The Crisis Is Building Based On U.S., Not Asian, Structural Weakness - Great Analysis

Discussion in 'Wall St. News' started by ByLoSellHi, Mar 1, 2007.

  1. Pay special attention to the last paragraph.

    After the Sell-Off
    Published: March 1, 2007

    In a way, the stock market’s rebound yesterday was as troubling as Tuesday’s rout.

    Ben Bernanke, the chairman of the Federal Reserve, managed to calm the market, saying that one could reasonably hope for a stronger economy by midyear if housing stabilized soon, and if manufacturing strengthened. But those are big ifs.

    The torrent of bad news on housing is only worsening, with a report yesterday that new home sales for January had their steepest slide in 13 years. And as David Leonhardt pointed out in yesterday’s Times, manufacturing has already slipped into a recession, with activity contracting in two of the last three months. How is it then that investors took Mr. Bernanke’s words as a “buy” signal?

    The short answer is that investors have a proclivity to hear what they want to hear. On Tuesday, warning bells were simply too loud to ignore, including the steep sell-off in stocks in Shanghai, downbeat reports on the United States economy and an attempt in Afghanistan on the life of Vice President Dick Cheney. Yesterday, investors needed only the slightest prod to revert to “hear no evil” form.

    The more complete answer is also more troubling. In recent years, as housing and stock markets surged, even highly speculative investors have been encouraged to an unusual degree by their bankers and regulators, who are supposed to restrain investors’ more maniacal bents, but instead have done little to quell or question excessive risk-taking.

    Just last week, Treasury Secretary Henry Paulson Jr. and top financial regulators said the government need not — and should not — provide greater oversight for the $1.4 trillion hedge fund industry, or, by extension, the trillions of dollars more in complex derivative transactions spawned by the industry. That stance is mostly free-market ideology run amok. But it is also based on the unproven assumption that unregulated investing, which dispersed risk and reduced volatility as markets surged, will continue to do so when markets tank.

    The upshot is a one-sided bet for investors. They have explicit assurances from regulators and policy makers that almost anything goes when the markets are hot, and implicit assurances — based on past experience — that the Fed would lower interest rates to contain a financial crisis should one erupt. Unfortunately, there is no guarantee that easing up on rates would have the same powerful effect in a future crisis as it had in the past.

    The next crisis appears to be building around weakness in the United States, not in Russia or Asia or South America. That means money could flow out of the country if markets were rattled. That would weaken the dollar and require speedy and complex remedial action by the world’s central banks — not just a rate cut by the Fed. Tuesday’s stock market decline could turn out to have been a garden-variety correction. But major market participants would be wise to rethink their assumptions.
  2. I was never great in economics classes, but if money is flowing out of the U.S., wouldn't the FED have to RAISE rates in order to make the Dollar more attractive? The article seems to infer that a rate cut would be the FED's action.
  3. I think that the money outflow would be due to deteriorating economic conditions - not currency considerations.

    So if the fed raised rates, that would further injure the economy.

    Your question is a good one, though.
  4. S2007S


    heard today that the chance of the Federal Reserve Cutting interest rates in July/August is very high now. Everyone is banking that if the market goes down even further that the federal reserve will come in and lower rates. Patiently waiting to see if this DOW can break 12,000
  5. Well, I think that's the conundrum the FED is in. A drop in rates is good for the markets, but bad for the Dollar, and vice versa. Since we have such massive debt, we have to keeping huge amounts of Treasuries. To do that it has to be attractive to the buyers. Hence the need for rates to remain attractive. That's my two-cents worth any way. I would like to hear from the more enlightened though.
  6. The shorts grabbed control of the ES Feb 15 and did not let go until yesterday.

    Each day from the 15th of feb they build an accumulating position on the bid, long before the China dive and long before that talking head Greenspan managed to get his pre-prepared speech in place.

    I tried to point this out to the knitting club
    over at the ES journal thread, but no takers there.

    It is all contained in the T&S gate if you go looking for it.
  7. Makes total sense. Our trade deficit and CA grow because foreigners support our consumption. However, if we slow there isnt a lot of reason to stick around. Thats why you cant trust interest rates at these prices. The fed could cut rates and the rest of the curve could go through a massive steepening. If you think the markets are crazy now. ...
  8. Money OUTFLOW? Guys you have it just opposite. Last year the most amazing fact was the percentage of invested funds from Americans that went overseas. Overseas mutual funds were the biggest winners and money managers really used the weak dollar to their advantage. NOW with risk in the air everywhere... are you racing to underwrite the bonds of a fledgling airline in Brazil? Or are you repatriating funds to the states.
    Money flow gentlemen and ladies. China is done. Now we have the fun.
  9. Good read. Thanks!
    #10     Mar 3, 2007