While prognosticating about the current situation and state of the market, I started thinking more about the roaring 20's. What a fine time it was, markets doing well, people generally happy and the sentiment was that it was going to go on forever. Not too unlike the last couple of years, and if you listen to some economist, they are saying the party will continue (I disagree). So looking back at the 1920's, the biggest reason the markets melted down was an over-extension of credit and leverage on equities, I believe it was 10:1 at the time. So a small snowball came rolling down the hill and became an avalance under the weight of leveraged magnification and we all know the end. Looking at what has recently transpired, one can only (or should) be very concerned by this lesson in history. Not only are we in a grossly over-extended credit situation, but the leverage within the system is mind boggling. For example, the two Bear Stearns funds that imploded early on in this story were levered 20:1 and 30:1 (I can't recall the exact ratio, but I believe these to be close if not correct). This leverage is embeded throughout the system, and is one reason why everything is freezing up. Like reading your rearview mirror, the risk is much larger than it appears. What is really disturbing is the fact that we have become desensitized at the monetary amounts being thrown around here. We hear of multi-billion dollar writedowns and losses now on a daily basis, and judging the broad market action and sentiment, seem to completely ignore the severity of the situation here. Long Term Capital Management almost caused a systemic failure less than 10 years ago, and that was on roughly 2 billion! Today Paulson spoke about systemic market failure and the job of the government to try to avoid this. The government is scared to death and you should be too.
I agree wholeheartedly. The other day it amazed me when Citigroup "decided" to move $49 BILLION onto the balance sheet to avoid credit downgrades. Who really believes the crap is worth more b/c it's temporarily avoiding a downgrade? More importantly, I checked the total market cap and it's the 50 Bil is about a third of the total for all of Citi! Nobody seems to care at the moment, but that dosen't make it any less absurd..
as each red day advances, the bears continue to tighten their grip one notch at a time. Rallies continue to be sold hard at every opportunity it seems and the technicals are beginning to weigh heavily in my view. There could be some spectacular downside to come here in very quick order I presume...
Outlook for 2008: Markets and the Economy Next year doesn't look bad. I'm wondering what happened to that recession we're suppose to be in since June though GDP is running at 4.9%.
Somebody then explain what would happen if we get the big meltdown?? I don't mean just a big sudden stock market meltdown; I,m talking about a meltdown in our whole economy like if China decided to no longer buy our debt. What would be the best position to be in>>even though there are curbs to slow intraday slides in the major indexes does that stop there from already being a huge decrease in say the S+P futures some morning when we wake up.....like could ALL stocks already be lower buy say 35% before the market even opens? .... and then further decreases would be slowed by the curbs...do the S+P futures have any curbs that would slow an overnight fall? This makes me wonder about what I,ve read in all the trading books about gaps down in a stock. Take for instance WCG that plunged over 70 dollars the day of the raid and 6 dollars suddenly today>>THE TRADING BOOKS SAY THAT A SPECIALIST ACTUALLY HAS TO PURCHASE ALL THOSE SHARES THAT ARE SUDDENLY SOLD AND HE/SHE ADJUSTS THE PRICE MUCH LOWER....SO LOW THAT HE KNOWS HE WILL EVENTUALLY MAKE MONEY ON THE TRADE............Can you professionals that know how the world really works explain to us if that really happens? Is there anymore somone that really physically purchases all those shares or do they just suddenly adjust the bid and ask hugely lower? (since its all electronic anyway)
1920,s 87, not going to happen, period. The rally came 900 points before the fed cut again. The market priced in the cut, then sold it. Period. Sub Prime mess is bad but there are healthy RE markets and the economy is stumbling along. The problem will hit those that are "Credit" out of their eye balls. Those who took in the Subs but will not be able to pay the baloon. The majority of the people are still spending, but will pull back. We will have a recession but nothing like what is posted on this site. The dollar is getting killed and will continue to get killed with no end in sight, just breathers. BUSH fucked up with IRAN, they are no longer a "Threat" according to new reports....per sa. This is going to cause many to sigh and believe the bullshit. The threat of War extending is all but lost. America Will limp along into the elections. Trading will dry up....if not trend sideways for most of 08, barring any "Black Swan". These are my personal beliefs based on patterns, news and "Stars and the moon". And common sense. The CRASH is no where in sight, the BEAR MARKET is.
I agree with the OP. One of the major problems in 1929 was the 10:1 margin that was allowed. Now we have "fixed" that, only giving retail investors 2:1 margin. But if you are rich you can put your money in a hedge fund at 30:1 leverage (or whatever they can convince people to give them).