in a while into doing things a better way or even The Right Way. Fat needs to be trimmed.

    However, when these situations arise (like they are right now) the Fed throws itself on the train tracks with more and more drastic measures to prevent Pain from happening. I think that everyone (well, almost everyone) realizes that this doesn't prevent it from happening, it only delays the inevitable.

    So rather than spreading the pain out and letting things fall by the way side bit by bit, we've been gradually propping up more and more dying items as time goes on. It will give one day and now we're going to have to pay a whole bunch of pipers rather than one.

    I'm not an economist, but it even seems clear to me that this has been very bad policy.
    posted by unixrat at 8:13 AM on January 22, 2008 [7 favorites]


    I'm worried about inflation. I'm the most boring type of person, financially speaking. I take a portion of my income every couple weeks, and stick it in a high-yield savings account. The only thing I'm vulnerable to is inflation. Inflation goes up, my money is worth toilet paper, and you have a very unhappy afroblanco wishing that he had spent his money on hookers and blow instead of putting it in a now-worthless savings account. And I tell you this, when boring motherfuckers like me are worried, the whole damn country is fucked.
    posted by Afroblanco at 11:05 AM on January 22


    The problem with the savings account approach is that its doesn't take into account the decline of the dollar against foreign currencies. If everything you buy is imported (most of it is), you're losing money even without taking inflation into consideration. With equities, the theory goes that as the dollar declines, other things being equal, stocks of companies that do make money become more attractive to foreign investors and go up.

    The problem is all the people with 401k's and IRAs. Those accounts have lost about 15% of their value since october. IF the rate cut has a psychological result of stopping the market from hemorrhaging further, it effectively preserves all those people's retirement accounts.

    If their retirements tanked, they have to rely more on social security, which we can't really pay for now unless we raise taxes considerably now and keep them high in the future, which is going to lead to more govt borrowing and and ever shittier US dollar. That's a very superficial reading of it. The system has a lot of moving parts, and only a very small number of them are in anyone's direct control. Rates are one of them. So are taxes and spending, but the most recent plan has fewer taxes and more spending. But imagine the engineer controlling those levers is a slightly retarded former coke addict and alcoholic who nobody can fire because his dad's a big cheese, so no help there.

    And every once in a while, treat yourself to the hookers and blow, because hey, you deserve it. And no one wants to see a cranky Afroblanco.
    posted by Pastabagel at 8:16 AM on January 22, 2008 [2 favorites]


    Mutant - given how much shit these guys have off-the-book, how can you say that?

    Nobody is clean about their actual exposure to fucked loans, and all of their bastardized offspring.

    Because of that, you don't know who's a legit, profitable company, and who's just selling you a sack full of exploding lepers.


    Well, I'm an informed investor, and never purchase anything without looking at at least an annual report first. In other words I do my homework. Some of the stuff I own is indeed holding alphabet soup securities - CDOs, Synthetic CDOs, ABS', etc, etc. This crap is difficult to value even in the best of times and now - well, who knows? But NOT everything I own is holding alphabet soup. Some are bricks and mortar, cash flow rich businesses.

    Yet at the open my personal portfolio was off about $40K. Now I'm only down about $7K.

    Hardly reflective of fair value, unless fair value is incredibly volatile. But since I know what I own and I know where they've invested their money, what assets they hold, I know this isn't representative of fair value.

    Its emotionally driven selling.
    posted by Mutant at 8:17 AM on January 22, 2008 [1 favorite]


    Flagged as FUD.
    posted by knave at 8:18 AM on January 22, 2008 [2 favorites]


    unixrat sums up very nicely why the subprime bailout that keeps getting proposed is such a bad idea—it would reward stupidity.
    posted by oaf at 8:18 AM on January 22, 2008 [1 favorite]


    From my understanding, the rate cut could cause more inflation that (at least now) hurts me far more than a tanking stock market does. Since my company's market isn't exactly booming, my take home pay isn't likely to increase while the cost of goods will, essentially meaning that I'm making less.
    posted by drezdn at 8:18 AM on January 22, 2008


    I like these rate cuts.

    The more they honk up the value of the dollar, the easier i can pay off my debt since I'm paid in other currencies.

    In theory, this plan should work beautifully!

    There are rumours of another cut at the january meeting (End of the month?)
    posted by Lord_Pall at 8:23 AM on January 22, 2008


    'Monger doom', that made me laff.
    posted by ClanvidHorse at 8:30 AM on January 22, 2008


    I live in the US. I have a huge chunk of student debt in Europe, payable in Europe.

    I juts learned to spell 'fucked.'
    posted by AwkwardPause at 8:33 AM on January 22, 2008 [1 favorite]


    Same as in town, Abiezer?
    posted by Mister_A at 8:35 AM on January 22, 2008


    I live in the US. I have a huge chunk of student debt in Europe, payable in Europe.

    I justs learned to spell 'fucked.'


    Sorry 'bout that.
    posted by AwkwardPause at 8:35 AM on January 22, 2008


    Will the cure be worse than the disease? - The Fed needs to let a recession happen.

    I take it your job isn't one of those that would recess.

    I've been goofing around in this thread the last hour or so (hey, I freely admit when I'm an ass), but in all seriousness, the problem here really is the Iraq war, and specifically the insane amount of spending on it. Had that money not been spent, or had it been spent domestically on any one of a thousand projects we need to focus on, there would have been no need for the Fed to jam down rates to where they were in 2005. Those low rates created sparkling new financial vehicles to convince people they could buy houses they shouldn't. People only get interest-only mortgages or teaser rates when interest rates are exceedingly low.

    The problem is that the money spent on the war is spent. This isn't like Nasa building rockets to the moon that created science and an interest in science that fueled one high-tech boom after another. This isn't like Eisenhower building highways all over that drove down the cost of commerce and created an affluent middle class.

    That money on Iraq ($800 billion, $1 trillion? I've lost track) is gone. What's worse is that it created global uncertainty that drove up the speculative risk premium in oil prices at precisely the same time that China's industrial growth created a surging demand for the commodity. What I'm saying is that the whole system was poorly managed.

    You want to go further? I can go further. The ban on stem cell research has killed the pharmaceutical industry who saw huge potential for new products pulled out from under them. We have a nascent but profitable solar power industry that should be subsidized at least in part to lower the cost of the products and encourage adoption, but instead we are subsidizing corn to keep the price high at the same time the president is suggesting we use corn also as energy. This has had the unexpected benefit of making food prices prohibitively expensive for some people, so mission accomplished there.

    This Fed action is a desperate attempt to keep people working. If there is a serious recession, and we have inflation (check the reports from last week), and commodity food and energy prices remain high because of global demand and war uncertainty, then there will be a lot of pissed off out-of-work people come election time. And I don't mean Hillary or Obama pissed off, either. I mean Karl Marx/middle-class-revolt pissed off.
    posted by Pastabagel at 8:38 AM on January 22, 2008 [22 favorites]


    I believe the second drop of the roller coaster will define what happens today. This will tell us whether the optimists, those who believed the interest rate cut will work, or the bargain hunters (if this is the moment for bargains) will win out. I predict they won't and it will end down at least 400.
    posted by dances_with_sneetches at 8:43 AM on January 22, 2008 [1 favorite]


    When you doomsayers say 'have a few months of money in cash' does that mean actual physical cash? Or is my checking account money good?
    posted by Mach5 at 8:44 AM on January 22, 2008


    So this is nothing. Seriously, what's the problem now?

    the problem? the last few times the fed cut rates, as a general rule, the markets rallied

    today they've made a huge rate cut and the markets are still slipping

    there's market crashes and panics - and then there's the death of a thousand little cuts

    this would seem to be the latter
    posted by pyramid termite at 8:47 AM on January 22, 2008


    Pastabagel - So we need to figure out how to turn the science of killing the utter shit out of people into an international growth industry...

    I'm open for ideas.
    posted by Lord_Pall at 8:49 AM on January 22, 2008


    Think about it - a nation of 38DD-cupped and 18-inch penis-gourded Americans would have INCREDIBLE confidence


    I think most of them would be incredibly uncomfortable.

    Seriously, that's some Tom Cruisian level of hyperbole you're working there. Just stop it.
    posted by maryh at 8:50 AM on January 22, 2008


    I like these rate cuts.

    The more they honk up the value of the dollar, the easier i can pay off my debt since I'm paid in other currencies.
    posted by Lord_Pall at 10:23 AM on January 22


    Given the fact you have about 20% of the comments in this thread, with majority of them being some ass-faced cheering for a crash in the name of a schadenfreude that ultimately resulted in you looking like an incorrect, FUD-humping moron, maybe you ought to bow out from this thread before starting in on cheering for some other negative thing that, if it comes to pass, will make a lot of people's life here difficult.
    posted by dios at 8:50 AM on January 22, 2008 [8 favorites]


    It's going to take a few years for some investors (like me) to make up for the losses incurred in 2007. 2008 is not going to help. The value of many major mutual funds have been in serious decline since last summer. It will be interesting see how much Brazil-Russia-India-China can offset our shaky confidence, but I'm guessing not much.
    posted by mattbucher at 8:51 AM on January 22, 2008


    This, too, will pass.

    I am sadly reminded of saying that to a freind going though some tough times. "I'm not so sure I don't want to pass with it," she replied. She committed suicide later that week.
    posted by StickyCarpet at 8:52 AM on January 22, 2008 [4 favorites]


    If there is a serious recession, and we have inflation (check the reports from last week), and commodity food and energy prices remain high because of global demand and war uncertainty, then there will be a lot of pissed off out-of-work people come election time.

    Heh. Economists are suggesting that the US is embarking on the worst consumer recession since 1980 and you think inflation is a continuing threat? If you think you're right, you should monetize that somehow because you're about a million miles from consensus.
    posted by Kwantsar at 8:56 AM on January 22, 2008


    Could I see a cite for that 'economists are suggesting that the US is embarking on the worst consumer recession since 1980' assertion?

    said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan. ``Markets are clearly pricing for a recession. I don't think it's necessarily going to be long or hard or deep.''

    "It's possible that with the amount of stimulus we've seen coming from the Fed, and the talk of a stimulus package, that this ends up being a fly-by'' slowdown in growth, said Jonathan Lewis, a founding principal at Samson Capital Advisors LLC in New York, which manages $3.8 billion.

    Two-year Treasury yields of less than 2.5 percent indicate government securities are peaking after seven months of gains, said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York.

    ``That fully prices in a recession,'' he said. ``It would be a very mild and short recession if one does occur.''


    I think you watching too much TV.
    posted by sfts2 at 9:02 AM on January 22, 2008


    Could I see a cite for that 'economists are suggesting that the US is embarking on the worst consumer recession since 1980' assertion?

    Call your Merrill salesguy and ask him for David Rosenberg's latest dispatch, wherein you will read that "(W)e expect that the economic downturn will be more severe than the capex-induced 2001 recession, with many sectors of the economy – such as consumer spending and residential investment – likely to experience the worst pullbacks since the 1980s."

    I think you watching too much TV.

    Keep on thinking that.
    posted by Kwantsar at 9:12 AM on January 22, 2008


    You said economist(s) then cite (1), and I provided (3) with divergent views, and I could have provided 3 more quotes from the same article. Which by the way, was from Bloomberg, today, and Merrill owns a minority stake in Bloomberg LP. So, I guess my point would be, your assertion that there is some consensus about the future occurrence and severity of any recession is incorrect, and the fact that you seem to think that a deep recession is a forgone conclusion is also disputed by many credible sources.
    posted by sfts2 at 9:18 AM on January 22, 2008


    "It will be interesting see how much Brazil-Russia-India-China can offset our shaky confidence, but I'm guessing not much."

    I track a bunch of stuff at The Bank, and write commentary on what ever market events interest me. FASB 157 is a current interest, so last weekend I was preparing another-such-publication, and just happened to stumble across some numbers. Theses were as of January 18th, so things have changed - not for the better mind you - over the past couple of days.

    The BRIC economies you ask? Well, if one believes the old adage about the stock market as a leading indicator of economic performance (as I do), well the BRIC economies aren't doing so well. Or won't be doing so well in a few months.

    All data represents year to date stock market performance in local currency, from January 1st to January 18th 2008. Sourced from some Citigroup research.

    If you believe in "The January Effect" (as I do, it's real and verifiable) then odds are 2008 is gonna suck large for across the board equity market performance.

    Morocco 9.83%
    Jordan 7.54%
    Egypt 2.38%
    Malaysia 1.97%
    Nigeria 0.89%
    Israel -2.00%
    India -2.83%
    Pakistan -3.95%
    Slovenia -4.87%
    Taiwan -5.16%
    Indonesia -5.23%
    Switzerland -5.90%
    Italy -6.03%
    Ireland -6.13%
    Russia -6.16%
    Japan -6.34%
    Thailand -7.09%
    New Zealand -7.23%
    South Africa -7.26%
    France -8.29%
    Spain -8.38%
    Peru -8.58%
    Hong Kong -8.59%
    Germany -8.75%
    Czech Republic -9.01%
    United Kingdom -9.31%
    United States -9.61%
    Portugal -9.62%
    Colombia -9.63%
    Netherlands -9.79%
    Philippines -9.80%
    South Korea -9.81%
    Singapore -9.90%
    Chile -9.98%
    Sweden -10.77%
    Mexico -11.02%
    Canada -11.16%
    Greece -11.66%
    China -11.70%
    Argentina -11.82%
    Finland -12.08%
    Turkey -12.11%
    Hungary -12.16%
    Denmark -12.76%
    Brazil -12.76%
    Iceland -15.73%
    Norway -15.75%
    Poland -16.08%
    Luxembourg -16.88%

    posted by Mutant at 9:30 AM on January 22, 2008 [2 favorites]


    You said economist(s) then cite (1), and I provided (3) with divergent views, and I could have provided 3 more quotes from the same article. Which by the way, was from Bloomberg, today, and Merrill owns a minority stake in Bloomberg LP.

    Heh. You'll hear roughly the same thing Rosenberg said from Paul Kasriel or Stephen Roach. And not that any economist isn't completely full of it, but Mitch Stapley? Really? And what Merrill's stake in Bloomberg has to do with any of this I do not know.

    And what I wrote was that Pastabagel's inflation call was miles from consensus. And if you're sitting at a Bloomberg, you nitpicking arse, you'll see that the latest Bloomberg Survey Table shows CPI growth falling to 2.3% in Q4 2008. Which is a 170 bps drop y/o/y. Can you think of a better way to measure consensus about the economy than a survey of economists?
    posted by Kwantsar at 9:32 AM on January 22, 2008


    sfts2: Here's a lot of good stuff from economist Nouriel Roubini: "First, the US recession is unavoidable and has already started; and this recession will be ugly, deep and severe, much more severe than the mild 8-month recessions in 1990-91 and 2001..." One glance at the titles of his prescient articles from the past year or two, nevermind their actual content, should tell you something about this guy's accuracy. And if Kwantsar's Merrill dispatch doesn't hold water for you, then how about this morning's report from Lehman Brothers? I could go on, but it seems you've already made up your mind that all the deep recession talk is a lot of whooey. It's not.
    posted by Asparagirl at 9:33 AM on January 22, 2008


    i have a theory that even the longest-lived among us will see a certain kind of extreme economic conditions only once in their lives. my aunt remembers the depression. we've never had a hyperinflation though. the rate cut by itself isn't going to alleviate the crisis; a lot more liquidity (fiat dollars conjured ex nihilo) will have to be added. i left the market some time ago; wish those of you still stuck in it good luck.
    posted by bruce at 9:34 AM on January 22, 2008


    I'm certain both kwantzar and asparagirl will become rich from their prescience. And while I may be a nitpicking arse, but I'm not a fucking moron, and I do know that recession is defined by GDP declining for two consecutive quarters, not CPI declining year over year. However, I wouldn't want any facts to distract you.
    posted by sfts2 at 9:48 AM on January 22, 2008


    Was just watching bits of the 2004 republican national convention last night, people should be required to do this every four years to remind themselves what was said and done, and I gotta say Bush completely, completely buggered up every single one of his goals from 2004, including a strong healthy economy.

    Generally I like to take the long view in regards to economics. Obviously things take time to work themselves through the system, so blaming a 1st term president for economic woes in his time is disingenuous, but after 7 years I think it is safe to lay some fault at the feat of those who have been running the ship into the ground for so long.
    posted by edgeways at 9:49 AM on January 22, 2008


    i left the market some time ago

    Out of curiosity, what are you doing with your assets? (Not looking for advice; at 36 I'll take my chances with the market for the long term - just curious).
    posted by nanojath at 9:52 AM on January 22, 2008


    you've already made up your mind that all the deep recession talk is a lot of whooey. It's not.

    Any reasonably prudent and cautious person would at least keep it on the radar as a possibility. In general it seems to me that we've tipped from 'glass is half full' establishment talk last November/December, to 'glass is half empty' talk this January. It's obvious that there's a complete lack of confidence in the market at the moment.
    posted by carter at 9:54 AM on January 22, 2008


    I do know that recession is defined by GDP declining for two consecutive quarters, not CPI declining year over year.

    You are so wrong.

    Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

    A:: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. According to current data for 2001, the present recession falls into the general pattern, with three consecutive quarters of decline. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.


    And in the United States, we usually measure inflation by the CPI . Pastabagel was talking about inflation. I was talking about inflation. Try to keep up.
    posted by Kwantsar at 9:58 AM on January 22, 2008


    cash 'n' metals. helps that i own my home, zero debt of any kind, ascetic lifestyle except for several fetishes.
    posted by bruce at 10:00 AM on January 22, 2008


    So, of all the folks who think doom is upon us, are any of you sure enough of yourselves to be out there shorting stuff? I thought not.
    posted by jfuller at 10:00 AM on January 22, 2008


    unixrat, that was a great explanation of why the Fed's 0.75% rate cut today, though probably politically unavoidable, was such a bad idea. To put it crudely, the Fed just blew their wad -- and for what, a lousy three hundred point band aid? What the hell are they going to do when the markets tank again?

    See this comment from the Calculated Risk blog for another take on it: The Fed has not just emptied the gun, but done it in advance of what will be an entire year of increasingly bad news. ARMs resets still haven't peaked, and are set to do so later this year. Foreclosures will continue to rise. Bankruptcies will continue to rise. Unemployment will continue to rise. Consumer spending will continue to fall. Housing prices will continue to fall. Some banks will likely outright fail, along with a hedge fund or two (if we're lucky; many more if we're not). Credit will continue to be frozen. More credit cards will become maxed out..."

    Or as economist Barry Ritholtz said today in a very good blog post: "This was a shot of penicillin to a cancer patient."

    And as orthogonality said upthread, the Fed's cut also tips their hand to everyone that they're frightened. Poor Ben Bernanke...a Princeton academic specialist on the Great Depression and market crashes, now stuck paddling furiously to undo Alan Greenspan's damage and faced with living out his field of study firsthand!

    One more fun thing to think about: if things in the overseas markets stay bad, there's the worry that the EU might splinter, since a lot of the individual countries (Germany, for one) are going to want to try to control their own unique problems and set their own rates, rather than stick with the one-size-fits-most EU plan.
    posted by Asparagirl at 10:04 AM on January 22, 2008


    Right on time (again)
    posted by hortense at 10:06 AM on January 22, 2008


    Asparagirl: if things in the overseas markets stay bad, there's the worry that the EU might splinter

    Where are you hearing about this worry?
    posted by syzygy at 10:09 AM on January 22, 2008


    jfuller-- One can be a bear on the US economy and still think that some stocks offer exceptional value. I am, and I do.

    Asparagirl-- Be careful about linking to near-permabear Ritholtz, who came in dead, dead last in 2006.
    posted by Kwantsar at 10:14 AM on January 22, 2008


    jfuller, I don't short stocks -- that's way too dangerous for my taste. But I did get my 401(k) out of the market last July, about three weeks before the big August drop. And in my personal brokerage account I started buying puts on homebuilders, investment banks, regional banks, and mortgage companies. (And ETrade!) They've been doing very nicely, especially my Downey Savings and Loan puts, thanks for asking.

    So how have you been doing since August? Since January 1st? Or would you rightly consider those questions to be none of my business since we should stick to discussing market stuff and stay away from the personal?
    posted by Asparagirl at 10:14 AM on January 22, 2008


    Oh no, the sky is falling -- oh wait, it's not even close.

    I think it would be a Really Great Idea if Metafilter required people to publish their long/short positions whenever making a financial post. Most of the information in this thread is so stupefyingly cockamamie and clearly intended to provide false information to investors that it provides a great reason why the government should regulate the entire goddamn internet.
    posted by felix at 10:17 AM on January 22, 2008 [1 favorite]


    if things in the overseas markets stay bad, there's the worry that the EU might splinter

    Cite? Or is it just doomsday speculation?
    posted by vacapinta at 10:18 AM on January 22, 2008


    Thank God for dopes like the Chicken Littles here. Without you investing would be more work. Financial markets are bigger than your Dick Cheney boogeyman machinations and if there's someone who can flatten out market cycles, they've covered their tracks damned well.
    posted by yerfatma at 10:22 AM on January 22, 2008


    Start buyin' cigarettes and diabetes medicine -- they'll be the currency of the future!
    posted by dopamine at 10:22 AM on January 22, 2008


    But I did get my 401(k) out of the market last July

    Explain why you did that. Bonus points for teaching the rest of us how to time the market on a regular basis.
    posted by yerfatma at 10:23 AM on January 22, 2008


    I am long stupid green combine harvesters, fwiw.
    posted by Pastabagel at 10:29 AM on January 22, 2008 [2 favorites]


    OMGWTFRRSP

    /canadian retirement planning joke

    Ok, so there's a recession. Again. Another one. Might be as bad as the early 80s, might be as lame as the early 00s (2001 was, based on the recessions I've been through, pretty mild). People recover, economies recover, the EU will recover (if it doesn't - OMG -splinter).

    Some people will get hit, some won't. Some will come out ahead, some will come out bankrupt. And the beat goes on.

    Marry me, baby.
    posted by Salmonberry at 10:30 AM on January 22, 2008


    The depressing thing about this (well, one of many) is the fact that since journalists don't know anything about finance and economics, they blindly swallow whatever any Wall Street "economist" has to say. It's ridiculous that the BBC's lead article has this absurd quote front and centre:
    "Unfortunately they have no power to reverse what in my opinion is the worst post-war recession," said Michael Metz, chief investment strategist at Oppenheimer in New York.
    No-one ever learnt anything by listening to Wall Street press releases.
    posted by Burger-Eating Invasion Monkey at 10:42 AM on January 22, 2008


    Meanwhile, in Davos... And Hank Paulson cancels his ski trip.
    posted by GrammarMoses at 10:43 AM on January 22, 2008


    This is most likely a stupid question, but has there ever been a history of actually avoiding a recession or are they just trying to mitigate the length and depth of the recession?
    posted by hexxed at 10:44 AM on January 22, 2008


    Marry me, baby.
    posted by Salmonberry at 12:30 PM on January 22


    Aw, shucks. Pastabagel wins Metafilter the internet life.
    posted by dios at 10:45 AM on January 22, 2008


    Cite? Or is it just doomsday speculation?

    Well, mostly the latter -- some comments on investing boards and blogs. Maybe too tinfoil-ish?

    Explain why you [pulled out of the market in mid-July]

    Luckily for you, I made a big Metafilter FPP about it at the time. July 11th, actually. Looking back at it now, I think I acquitted myself decently.

    Bonus points for teaching the rest of us how to time the market on a regular basis.

    Look, I'm admittedly a financial newbie; I am absolutely not someone involved with the markets or Wall Street in any meaningful way, nor do I have a degree in Economics, nor have I been investing for very long. In short, a know-nothing!

    But I do read a shitload of news and opinion everyday, and something about the whole housing/credit/derivatives bubble mess that's been building up for the past few years now just started to stink to high heaven last year. The two Bear Stearns funds blowing up last July was just the final thing to push me over into being Bearish on the economy and the stock market. That doesn't make me particularly smart, it just means that the problem is so damn big that even a newbie like me could see it coming.

    And can I just mention that we gloomy Bearish people pointing out that the economy is in trouble and likely to get much worse doesn't mean that we want it to be in trouble! I mean, you'd think that should be obvious. But I see a surprising amount of anger directed at us -- not just disagreement or mocking, but anger -- coming from people who think elsewise -- as if all Bears were rooting for things to crash rather than just warning futilely that it was coming.
    posted by Asparagirl at 10:54 AM on January 22, 2008 [1 favorite]


    One more fun thing to think about: if things in the overseas markets stay bad, there's the worry that the EU might splinter, since a lot of the individual countries (Germany, for one) are going to want to try to control their own unique problems and set their own rates, rather than stick with the one-size-fits-most EU plan.

    European in the EU here (admittedly one outside the Eurozone) but this is the first time that I have heard anything like this other than someone talking shite in a boozer. Is there more to this than pub talk? I cannot remember this being talked about seriously by anyone, anywhere. Any citations to enlighten me?

    Do you think Angela Merkel was secretly round the back arranging a divorce whilst signing up to the Lisbon treaty that is designed to ensure greater European cohesion?

    This 'theory' seems to run counter to the main thrust of European policy and anything I have read on Europe recently. To use a good old European word, it sounds like bollocks.
    posted by ClanvidHorse at 10:59 AM on January 22, 2008


    I've cancelled this in my area.
    posted by eddydamascene at 11:11 AM on January 22, 2008 [1 favorite]


    "except for several fetishes."

    Look out, those things can kill you.
    posted by Eideteker at 11:12 AM on January 22, 2008


    Wow, I got called out by Dios.. And you guys favorited him! Consider me sufficiently chastened.

    I apologize if I was coming across as exuberant. I am neither ass faced, nor a fud-humping moron. I simply find this interesting.

    I did mean all that shit about slight of hand financials though. It's ridiculous, and it's why we can't have nice things.
    posted by Lord_Pall at 11:17 AM on January 22, 2008


    Uh, oh. Kwantzar told me I'M WRONG and links to a blog to support his assertion.

    By the way, not to again confuse someone that is obviously so limited in understanding with any more details about actual economics, but to make it simple enough for you I'll just say this.

    There is a difference between a decline in rates of growth of economic activity (which is what you cite) and decline in the level of economic activity. A recession is when growth is NEGATIVE (think recedes). You really should attempt to gain some mastery of the subject matter prior to posting so aggressively. You just come off as a dipshit.

    And no, recession has fuck all to do with inflation, and your original post discussed recession, so no, we were not talking about inflation.

    Dumb. Ass.
    posted by sfts2 at 11:18 AM on January 22, 2008


    Oh, but you can change the subject if you want. Its advisable.
    posted by sfts2 at 11:19 AM on January 22, 2008


    and something about the whole housing/credit/derivatives bubble mess that's been building up for the past few years now just started to stink to high heaven last year

    Right, but that's a classic mistake, thinking because you got it right once you are on to something. We might be all dead in the longest term, but patience wins in the mid-term.
    posted by yerfatma at 11:23 AM on January 22, 2008


    Wow, I got called out by Dios.. And you guys favorited him! Consider me sufficiently chastened.

    Don't worry. He's actually not all that discriminating.
    posted by pineapple at 11:25 AM on January 22, 2008


    I hope that the sky-not-falling news will rally the international stocks. My VEU has been hammered over the past month.
    posted by a robot made out of meat at 11:26 AM on January 22, 2008


    My snarkmeter is not in a recession.
    posted by anthill at 11:30 AM on January 22, 2008


    because you got it right once

    Twice. What sorts of changes have happened at Citibank in the three short months since I posted that one? How's its stock price, its dividend, its CEO? Who are their shiny new investors, and what kind of crazy deal did they get? And what happened to the much-defended "M-LEC" idea to unload the hard-to-price commercial paper? Oh, right.

    patience wins in the mid-term

    I want to believe that, I really do, but in this one particular yucky situation, I just can't. I think I would have normally been a hold-'em-long kind of investor too, in some other half-decade -- and I'm sure I will be again someday. But I'm living in this half-decade, and I can't do it. I can only cringe.
    posted by Asparagirl at 11:39 AM on January 22, 2008


    I like Harry's take on it.
    posted by i_am_joe's_spleen at 11:58 AM on January 22, 2008


    Twice. What sorts of changes have happened at Citibank

    So two pieces of empirical evidence make a rule?

    I want to believe that, I really do, but in this one particular yucky situation, I just can't.

    I understand. All I'm saying is that's how people make money long-term, by buying up the bargains presented by people (like those in this thread) who think every big event is "special" this time. Since 1997 or so, we've had plenty of these events, like the one where the Internet had made old school economics and valuation obsolete, how demand curves hadn't been changed, they'd been moved way out on the axis. Every era has snake-oil salesmen who get by preying on the fears of investors, appealing to ego by suggesting we're smart enough to see something the pros missed en masse.
    posted by yerfatma at 11:59 AM on January 22, 2008



    Look, I'm admittedly a financial newbie; I am absolutely not someone involved with the markets or Wall Street in any meaningful way, nor do I have a degree in Economics, nor have I been investing for very long. In short, a know-nothing!


    FFS, I've been reading this thread with a nagging scratch behind my brain saying "Asparagirl.... Asparagirl... I've done this before, we've been through this", and then you linked your housing DOOM! thread and finally that nailed it for my shoddy memory.

    Look, I appreciate speculation and risk aversion like any sentient being, but I think you weigh your news sources too highly on the chicken little crowd.

    The intra-meeting rate cut spooks me a bit, but the rest of what you and Kwanstar are peddling are nightmare city blogs and exxagerated positions. Are we in for an interesting year? We sure are. Are all the major financial instituions going to collapse? Don't think so.

    There. I've studied as much economics as you, so here I am with a counterpoint. Meh.
    posted by cavalier at 12:04 PM on January 22, 2008


    unixrat: "The Powers That Be have been running the markets et al for the last decade in a "We must never let them feel pain" type of situation. Every downturn is immediately attacked with easy money, rate cuts, and if those don't help - bubble shifting. "

    Can we take that and turn it around on all the conservative fuckwits who bitch about "liberal America" being sissy and soft and always cry for saving the children? You know... "In my day, we didn't have railguards on slides, we fell off and got bruises..." that kinda shit?

    Can we say "Hey motherfuckers, your corporate/conservative allies have that same fucking attitude? How come you never bitch about them crying for help?" Just a thought.
    posted by symbioid at 12:05 PM on January 22, 2008


    aramaic writes "way you can see why they have their opinions"

    It's not like your selling will make my bet on market crashing more profiteable.....oppps !
    posted by elpapacito at 12:06 PM on January 22, 2008


    Uh, oh. Kwantzar told me I'M WRONG and links to a blog to support his assertion. There is a difference between a decline in rates of growth of economic activity (which is what you cite) and decline in the level of economic activity. A recession is when growth is NEGATIVE (think recedes). You really should attempt to gain some mastery of the subject matter prior to posting so aggressively. You just come off as a dipshit.

    The NBER is not a "blog." The Business Cycle Dating Committee are the folks who actually define what a recession is. HINT: It's not what you say it is. Look at the link! Since you think the link goes to a "blog," my only guess is that you didn't click on it.

    I'm not changing the subject. Reread what I wrote, what you wrote, and what I linked, and realize that you've been wrong.

    Bonus points if you can point out where I claimed that contraction and growth deceleration are the same thing, or mistook one for the other. Because I never did.
    posted by Kwantsar at 12:11 PM on January 22, 2008


    The intra-meeting rate cut spooks me a bit, but the rest of what you and Kwanstar are peddling are nightmare city blogs and exxagerated positions.

    What am I peddling, here? I paraphrased David Rosenberg for precisely one sentence!
    posted by Kwantsar at 12:12 PM on January 22, 2008


    I think I would have normally been a hold-'em-long kind of investor too, in some other half-decade -- and I'm sure I will be again someday. But I'm living in this half-decade, and I can't do it. I can only cringe.
    posted by Asparagirl at 2:39 PM on January 22


    Except you can "hold-'em long". The indicies only look like crap because they include the financials, which are crap.

    But you could have bought and held even the momentum names like Google, Apple, Baidu, Intuitive Surgical, and you'd still be up a few percent, though not as much as if you sold two weeks ago or a month ago. Same with the oil and agriculture stocks. I understand that potash is not as sexy as ISRG's robotic eviscerator (and let's face it, who doesn't want in on the ground floor of that), but up is up.

    So if you made few points on a once-in-a-generation disaster, good for you. But pride goeth before the fall, as they say. Buy and hold works because timing is becoming nearly impossible. Did we put in a bottom today? Or did we put in a bottom exactly at 9:35, and if your computer was slow booting up, you missed it?

    Look at a 5 day-chart.
    posted by Pastabagel at 12:12 PM on January 22, 2008


    Ooops, shouldn't have hit post. I meat look at a 5-day s&p chart. The crash shows up as a blip in a steady downtrend. Five years from now, this "crash" won't even be that.
    posted by Pastabagel at 12:14 PM on January 22, 2008



    What am I peddling, here? I paraphrased David Rosenberg for precisely one sentence!
    posted by Kwantsar at 3:12 PM on January 22


    I would like to interject here to explain that Kwantsar was responding to my comment above that "If there is a serious recession, and we have inflation (check the reports from last week), and commodity food and energy prices remain high because of global demand and war uncertainty, then there will be a lot of pissed off out-of-work people come election time" by arguing that we won't have inflation. I wasn't arguing that we will have inflation, and there is a very strong deflationary case to be made that isn't apparent because of the high corn and energy prices (and in fact it is the Fed's apparent misunderstanding of the deflationary case that has frustrated many traders).

    I was simply arguing that if we have all of those things together, there would be trouble.
    posted by Pastabagel at 12:24 PM on January 22, 2008


    No Malor in this thread. He must already be in his bunker, loading his shotgun against the wolves.
    posted by Eideteker at 12:38 PM on January 22, 2008


    Pastabagel wrote : If there is a serious recession, and we have inflation (check the reports from last week), and commodity food and energy prices remain high because of global demand and war uncertainty, then there will be a lot of pissed off out-of-work people come election time.

    Kwantzar wrote: Heh. Economists are suggesting that the US is embarking on the worst consumer recession since 1980 and you think inflation is a continuing threat? If you think you're right, you should monetize that somehow because you're about a million miles from consensus.
    posted by Kwantsar at 8:56 AM on January 22 [+] [!]



    I wrote: Could I see a cite for that 'economists are suggesting that the US is embarking on the worst consumer recession since 1980' assertion?

    I know exactly what I wrote and what you wrote. I asked for a very specific backup on one of your assertions, and believe you to be overly simplistic and honestly, just plain wrong with much of what you asserted in your reply to pastabagel. I am not pastabagel. Please stop conflating the two conversations.

    By the way, inflation IIRC correctly, was over 6% for last year. So yes, inflation is a continuing threat, especially in an environment with 3-4% money. Interest rates are not even covering inflation. Read this as 'artificially low'
    posted by sfts2 at 12:46 PM on January 22, 2008


    By the way, inflation IIRC correctly, was over 6% for last year.

    Not even close.

    So yes, inflation is a continuing threat

    I already explained to you that the Bloomberg survey of economists is inconsistent with what you believe.

    I asked for a very specific backup on one of your assertions, and believe you to be overly simplistic and honestly, just plain wrong with much of what you asserted in your reply to pastabagel


    Yeah. You think recession is defined by GDP declining for two consecutive quarters, too, and you also think that the NBER website is a blog. So remind me not to make much of what you think.

    And if you read Pastabagel's comment, it's crystal clear that he understood what I was saying. I really haven't conflated the two of you, and I really haven't conflated economic growth and inflation.
    posted by Kwantsar at 1:03 PM on January 22, 2008


    Note that it's important to realize that this is not happening in a vacuum. This is a symptom of a long and deep malaise, and it's mostly been caused by Alan Greenspan. There's so much to talk about that this post could be the size of a novel, so I'll just try to cover the high points. This may be a bit disjointed, because there's so many different things that relate, and I may not do a very good job of assembling them into a coherent whole. If so, I apologize in advance.

    Further, I should inject that I'm just a layman, and I'm struggling to understand what's going on just like you are. I've been at it longer, studying this off and on from my armchair since 1998 or so, but I have no formal training, and I will probably get details wrong. I think I have the big picture correct, and so far I've been doing pretty well in my calls that the house bubble popping was a Gigantic Big Deal, but I am still just an amateur, and you should remember that.

    For the last three decades, our monetary system has been entirely fictional. New dollars are created out of nothing, at will. They're not a hard asset; they're debt, claims on future production in the economy. This in and of itself isn't necessarily a gigantic problem, except that it gives rise to a number of other issues that are indeed very large problems.

    When all money is debt, it's very easy to abstract that debt away in new ways without much immediate consequence. Most derivatives are an example of this. A basic example is home loans. It used to work this way: a bank would lend you money for a house, and you would repay them more money over time. It was a pretty simple transaction, and the bank wanted to be pretty sure you repaid it. They had to live with the loan, so they wanted to be sure your credit was good.

    I don't know exactly when the 'securitization' thing started, but some genius somewhere (that's probably literally true), realized that you could spread risk across a lot of loans at once, by packaging them up into big securities. Different investors have different appetite for risk versus reward, so each security was divided into 'tranches'; the 'highest' tranches got the least interest, but got paid first from the home loan proceeds. Money 'trickled down' the tranches to higher-risk investors; as long as there was enough money coming in from the loan repayments, they got their higher interest rates. As long as the money keeps flowing, everyone gets paid; if the money partially dries up, the high-interest/high-risk investors get shafted, but the low-interest/low-risk investors still get their money. Yay! We've converted a risky asset class into a safe one.

    This derivative, in other words, spreads risk out. But it also decouples the assessors of risk from those who bear it, which will result in gigantic amounts of fraud and waste. When nobody involved in making the loan has to live with the results, when they all get paid just for MAKING it, not for getting REPAID, well.... the loans just aren't going to be very good.

    It was Greenspan's contention that derivatives reduced overall risk in the marketplace, and he actively and encouraged this new financial engineering/wizardry. But it appears he got it exactly wrong. In general, if you can hedge your risk against other entities with derivatives, you will take more risks. But the whole idea of hedging is that you hedge a small position against the much larger market... but hedging has gotten so enormous that there's not really any larger market to hedge against anymore! This means that if we do have a failure, it can cascade into broad contagion and multiple collapses very quickly, because everyone is joined at the hip.

    In addition, you get inflationary effects. A bank that buys these securities doesn't classify them as a loan, but rather as an asset. They're still loans, and still risky, but banks classify them like any other bond asset in their portfolios... and this is the key part... including making loans against those assets.

    So why's that bad? Well, for one... and I'm not entirely sure about this, so pay attention to corrections.... it would appear to result in an infinite money multiplier, over time. Bank A makes some loans, the loans are packaged up, and sold to bank B. Bank B then uses those assets as the base to make more loans against, which bank A then buys. Then bank A can make even more loans.... this results in a staggering increase in the apparent money supply without any actual money being injected by the Fed. (normally, the Fed creates money and lends it to banks; banks then multiply, through fractional reserve lending, this base cash, M0, into the broad 'money supply', M1.) Each bank gets only a tiny fraction of the other bank's lending, as the rest of the economy soaks up the majority of the housing derivatives, but even so, that's still is going to add up significantly over time.

    With infinite supplies of money, you get spiraling asset prices in popular asset classes (house inflation), and you get ever-spiraling risk, because the more money people borrow, the riskier the loans become, as the housing prices decouple from their true value in a healthy economy. But the securitization process hides most of the risk from the market, because it looks like a standard bond with quantifiable risk. The effect is that the very existence of these bonds increases systemic risk, it doesn't decrease it as Greenspan thought.

    If we were still on commodity money, these abstractions would have been causing weird movements in whatever the commodity was. China and Japan have accumulated over a trillion dollars each in dollar-denominated US assets; with a gold-backed currency, enough of the gold would have been flowing over there to set off alarm bells long ago. But, intead, with our fictional currency, we just make a few new entries in a ledger and let foreign entities build up enormous claims to our assets without any inherent check. With a commodity, there's only so much of it, but when you can invent new cash with a few keystrokes, unlimited supplies of the stuff can accumulate everywhere without immediate consequence.

    Greenspan started to realize things were a bit amiss in 1994, with his 'irrational exuberance' speech, but then backed off... markets, he figured, couldn't possibly get it wrong. (I suspect that's his Randian tendencies.) Markets are prone to the madness of crowds, but he didn't seem to believe that.

    Over the last twenty years, the world economy has on multiple occasions signaled that things were amiss; the Russian collapse/Long Term Capital Management crisis/"Asian Flu", the Mexican peso collapse, the Argentina collapse, the Turkish collapse.... there's probably been more that I'm not thinking of right now. It's not normal to have countries all over the world falling apart due to monetary disorder, particularly when those currencies are tied to the dollar.

    Anytime the economy has signaled pain, instead of letting it adjust to whatever is causing the hurt, the Fed has instead injected cash. Lots of cash. Cash in great excess. It has, after all, any amount of cash it needs at will. The closest analogy I have is that of using only anesthetic on a broken bone. The patient can get up and even maybe walk, but he's not healed and is just making himself worse. Another analogy is that of using methamphetamine for personal productivity; it works. For awhile. For some period of time on meth, your productivity numbers must look fantastic.

    The Fed's malfeasance went to amazing heights in 2001-2002. Instead of figuring out why asset prices could go to 100, and then be (much more correctly) valued at 40 just two years later... they focused all their efforts on getting the prices up to 100 again, which meant insanely low interest rates (much below the real rate of inflation), and massive cash infusions. This partially staved off the collapse of the stock market bubble, but set off the property and debt bubbles.

    Those have been popping since August, and it looks like the Fed's absolutely unprecedented and irresponsible machinations to try to save their banking buddies may not be working after all. I'm guessing that when Bush stood up and proclaimed that we need to consume our way back to prosperity, the Rest of the World finally decided the jig was up. And they're our creditors, so if they don't like us anymore, we're in Truly Deep Shit.

    (as an aside, I had a (young?) economics major tell me in tones of Absolute Certainty that consumption was the key to economic success, and that savings was irrelevant. If they're teaching this to the kids these days, it's no fucking wonder we're going through a collapse.)

    The simple-thinkers will see this stock market collapse and will try to blame the ensuing economic chaos on that one thing. Everyone will be insistent that it caused our later problems, like the 1929 crash is claimed to have caused the Great Depression. In actual fact, 1929 looked almost exactly like America of 2000... an economic boom caused by monetary disorder, followed by a generation of crushing poverty. In 1929, the government at the time was rather inept, but they didn't do anything truly impossibly stupid. In 2000, on the other hand, they turned the stock market bubble into two more ten times bigger, so the ensuing chaos is probably going to be a serious challenge to the continued existence of the world as we know it.

    In my opinion, things are going to get so bad that even holding on to our government system is going to be difficult. In times of crisis, the despots always come out of the woodwork promising salvation. And it deeply frightens me that we are:

    A: indebted to the world to a degree we can't possibly repay;
    B: have the largest military force extant, and
    C: Have a very large population of very poorly educated people.

    I'm really frightened by just how bad things could get over the next decade.

    Whatever else happens, don't think that this is an isolated event. This is the latest symptom in a gigantic mess that's been going on since Greenspan took over the Fed. Stock market crashes are a symptom, not a cause, of economic disorder. There will probably be a mounting cascade of failures.

    But you don't blame the match for blowing up the mine, you blame the people who packed it full of gunpowder.
    posted by Malor at 1:13 PM on January 22, 2008 [80 favorites]


    I favorited Malor's comment before reading it. I was right to do so.
    posted by oaf at 1:25 PM on January 22, 2008 [2 favorites]


    The intra-meeting rate cut spooks me a bit, but the rest of what you and Kwanstar are peddling are nightmare city blogs and exxagerated positions. Are we in for an interesting year? We sure are. Are all the major financial instituions going to collapse? Don't think so.

    Then you still need to really, really INTERNALIZE the implications of this chart.

    The property bubble valuations of 2004-2006 were powered by the wonderful zoom up in net consumer lending via 1st, 2nd, 3rd etc. mortgages. This lending boom also powered the consumer to spend money which ended up as corporate profits, bullish forward P/Es, and the DIA, S&P500, the Russell 2000. Wilshire 5000 etc etc.

    But we've finished that dessert course, and are now on a diet. The implications are not good for Joe Consumer, and thus the financials as a whole, given the level of debt Joe Consumer is carrying with the financials.
    posted by panamax at 1:30 PM on January 22, 2008


    As a lifelong student of the markets (and not just equity markets) I’ve often observed investor emotions swinging across a continuum of two extremes: excitement and greed giving way to loathing and fear. For a long time we saw excitement driving greed, with people eager to get into the markets, equities, real estate, whatever market, at any price, lest they miss out on what other people were getting. Greed, simply put. But now the markets seem deep into fear territory - this seems to cut across and encompass both the buy and sell side - and it’s anyone’s guess when emotions will turn for the better. But the emergent loathing does indeed bode well for long term investors.

    Keep in mind that trying to time the markets is a strategy that doesn't consistently work. This must be true otherwise we'd have a relatively large number of professional money managers who consistently outperformed their chosen benchmark, who always make money. And we know this isn't the case, that managers of Warren Buffett's calibre and his track record are - well, unique.

    I've mentioned FASB 157 a couple of times so maybe I'll explain a little more about what I think is contributing to a lot of the institutional fear. This is an excerpt of something I've recently distributed. I'm excerpting the FASB 157 bits, hopefully this won't turn out too too mangled as I don't have time to rewrite (gotta sleep as I'm usually up early and this has been an exciting day).

    excerpt begins

    "
    FASB 157, which emerged Q4 of last year, has markedly changed how institutions account for the fair value of assets. Under FASB 157 assets are divided into three groups – Level 1, Level 2 and Level 3. Assets are segregated into each group according to how they’re traded. Let’s see how this works in practice and perhaps learn something about what’s making market participants so nervous.

    Level 1 assets are fairly straightforward - instruments that trade on organised exchanges. Examples would be shares bought and sold on the CAC, the AEX, the FTSE or the NYSE. Prices are clearly available from the exchanges. There is absolutely no doubt about the price or value of these assets, these shares, as they are exchange traded instruments. In finance terms, there is an active secondary market. We have a lot of confidence in the fair value of Level 1 assets as we can always consult the relevant stock exchange for a price. So we don’t have anything to worry about there.

    Level 2 assets are those for which a secondary market exists, but trading volumes are low. We may not be able to directly observe prices, but we can get a relatively good idea somehow, but from market sources. An example might be some smaller corporate bond issues, where there is little or no trading after issuance. Typical practice has us using proxies to infer fair value for these instruments as real prices are difficult to come by. In banking we say the market for such assets is thin. As there are few buyers and sellers there isn’t much trading in the instruments. Because there isn’t much trading liquidity is suspect. Prices can change a lot, but as there are prices which can be observed we can arrive at a reassuring idea of fair value, of the instruments price. So we can see Level 2 assets, while not as secure as Level 1 assets from a price point of view, are ok to own. Once again, no worries.

    But what about Level 3 assets the careful reader asks? Ah yes, Level 3 assets. Well sir, Level 3 assets are what we call “alphabet soup” – CDO, CLO, CDS, MBS, ABS, Synthetic CDOs or CDO squared– to name but a few. These structured products don’t trade anywhere on an organised exchange; rather banks, hedge funds and other market participants trade these instruments amongst themselves. These are also known as Over the Counter or OTC securities, and the secondary market for such instruments is not a physical place like a stock exchange, rather the market exists only between buyer and seller and only as private transactions. In other words, if a bank wishes to sell a CDO they must find a willing buyer. There isn't an exchange where this trade can take place (this is a simplification, but it helps explain what's going on here). Once a price for this CDO has been agreed the sale is consummated. Everything takes place between buyer and seller.

    So the definition of Level 3 assets is clear except for a not so minor point: price. Level 3 assets, those arcane sounding instruments of modern finance have in the past been priced using models; in bankers terms we say they’ve been marked to model. That is, given a CDO we then use a mathematical model (the Gaussian Copula by David Li, 2000, is widely used at present) to establish a price for the instrument. That’s right. A mathematical model. In other words, and in our view this is critically important to understand current market nervousness – A THEORETICAL PRICE.

    And that was ok, as long as both buyer and seller used the same, or roughly similar models. Still no worries.

    But FASB 157 changes this, requiring Level 3 assets to be marked to market; that is, banks holding CDOs (or other alphabet soup instruments) must now establish fair value by getting prices for these instruments.

    So what’s the problem you ask?

    Well, once banks and hedge funds starting getting market prices for these structured products we found that many of them weren’t worth what the models were telling us. In many cases, actual market prices were 20% - or less – of the theoretical value. The causes for these pricing discrepancies are legion and beyond the scope of this paper, but we know they are real, and we know there are presently very few buyers for these instruments and we also know these pricing differences are, to use an accounting term, material. Nobody realised these assets were so overvalued until they were actually marked to market – not model.

    And we’ve seen the fallout. Banks are taking huge losses as assets are written down to fair value. Folks are increasingly nervous because we’re finding out that not only banks are holding the alphabet soup, but pension funds and other entities that typically have been deemed safe and conservative have some as well.

    So we believe a lot of the fear is driven by the realisation that large portions of the balance sheets at many institutions are being sharply marked down.
    "

    excerpt ends.
    FWIW, I went long today in my personal accounts, having been a moderate seller of equities until last week.
    posted by Mutant at 1:32 PM on January 22, 2008 [10 favorites]


    Ha ha stupid permabears! We permabulls ended up losing only 1% today!
    posted by panamax at 1:34 PM on January 22, 2008


    I don't know exactly when the [mortgage] 'securitization' thing started, but some genius somewhere...

    It was mostly created by Lewis Ranieri and his team of loud, louche, cheeseburger-loving traders at Salamon Brothers in the 1980's and early 1990's. Their story is told in the book "Liar's Poker" by Michael Lewis. It's really good.
    posted by Asparagirl at 1:36 PM on January 22, 2008


    Mutant: any reason you expect Wall Street to recover its 2007 performance when we're heading into something resembling a recession?

    Right now everything has been reset to the March 2007 sub-crash levels. We going to see eurodollars coming back? People forced back into the market as an inflation hedge? Corporate profit expectations returning?

    2003 was no doubt oversold but 2004-2005 levels seem to be a fair valuation of Corporate America going forward. That's another 10% down, btw.
    posted by panamax at 1:41 PM on January 22, 2008


    Mutant: any reason you expect Wall Street to recover its 2007 performance when we're heading into something resembling a recession?

    Well, my tawdry secret is I only purchase for cash flow. As long as the underlying securities can pay the dividend stream I'm largely share price indifferent. I base my purchases largely on dividend cover (how much the company makes vs what it pays out).
    posted by Mutant at 1:44 PM on January 22, 2008 [2 favorites]


    Mutant: that's why I like FXC ;) I get dividends *and* the option of moving to Canada ;)
    posted by panamax at 1:47 PM on January 22, 2008


    Can someone answer a fairly naive and probably simplistic question?

    The government doesn't just print money whenever it feels like it; it asks the Federal Reserve for it, right? And the Fed is owned by banks? So if a big infusion of pretend money is irresponsible and will do more harm in the long run, will the time come when the (you'd think) cooler heads at the Fed simply say "no"? And what happens then?
    posted by George_Spiggott at 1:52 PM on January 22, 2008


    Man, I’d like to inject that I'm just a layman. That’d be sweet.

    (thanks Malor, et.al. for helping fiscally illiterate folks like myself understand some of this)
    posted by Smedleyman at 1:53 PM on January 22, 2008


    Those people complaining about this all being a storm in a teacup and pointing to the relatively small drop in the US indices (like this post) should remember that this metafilter thread was started yesterday when indices in the rest of the world were showing dramatic drops on a day that the US markets were closed {the FTSE had it's biggest one day fall (when measured in points) in its history} and that the FED made an emergency cut in US interest rates by 0.75% in order to support the markets today.

    It's not unreasonable to expect that in the abscence of the rate cut, similar falls would have been seen in the US stock market indices. Or perhaps the nay-sayers think that a FED cut of 0.75% means everything must be OK? After all they do that kind of thing all the time don't they...
    posted by pharm at 1:59 PM on January 22, 2008


    oh, btw, the f-bomb punk in the FPP would have not lost $40K but made a bit on his Russell 2000 position if he'd held on until the PM today.
    posted by panamax at 2:06 PM on January 22, 2008


    that the FED made an emergency cut in US interest rates by 0.75% in order to support the markets today.

    They were expected to cut it at their meeting next week anyways. The emergency part was the timing.
    posted by smackfu at 2:07 PM on January 22, 2008


    Actually, George and Smedley, I think the "pretend" aspect is over-emphasized in Malor's argument.

    The world has ~3B people productive employed making shit (or, in economist terms, "goods").

    Money supply can (and should, arguably) expand to match the concomitant rise in available goods.

    Money is created via fractional reserve lending, but I have yet to see an adequate explanation for why CDOs and SIVs exist if all the lending is created by the Fed.
    posted by panamax at 2:09 PM on January 22, 2008


    smackfu: the market, to the extent it is indeed "rational", is attempting to price in the continuing cuts, and pace of cuts, for the remainder of this year, and what the economy will look like a year from now with a ZIRP in place.
    posted by panamax at 2:11 PM on January 22, 2008


    They were expected to cut it at their meeting next week anyways.

    Not by that much, I bet.
    posted by oaf at 2:12 PM on January 22, 2008


    Here in New Zealand, our teeny weeny bijou bourse-ette is looking good this morning, as it was yesterday.

    Mind you the local firms don't own a whole pile of shit stored in bags labelled "chocolate" either, so now that the foreign investors have bailed, the rest of us aren't panicking so much.

    I have been keeping an eye on low PE stocks with big dividends and low debt. Yummy.

    Mutant, you should start a blog. I like your take on things.
    posted by i_am_joe's_spleen at 2:17 PM on January 22, 2008


    smackfu: The markets are currently expecting the FED to cut again at the meeting next week (look at the spread betting markets). This is not just bringing forward next week's cut.
    posted by pharm at 2:21 PM on January 22, 2008


    Food storage people. Everyone needs to have 3 months food and water stored away for the hard times ahead.
    posted by JaySunSee at 2:38 PM on January 22, 2008


    Here in New Zealand, our teeny weeny bijou bourse-ette is looking good this morning, as it was yesterday.

    You guys come up with the most inventive names for your pets, I swear. They must be well loved.
    posted by UbuRoivas at 2:45 PM on January 22, 2008


    Yeah, three months of food should carry us through Malor's catastrophic meltdown of the global economic system. Thanks for bolding that, you're saving lives.
    posted by nanojath at 2:45 PM on January 22, 2008


    “Actually, George and Smedley, I think the "pretend" aspect is over-emphasized in Malor's argument”

    Fair enough. I’m not that well versed in this stuff. I’m just popcorning.

    (and expressing general gratitude for the breadth of info)
    posted by Smedleyman at 3:01 PM on January 22, 2008


    Food storage people. Everyone needs to have 3 months food and water stored away for the hard times ahead.

    Mormon at all?
    posted by Afroblanco at 3:26 PM on January 22, 2008


    Oh yeah, and Malor sounds like a Ron Paul devotee.

    (not that there's anything wrong with that)
    posted by Afroblanco at 3:27 PM on January 22, 2008


    And finally.....

    The problem with the savings account approach is that its doesn't take into account the decline of the dollar against foreign currencies. If everything you buy is imported (most of it is), you're losing money even without taking inflation into consideration.

    Yes, and correct me if I'm wrong, but rate cuts have the effect of further devaluing the dollar. So, for me, rate cuts are an all around disaster, making the money in my savings account worthless and, at the same time, devaluing it relative to foreign currencies.

    This is wrong. Wrong, wrong, wrong, wrong, wrong. Our financial system should not be punishing people like me who are conservative with their finances.
    posted by Afroblanco at 3:34 PM on January 22, 2008 [1 favorite]


    Our financial system should not be punishing people like me who are conservative with their finances.

    Sure it should. Why should the financial critters let your money waste away to inflation when they can take it by having you invest?
    posted by ryoshu at 3:56 PM on January 22, 2008


    "the Mexican peso collapse"

    I have personally been trhough two of those.

    The first in 1982. I was very young at the time but I can still remember that some fifty peso coins I really liked (I called them "chichonas" --look it up) were literaly worthless a few months after they came out. I am talking about looking at this this through the eyes of a 4 or 5 year old, mind you: when the packet of Thundercats bubblegum cards costs 2 pesos one year and 200 the next one (and the coin is exactly the same one, just with more zeroes on it --imagine a quarter being worth $2.50 for a comparison), even your inner child knows something is wrong.

    Then, in december 1994 I was a little older (almost out of my teens), and I do remember the awful consequences, that last until now: the inflation was so large that they cut three zeroes from the peso. They didn't cut the inflation, just the zeroes. What was worth 500,000 pesos one day was worth 500 new pesos the next. We still carry this inflation around, though; people in Mexico tend to forget just how bad it was, because now "there's only 11 pesos to a dollar, and in 1976 it was 22 to 1"... well, no, because if you take into account the real value, there's 10,904.30 real pesos to a dollar. Not quite Zimbabwe or post WWII Germany, but some crazy inflation, nonetheless.

    This is something you do not wish would happen to any society, trust me. Maybe to the individuals who stole (or otherwise mismanaged, on purpose or not) the money to cause this, but even then, not much, because they will likely drag many people down with them.

    Just imagine your sallary being worth 10% than what it was worth a month ago (if you manage to keep your job, of course), and not only that, but everyting else too: your savings gone, your possessions worthless (both in that they are worth almost nothing compared to what you paid for them and that they are impossible to sell), the bank charging you up to 300% on top of the regular interest rate for any debts you had, and, generally, economic chaos all around.

    If this thing is turns out as bad as some of these comments have made it sound, well then, good luck to all.
    posted by omegar at 4:42 PM on January 22, 2008 [1 favorite]


    omegar: the US is a bit different because our debt is denominated in dollars, so inflation makes it easier to pay off and devaluation doesn't affect the current debt.

    But when I say "inflation" I mean wage inflation. And thanks to NAFTA and further globalization WRT India, China etc I really don't see that in the cards, except if & when the dollar decline 50% against the Euro and JPY, which would make American wage earners quite competitive on the labor market again.

    I'm not really a gloom & doomer . . . I think we'll muddle through, but it's going to take a decade or so and I don't see how the debt overhang isn't going to cause a Great Depression-scale turn in consumer sentiment and purchasing power.

    shorter me: I think the US is going to follow in Japan's "Lost Decade" footsteps, which is funny since I was living in Japan for the bulk of that timeperiod.
    posted by panamax at 5:34 PM on January 22, 2008


    Money is created via fractional reserve lending, but I have yet to see an adequate explanation for why CDOs and SIVs exist if all the lending is created by the Fed.

    They exist, primarily, to facilitate regulatory arbitrage(pdf), wherein a bank can hold less capital against the obligation (sometimes but not always moving it off the balance sheet entirely) than it otherwise would have to.
    posted by Kwantsar at 5:35 PM on January 22, 2008


    That's SIVs but not CDOs.

    How much of the blow-off top (2001-2007) of this chart was created via fractional reserve lending, vs. actual investors' money from China, OPEC, Narvik, the Florida MM fund, the GSEs, etc?

    50%? 90%? It's unclear to me still.
    posted by panamax at 5:53 PM on January 22, 2008


    That's SIVs but not CDOs.

    A SIV is a structure. A CDO is a security. Some SIVs contain CDOs. And, I repeat, the purpose of CDOs, by and large, was/is regulatory arbitrage. You take a bunch of paper, and the credit of the structured pieces is greater than the credit of the unstructured pieces. That is why they exist.
    posted by Kwantsar at 6:18 PM on January 22, 2008


    (just woke up) Thank you, Malor for, explaining at great length what I gestured at near the beginning of this thread, and would tried to explain again in detail if you had not done such an able job, as usual.

    The people in this thread who breezily accuse folks who talk about the larger problems here of chicken-littling, and point at the stock market as if that were the alpha and the omega of it all, confident that all will be well because it only lost a couple of percent on the day that the Fed shit its pants and made an 'emergency' rate cut, suggesting that that is somehow indicative of, well, anything: I hope they get through the storms safely too, I guess.

    I've said before that I wouldn't be surprised by a near-complete meltdown; nor would I be much surprised if it's nothing more serious than the last few bad patches, though I have very little faith in the ability of any of the actors in the drama to do anything but make bad guesses and apply polysporin to a shotgun wound. So I do lean towards the former.
    posted by stavrosthewonderchicken at 6:50 PM on January 22, 2008


    me, earlier: I think I'm going on a bender today. Sadly, I'm not actually kidding.

    BENDER ACCOMPLISHED.

    yes.
    posted by Justinian at 7:28 PM on January 22, 2008 [2 favorites]



    What a thread.
    posted by bukharin at 8:27 PM on January 22, 2008


    yerfatma - All I'm saying is that's how people make money long-term, by buying up the bargains presented by people (like those in this thread) who think every big event is "special" this time

    on 9-23-29 the dow jones average was 381.17

    the day that this record with an average of 382.74 was on 11-23-54

    that's over 25 years

    in other words, it is a definite possibility that someone could invest in stocks on day x and not see a profit of any kind until 25 years had passed

    and it wasn't the crash of 1929 that really killed things off - it was the slow, godawfully sickening slide from 1930 to 1932 that really did the market in

    the whole day by day numbers from late 1928 to today
    posted by pyramid termite at 9:12 PM on January 22, 2008 [4 favorites]


    So I was talking to my partner about why we feel so freaked out by this, given that we barely even noticed the dot-com or preceding busts.

    Then it occurred to me that we're both "past our primes." That is, in more-or-less accordance with our chronological ages, we find our capacities to absorb socio-economic shock significantly diminished.
    posted by treepour at 10:38 PM on January 22, 2008


    An aggregator for blogs discussing stocks.

    Zing.

    The US seems headed for a nasty recenssion.

    This are some visuals I like: a map of the market and Market Summary and the NASDAQ chart.
    posted by nickyskye at 11:22 PM on January 22, 2008


    *recession
    posted by nickyskye at 11:26 PM on January 22, 2008


    Asparagirl: thanks for the recommendation, I added that to my wishlist.

    Afroblanco said: Oh yeah, and Malor sounds like a Ron Paul devotee.

    I assure you, he didn't get any of what he's talking about from me.

    I would love to see him be the Republican nominee, not because I really want him to win, but some of his issues are very central to the core problems we're facing. From what I can see, only Paul and Kucinich have any idea that anything is even wrong, much less catastrophically so.

    This is wrong. Wrong, wrong, wrong, wrong, wrong. Our financial system should not be punishing people like me who are conservative with their finances.

    Amen to that, brother. The Fed is in the process, and has been for twenty years, of penalizing savers and rewarding borrowers. It's getting to the point now of outright ruining savers, not just forcing them to accept high risk for a reasonable return.

    FWIW, everyone, I really do hope I'm wrong. That would make me happier than you can imagine. But I don't think I am. Yes, there's some 'I told you so!' in my head, because I talked about this to the point of freaking exhaustion with my family.... who promptly ignored me, and who are now in way over their heads in their houses ... but I would much, much rather be considered (or actually BE) a cracked, raving lunatic than to actually be correct. It's like buying life insurance on a loved one... you certainly don't want them to have a heart attack.

    I can't even tell you how deeply and powerfully I want to be wrong. I really hope I'm the internet loser who cried wolf.
    posted by Malor at 11:49 PM on January 22, 2008


    I, like most of the world, don't have a couple of months cash squirreled away. Frankly, it is pretty bourgeois to assume that every rational person does. Rationality has nothing to do with it, being poor does.

    Don't worry, with the fed cutting interest rates left and right, and the ugly head of inflation peeking around the corner, all those folks with their two months salary squirreled away will soon be sitting on a pile of kindling. Huzzah!

    The Fed is in the process, and has been for twenty years, of penalizing savers and rewarding borrowers.

    YEP! Rainy-day funds are, by definition, funds you aren't pissing away on big-screen TVs and new cars (at least, when it's not raining). Inflation is a brilliant way of forcing your average American to SPEND their savings, because... well, shit... every day my pile of money buys me less stuff, so the rational thing to do would be to spend it as soon as I get it! Oh, sweet land of liberty, of thee I sing!
    posted by Civil_Disobedient at 5:32 AM on January 23, 2008 [1 favorite]


    I was thinking about this last night, and it occurred to me that a lot of this talk is perhaps an extension of the presidential election effect. So I went back and looked at the year leading up to the last presidential election. on Metafilter. And what did I find?
    Pop Goes the Bubble! Market Disaster Imminent
    On the eve of the Debates, Bad Economic News for Bush

    The United States is in Deep Doo Doo!

    I'm certainly not suggesting that Asparagirl has any political motivation in posting this thread. And I'm not suggesting this market issue is a result of the upcoming election. But it seems to me that there is usually more uncertainty and doubt in the markets before a presidential election, and that maybe that leads to a greater concern or magnification of things which are constant issues with any market-based economy. Or to frame it another way, the indiciations of a recession are certainly cause for concern for the market and should be there irrespective of political issues, but the chicken-little, armageddon-is-nigh attitudes seem to me to be likely politically driven in light of the election. Or, maybe I'm completely wrong about this.
    posted by dios at 8:14 AM on January 23, 2008


    Even though it is late in the discussion, I thought I'd post this tidbit here.

    The day before Black Monday, the stock market (DJIA) stood at ~300.

    Fri 1929-10-25 301.22

    Six months later it was again near 300.

    Thu 1930-04-17 294.07

    Two years later, it hit its real low.

    Fri 1932-07-08 41.22

    Which of the following lessons can be learned from this?

    A) Black Monday didn't start the depression so the depression never really happened.
    B) Rebounds don't necessarily stick.
    C) Black Monday is overrated.
    D) Statistics can be played with.
    E) Not quite all of the above.
    posted by dances_with_sneetches at 8:30 AM on January 23, 2008 [1 favorite]


    dios, are you conservatives so fixated on politics that you can only see things through that lens? This is a problem now because it's happening now. I've been talking about it for ten years to anyone who would listen, to the point of massive boredom, I'm sure. I'm amazed it's held together this long.

    The reason people are talking about it now is because it's falling apart now, not because of fucking politics. Jesus christ.
    posted by Malor at 9:02 AM on January 23, 2008 [1 favorite]


    I was thinking about this last night, and it occurred to me that a lot of this talk is perhaps an extension of the presidential election effect.

    cutting interest rates by .75% is not just talk

    having markets drop a sizable percentage in a few weeks is not just talk

    losing tens of billions of dollars through bad mortgages is not just talk

    from where i'm seeing it, the presidential election is becoming an extension of the recession effect

    the chicken-little, armageddon-is-nigh attitudes seem to me to be likely politically driven in light of the election.

    i think you'll find that those attitudes are almost always politically driven and that it's most often the extreme right that is most interested in them - like ron paul

    the thing is that right now those ideas are much more plausible than they were 4 years ago and the economics are now going to start driving the politics, even though i have my doubts as to whether anyone's program is going to be that effective if the doom and gloom scenarios happen

    i have the funny feeling that in 6 months we're going to be worried about something else altogether, even if the economy isn't doing well
    posted by pyramid termite at 9:04 AM on January 23, 2008


    losing tens of billions of dollars through bad mortgages is not just talk

    hundreds (~200) already. With at least another 200, and quite possible another TRILLION in losses still coming over the next 3-5 years.

    Or, maybe I'm completely wrong about this

    ah, the education of an idiot. Come to the light, dios! Someday you can be right about something!

    Frankly I really don't give a shit who wins in November. I'm a wealthy middle-aged white guy now so the Republicans are basically the party for me, personally.

    The democratic field doesn't have any leading lights, other than Russ Feingold and he isn't running.

    Obama is way too young and I fear rhetorical ability may not map well into true leadership and policy inititiave ability. The present Democratic Congress . . . not enough m-e-h keys on my keyboard to express my opinion.

    FWIW, I don't see financial armageddon ahead . . . just what the LA region experienced when I was there 1985-1992, and what Tokyo experienced 1992-2000 when I was there. hmm, I beginning to see a pattern here ;)
    posted by panamax at 9:21 AM on January 23, 2008


    The reason people are talking about it now is because it's falling apart now, not because of fucking politics. Jesus christ.
    posted by Malor at 11:02 AM on January 23


    I'll ignore the baseless insults and attempts to label and ask you to re-read my comment you are railing about.

    I provided you with links from the 2004 election where people were screaming "it's falling apart now, not because of fucking politics." See "Market Disaster Imminent" from March 2004.

    I'm not trying to question anyone's motivations in discussing this or deny that yesterday was a bad indicator for the economy. What I was suggesting is the idea that perhaps there are various market corrections that occur unavoidably or idiopathically, and that when these events occur in light of confusion and uncertainty of an election, they seem more dire or publicized. Again, this is not a good thing and portends ominously for the economic outlook. That is without a doubt. But what I am talking about is the level of hand-wringing.

    Look, I was purposing a question. A thought that occurred because I always seem to recall people screaming about how the economy is doomed in advance of election. So what I was mentioning was whether the apocalyptic view of what was going to happen yesterday was being magnified or buoyed by the upcoming election to a degree. Not wholly, but to a degree. Or to put it another way, if yesterday would have occurred in 1998, would the apocalyptic view of it would have been the same? Maybe it would. Maybe it wouldn't; maybe it would just been seen a correction the market needs to go through and recover from as a matter of course.

    If your only response to this is to insult me and cast aspersions to me, then don't bother responding. I was just putting a thought out there and wondering if anyone else notices this.
    posted by dios at 9:38 AM on January 23, 2008


    Someday you can be right about something!

    dios is Right about a lot of things.
    posted by oaf at 10:07 AM on January 23, 2008


    f yesterday would have occurred in 1998, would the apocalyptic view of it would have been the same?

    Well, I would have been relieved if we'd had yesterday in 1998. If we'd started the readjustment process 10 years ago, we'd have been long since past it and back into healthy growth. I think you'd have had very few major doomsayers, because with 10 years less maladjustment, it wouldn't have been such a big deal. In 1998, yesterday would have been a problem; in 2008, it's a crisis.

    We've been on borrowed time since 2000, when the original stock market bubble popped. The Fed has been going to ever-more-extreme machinations to keep things afloat, setting off more bubbles in the process. I wasn't paying attention that closely at the time, but 2004 was probably the last time their manipulations started to 'cool off'. The election-year timing was, presumably, more because of fiscal cycles than political ones. The cynic in me wants to observe that perhaps the Fed was trying to get the Republicans re-elected, but the realist hasn't seen any obvious signs of political favoritism.

    The only reason things haven't already blown up is because of wild irresponsibility; by endlessly trying to forestall the pain, they're making the situation ever more dire. The longer it takes before things fall apart, the more severe the damage will be. The current system is not sustainable, and will not work over the long term. We can't grow the economy forever on exporting dollars to finance consumption. It just won't work.

    Perhaps that game has finally played itself out. Perhaps not. We're finding out.
    posted by Malor at 10:51 AM on January 23, 2008 [2 favorites]


    I think we should vote Panamax off the island...
    posted by twsf at 11:29 AM on January 23, 2008 [1 favorite]


    Economics Journalist Robert Kuttner on the "Most Serious Financial Crisis Since the Great Depression": "This is the Result of Rightwing Ideology and the Political Power of Wall Street"
    posted by homunculus at 1:07 PM on January 23, 2008


    The market is up big time right now. Could be a dead cat bounce, but I wish I could see the look on the face of that whiny daytrader dude who posted the freakout video. If he had held his position he'd be up a bunch of money now instead of losing 85% of his stack. Never, ever base your trading decisions on panic. I made that mistake myself before I learned that I didn't have the constitution to be a trader but, luckily, it only cost me about $2000 instead of the $50,000+ it cost this guy,
    posted by Justinian at 1:09 PM on January 23, 2008


    Justinian: here ya go.
    posted by panamax at 5:34 PM on January 23, 2008


    We can't grow the economy forever on exporting dollars to finance consumption

    Fixed that for you.
    posted by flabdablet at 5:44 PM on January 23, 2008


    Going Bankrupt: Why the Debt Crisis Is Now the Greatest Threat to the American Republic
    posted by homunculus at 7:58 PM on January 23, 2008 [1 favorite]


    Overall, great thread, good topic, some excellent comments. Here's a few of my favourite books on this topic.

    The Great Crash, by Galbraith, is a classic, I've read it three times now and that's after Business School where it was required for one of my economics classes

    Goes into great detail on both the equity market and the real estate market mania's that presaged not only the market crash of 1929 but also the depression that followed (deja - wha?).

    If you believe crashes are a rare event, Manias, Panics, and Crashes by Kindleberger will set you straight. Markets crash all the time, about once a decade actually (of course we're not talking only about the stock or property markets). Kindleberger looks back to 1600 or so, and in an encyclopedic tome details the events, and discussed some of the preconditions and aftermaths. I've read this a couple of times, picked it up myself due to some research I've been doing in Behavioural Finance. Very interesting book, but bewarned - a dense read.

    The final book I'd recommend, one that is particularly appropriate given some of the comments upthread regarding the impact of derivatives and indebtedness is Empire of Debt, by Bonner.

    Curious book, and I mean that because its both funny and thought provoking. While talking about finance no less (ok, I read lots of finance books and its rare to come across one thats very entertaining). This book made the rounds on trading desks here in London about a year ago. Bonner is one of the people that I regularly read, most often via MoneyWeek, which is one of three financial publications I regularly digest (The Economist and FT being the two others).
    posted by Mutant at 12:29 AM on January 24, 2008 [2 favorites]


    Fascinatingly, it turns out that a good chunk of the recent drops in the European markets may have had more to do with the fact that a rogue trader at Société Générale set up huge deriviative trades which the bank have had to unwind at a cost to them of the order of 5 billion EUR.

    This might explain a good chunk of the difference between the sell off in EU versus US markets: the timing just happened to co-incide with the monoline bond downgrades by chance.

    How a trader was able to hide open trading positions of this magnitide in a modern investment bank is a whole other kettle of fish: ironically Société Générale was named equity deriviatives house of the year by Risk magazine at the beginning of January!
    posted by pharm at 1:47 AM on January 24, 2008


    Mutant, those are good recommendations, and I added Empire of Debt to my wishlist for the next book order.

    pharm: that's another example of derivatives exerting weird pressures on the markets underneath. They're dangerous financial devices.

    Just think: that means that one man forced the Federal Reserve to make probably the largest emergency rate cut ever. There may have been larger moves in absolute terms, but in relative terms, 0.75% on the already-low rate was absolutely gigantic.
    posted by Malor at 12:15 PM on January 24, 2008


    pharm, that doesn't make it any better. Such things have caused panics before. See the panic of 1907. That one rippled across the globe, long before we had such interconnected financial webs.

    Of course, what made it particularly bad was the lack of liquidity, which we can now inflate ourselves out of, as we are currently doing.
    posted by wierdo at 10:15 PM on January 24, 2008


    was the lack of liquidity, which we can now inflate ourselves out of,

    The Fed is trying to do exactly that. If they succeed, what will actually happen is a new round of derivative explosion, causing absolutely wild maladjustments, and possibly a hyperinflationary runaway. If they fail, we'll have a deflationary debt collapse.

    They may be able to tread the straight-and-narrow for a few years more, without tipping off into either hyper- or deflation, but the path gets narrower every year as the derivative mess erodes away the economy underneath.

    You CAN'T solve problems by printing fiat money. Money isn't wealth. Wealth is knowledge and unconsumed production, and printing more money just issues more claims on what already exists. It forces reallocation of resources into asset classes that are close to the source of inflation (ie, Wall Street). It does not fix actual problems.

    The reason we're having a liquidity crunch is because all the fake money floating around from derivatives (even more fake than the actual Federal Reserve Notes). Banks have discovered that a lot of that 'money' is no good. Trying to turn it into 'real' money is just rewarding stupidity. It will just cause more of the super-fake money to come into circulation.

    There aren't any GOOD solutions. A deflationary collapse would probably be the least bad outcome; hyperinflationary runaways do even more damage, a la Zimbabwe. The destruction in hyperinflation is often near-total, where a core economy appears to survive deflation.
    posted by Malor at 3:40 AM on January 25, 2008


    The darker side of interest rate cuts
    posted by Eideteker at 8:47 AM on January 25, 2008


    I'll post the second half of this week's Credit Bubble Bulletin. (That's a temporary link, and will break; if you want to refer to this later, you'll need to search the archives for the CBB of January 25, 2008.)
    More than 20 Years in the Making:

    It all began innocently enough: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

    The newly appointed Federal Reserve chairman, Alan Greenspan, released this statement prior to the opening of market trading on Tuesday, October 20, 1987. The previous day, “Black Monday,” the Dow Jones Industrial Average crashed 508 points, or 22.6%. All the major indices were down in the neighborhood of 20%, with S&P500 futures ending the historic trading session down 29%.

    The 1987 stock market crash was contemporary Wall Street finance’s first serious market dislocation. Stock market speculation had been running rampant, at least partially fostered by newfangled hedging and “portfolio insurance” trading strategies. When a highly speculative market began to buckle, the forced selling of S&P futures contracts to hedge the rapidly escalating exposure to market insurance written (“dynamic trading”) played an instrumental role in instigating illiquidity and a market panic.

    Following “Black Monday,” there was of course considerable media attention directed at the event’s causes and consequences. Some believed at the time the stock market was discounting a severe economic downturn. Others recognized the reality that the situation had little to do with underlying economic forces. The economy was in the midst of a robust economic expansion, while Credit was flowing (too) freely. Immediately post-crash, however, the financial system was extremely vulnerable and the Greenspan Fed acted decisively to ensure the marketplace understood clearly that the Federal Reserve was a willing and able liquidity provider.

    Credit then really began to flow. Greenspan’s assurances came at a critical juncture for the fledging Wall Street securitization marketplace; for Michael Milken, Drexel Burnham and the junk bond market; for private equity, hostile takeovers and the leveraged buyout boom; for the fraudulent S&L industry and for many banks’ commercial lending operations. While it sounds a little silly after what we’ve witnessed since, there was a time when the eighties were known as the “decade of greed.”

    When the junk bonds, LBOs, S&Ls, and scores of commercial banks all came crashing down beginning in late-1989 to 1990, the Greenspan Fed initiated an historic easing cycle that saw Fed funds cut from 9.0% in November 1989 all the way to 3.0% by September 1992. In order to recapitalize the banking system, free up system Credit growth, and fight economic headwinds, the Greenspan Federal Reserve was more than content to garner outsized financial profits to the fledgling leveraged speculator community and a Wall Street keen to seize power from the frail banking system. Wall Street investment bankers, all facets of the securitization industry, the derivatives market, the hedge funds and the GSEs never looked back –not for a second.

    In the guise of “free markets,” the Greenspan Fed sold their soul to unfettered and unregulated Wall Street-based Credit creation. What proceeded was the perpetuation of a 20-year myth: that an historic confluence of incredible technological advances, a productivity revolution, and momentous financial innovation had fundamentally altered the course of economic and financial history. The ideology emerged (and became emboldened by each passing year of positive GDP growth and rising asset prices) that free market forces and enlightened policymaking raised the economy’s speed limit and increased its resiliency; conquered inflation; and fundamentally altered and improved financial risk management/intermediation. It was one heck of a compelling – alluring – seductive story.

    But, as they say, “there’s always a catch”. In order for New Age Finance to work, the Fed had to make a seemingly simple – yet outrageously dangerous - promise of “liquid and continuous” markets. Only with uninterrupted liquidity could much of securities-based contemporary risk intermediation come close to functioning as advertised. Those taking risky positions in various securitizations (especially when highly leveraged) needed confidence that they would always have the opportunity to offload risk (liquidate positions and/or easily hedge exposure). Those writing derivative “insurance” – accommodating the markets’ expanding appetite for hedging - required liquid markets whereby they could short securities to hedge their risk, as necessary. There were numerous debacles that should have alerted policymakers to some of New Age Finance’s inherent flaws (1994’s bond rout, Orange Co., Mexico, SE Asia, Russia, Argentina, LTCM, the tech bust, and Enron to name a few). Yet the bottom line was that the combination of: the Fed’s flexibility to aggressively cut rates on demand; ballooning GSE balance sheet on demand; ballooning foreign official dollar reserve holdings on demand; and insatiable demand for the dollar as the world’s reserve currency all worked in powerful concert to sustain (until recently) the U.S. Credit Bubble - through thick or thin.

    Despite his (inflationist) academic leanings and some regrettable (“Helicopter Ben”) speeches as Fed governor, I do believe Dr. Bernanke aspired to adapt Fed policymaking. His preference was for a more “rules based” policy approach of setting rates through some flexible “inflation targeting” regime, while ending Greenspan’s penchant for kowtowing to the markets. Today, it all seems hopelessly naïve. Inflation is running above 4%, while the FOMC is compelled to quickly slash the funds rate to 3%. And never – I repeat, never – have the financial markets been more convinced that the Federal Reserve fixates on stock prices while being permissive of inflationary pressures. Today, the contrast to the ECB and other global central banks could not be starker. The Fed has climbed way out on the limb, and it is difficult at this point to see how they will regain credibility when it comes to either fighting inflation or supporting our currency. It is not only trust in Wall Street-backed finance that is being shattered.

    The greatest flaw in the Greenspan/Bernanke monetary policy doctrine was a dangerously misguided understanding of the risks inherent to their “risk management” approach. Repeatedly, monetary policymaking was dictated by the Fed’s focus on what it considered the possibility of adverse consequences from relatively low probability (“tail”) developments in the Credit system and real economy. In other words, if the markets (certainly inclusive of “New Age” structured finance) were at risk of faltering, it was believed that aggressive accommodation was required. The avoidance of potentially severe real economic risks through “activist” monetary easing was accepted outright as a patently more attractive proposition compared to the (generally perceived minimal) inflationary risks that might arise from policy ease. As it was in the late 1920s, such an accommodative (“coin in the fuse box”) policy approach is disastrous in Bubble environments.

    The Fed’s complete misunderstanding of the true nature of contemporary “inflation risk” was a historic error in monetary doctrine and analysis. To be sure, the consequences of accommodating the markets were anything but confined to consumer prices. Instead, the primary - and greatly unappreciated - risks were part and parcel to the perpetuation of dangerous Credit Bubble Dynamics and myriad attendant excesses. Importantly, the Fed failed to recognize that obliging Wall Street finance was ensuring ever greater Bubble-related distortions and fragilities – deeper structural impairment to both the financial system and real economy. In the end, the Fed’s focus on mitigating “tail” risk guaranteed a much more problematic and certain “tail” – and a rather fat one at that.

    Fundamentally, the Greenspan/Bernanke “doctrine” totally misconstrued the various risks inherent in their strategy of disregarding Bubbles as they expanded – choosing instead the aggressive implementation of post-Bubble “mopping up” measures as required. They were almost as oblivious to the nature of escalating Bubble risk as they were to present-day complexities incident to implementing “mop up” reflationary policies. “Mopping up” the technology Bubble created a greatly more problematic Mortgage Finance Bubble. Aggressively “mopping up” after the mortgage/housing carnage in an age of a debased and vulnerable dollar, $90 oil, $900 gold, surging commodities and food costs, massive unwieldy pools of speculative global finance, myriad global Bubbles, and a runaway Chinese boom is fraught with extraordinary risk. Furthermore, the Fed’s previously most potent reflationary mechanism - Wall Street-backed finance – is today largely inoperable.

    I’m not going to jump on the criticism bandwagon and excoriate Dr. Bernanke for his panicked 75 basis point inter-meeting rate cut. From my vantage point, the “wheels were coming off” and I would expect nothing less from our increasingly impotent central bank. Yet it is silly to blame today’s mess on recent indecisiveness. The Fed has not been “behind the curve,” unless one is referring to the “learning curve.” The unfolding financial and economic crisis has been More than 20 Years in the Making. It’s a creation of flawed monetary management; egregious lending, leveraging and speculating excess; unprecedented economic distortions and imbalances on a global basis. And I find it rather ironic that Wall Street is so fervidly lambasting the Fed. For twenty years now the Fed has basically done everything that Wall Street requested and more.

    It is also as ironic as it is predictable that Alan Greenspan - Ayn Rand “disciple” and free-market ideologue - championed monetary policies and a financial apparatus that will ensure the greatest government intrusion into our Nation’s financial and economic affairs since the New Deal. Articles berating contemporary Capitalism are becoming commonplace. I fear that the most important lesson from this experience may fail to resonate: that to promote sustainable free-market Capitalism for the real economy requires considerable general resolve to protect the soundness and stability of the underlying Credit system.

    And, speaking of the Credit system, some brief market comments are in order. Stocks generally rallied this week, yet it was a backdrop that provided little comfort that the system is beginning to stabilize. Sure, the banks rallied 10%, the homebuilders 20%, the retailers 7%, the transports almost 7%, and the restaurants 5%. One could easily assume that the bears were squeezed and leave it at that. There are, however, surely more complex and problematic dynamics at work. Notably, many of the favorite sectors were hit this week – the utilities, technology and biotechs all posted notable weakness. Coupled with this week’s extreme volatility, I will assume that the huge “market-neutral” and “quant” components of the leveraged speculating community have suffered even greater losses so far this month than those from last August. It is also worth noting that some important Credit spreads have diverged markedly, most notably many corporate, junk and commercial MBS spreads have widened as dollar swap spreads have narrowed. The spectacular Treasury melt-up must also be causing havoc for various strategies, ditto the recently strong yen and Swiss franc.

    I’ll stick with the view that an unfolding breakdown in various trading models and hedging strategies is at risk of precipitating a crisis of confidence for the leveraged speculating community. I suspect hedge fund trading was much more responsible for chaotic global securities markets this week than a rogue French equities trader. There is, unfortunately, little prospect for markets to calm down anytime soon. There is no quick or easy fix to any of the myriad current problems – seized up securitization markets, sinking housing markets, faltering bond insurers, counterparty issues, a crisis in confidence for “Wall Street finance”, or acute economic vulnerability - to name only the most obvious. Again, they’ve been More than 20 Years in the Making.
    -- Doug Noland, writing for the Prudent Bear
    posted by Malor at 2:51 AM on January 26, 2008


    Malor wrote: You CAN'T solve problems by printing fiat money. Money isn't wealth. Wealth is knowledge and unconsumed production, and printing more money just issues more claims on what already exists. It forces reallocation of resources into asset classes that are close to the source of inflation (ie, Wall Street). It does not fix actual problems.

    I didn't say I condone the Fed's policy of inflation, I was just observing. In fact, I think it's fucking stupid. The economic world as we know it depends on a much stronger dollar than the yahoos in charge seem to be willing to live with the consequences of keeping.

    Even if we don't suffer the severe pain that you've been predicting (and I don't think it's unlikely that we will), there will still be dislocation on a scale we're not prepared for in our position as the financial center of the world, which will only weaken the dollar further. On the bright side, the increasing cost of imports may spur more real economic growth, rather than the extreme atrophy we've seen in the production of useful durable goods that we've seen over the last 30 years.

    Of course, with the "new" bankruptcy laws, any economic downturn will be very painful for a lot of people.
    posted by wierdo at 8:57 AM on January 27, 2008


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