Covered WFC yesterday, I rather play the banking sector though weaker names. Particulary JPM(which Roubini is claiming could end up as bad as C if his economic forecast is right), GS, and perhaps BOKF(lots of commercial real estate) The Dow Jones is having its worst start since 1900. This comes after a stock market crash in Oct and its the 2nd top to bottom decline ever. So the stock market clearly thinks 'this is different', the credit market is already there and a number of private investors are also joinning a depression camp
Interesntly enough. Robert Barro just had an op-ed on the WSJ saying something similar http://online.wsj.com/article/SB123612575524423967.html 'Our data reveal 251 stock-market crashes (defined as cumulative real returns of -25% or less) and 97 depressions. In 71 cases, the timing of a market crash matched up to a depression.' The only disagreement I would have with his article is that he seems to argue that a stock market crash is only a predictive element for a depression, when in fact it also helps to CREATE one through both wealth effect of lower consumer spending(as extensive reseach shows) and lower corporate investment as greenspan work's has demonstrated
Bingo! We are really seeing this in the wake of the government conversion of preferred to common of Citi. The insurance cos are in meltdown mode. With losses from holdings of bank securities along with large obligations on variable annuities tied to s&p performance. Honestly I don't see how this can go on. We are one step away from "THE END" The government is in a corner and "may" take radical action. Probably not a great time to be short.
It scares the crap out of me to see that the stock market performance is the worst ever for the amount of time it went for http://www.smartmoney.com/Investing/Economy/Even-Worse-Than-the-Great-Depression/# Meanwhile we had 0% rates, fiscal packages, no major protectionist move, bank recaps(which in the 30's it took till 33 I believe) and yet the market is worst than during the 30's where money was tighter, smoot-hawley had already passed (although its effects werent fully on yet) and the treasury secretary was an austrian 'let it collapse' type That could mean that animal spirits are even worse now and people are panicking or that leverage and global connections are bigger and that is having an impact Either way I'm getting more scared everyday
It's gonna take something massive/controversial to break the downgrade death spiral. The US government needs to realize that IT is in control and can make/change any rules it wants to preserve "the system". no sign of that yet though.
Since the markets are supposedly a zero-sum game, for all the equity losses that most retailers and funds suffered, there has to be a small group on the other side of the trade who have earned tons. The question is, where have they parked their money?
No there doesn't. The world is net long investment assets. The number and size of shorts is tiny in comparison. The people who have 'earned' money are those who were not invested, and can now buy stocks, houses, corp bonds or luxury cars for far less than 18 months ago, and the 3 people who were short and stayed short all the way down through every 20-30% rally, and who don't also go bust when the S&P finally doubles in 6 months off the bottom. As for when it will end: PE of 6 or lower, yield of 10%+ on blue chips. Stocks at <0.5 times book value. When sentiment reaches the point of maximum pessimism. When houses sell for 2 times average earnings, and 60% of replacement cost. When everyone who can't hold on is forced to sell and finally liquidates. When every buy & holder goes to cash. When every baby boomer has their ludicrous naive beliefs about the markets shattered. When most of the financial system is finally liquidated. Most importantly, when a bull market starts again.
Think of a prison with 100 people inside. The total money supply of this economy is $10,000. Lets say during a bubble period lets say the price of cigarretes of this economy goes from $1 a pack to $50 a pack, the means the amount of money exchanged for that pack goes up but the money supply never changes. During boom years you have some economic agents(basically whoever gets a supply of packs from outside) gaining purchasing power, the people that are selling their inventories during the boom years are locking in their new found wealth. During the bust the holders of packs are losing wealth, losing to whom?To the people that sold during the boom also the people who sold at $40 before the price tanked to $15. The guy who bought at $15 and sold at $13 is 'gaining' from the guy who bought from him at $13 and held all the way down to $2 and so on. They gain to the extend they pass the losses to somebody else(Or they lock gains during boom years) the others lose to the extend they get to buy the garbage assets and keep holding on the way down Now, in assets where there is an in-built tendency to rise(like stocks) the game wont be zero-sum(or negative sum) since there is a tendency for the price to inflate thus posponing the final 'bust' forever
A simple way to understand this is to realize that in that small economy with static money supply, the financial markets simply transfers money supply from one hand to another and real wealth(purchasing power) ends up on the hands of those who timed the market correctly or are invested in assets that are sure to recover given enough time. So the answer to your question is, the money parked in the US financial system(checking accounts, money market funds, savings accounts, etc though the particular share of each one is always changing) like it always was, its just that the ownership of that money has changed
Interesting interview with Buffett on CNBC http://search.cnbc.com//main.do?tar...date&minimumrelevance=0.2&pubtime=0&pubfreq=h http://search.cnbc.com//main.do?tar...date&minimumrelevance=0.2&pubtime=0&pubfreq=h http://search.cnbc.com//main.do?tar...date&minimumrelevance=0.2&pubtime=0&pubfreq=h He actually makes some points that austrians dont seem to understand on why you cant allow the banking system to collapse, I was never able to articulate that argument so well but buffett does it http://www.cnbc.com/id/15840232?video=1056711901&play=1 His point is capitalism doesn't work if people are worried about their money in banks, risk taking dissapears. Bernanke has stressed that point as well. The damage to animal spirits that ongoing collapses, losses by depositors, more collapses from interlinks(there is no healthy large US banks to 'take over' once the bad ones fail, they are all interconnected) would be so severe it would lead to more deflation, foreclosures, bankruptcies which would continue to feed on itself. Even if healthy banks appeared to 'take over' people would be under FEAR, so rational behavior would not necessarily take place, that is unless the government steps in and says 'your money is good, dont worry about it' His bank plan is to have the government apparently guarantee every depositor and bondholder to US banks. This would probably work because right now people are using stock price and CDS quotes to get more or less worried about their deposit money, which is fueling more fears. Then the government feels like they need more injections to control the fear