Wednesday, April 1, 2009

On Markets: Five Laconic Points

  1. Financial markets have discounted a grim global future similar to the Great Depression. Just look at share prices or credit spreads. Speculators have switched heavily to shorting.
  2. However, this is NOT the 1930s - no gold standard, more international financial and political co-operation, better understanding of monetary economics.
  3. In combating the crisis the Fed and Treasury have provided, loaned or guaranteed $13 trillion in new funds - equivalent to nearly 100% of US GDP. This enormous peacetime economic intervention is completely unprecedented in size and scope. It will have an effect.
  4. Therefore, we won't repeat the Great Depression. Not even close.
  5. Therefore, markets have over-discounted on the downside.
5a. Maybe the post should be titled Five Monty Python Points? "Snap snap, grin grin, wink wink, nudge nudge, say no more??


  1. And I guess you just assume that all the bailouts, rescues, credit facilities, taking on of junk assets for swaps, ZIRP, stimulus packages, etc.. will have ZERO unintended consequences?

    That the fed will perfectly and neatly take back the credit facilities and that there will be no problems borrowing funds by issuing treasuries to support these policy actions with very low rates? That there is no chance of a whiplash effect at the tail end of this?

    This is a great example of ignoring the side effects of these actions, ignoring that higher quality debt classes are deteriorating much faster than originally thought, that consumers are spending again, that debt can easily be rolled over, etc..

    Just ignore what possibly COULD go wrong, and focus on how it MAY go right. Yea, perfect investing advice.

  2. ...and assuming that the household is in great shape with solid balance sheets, no debts, great job security, and a solid nest egg of equity in their home and equity portfolios.


    stupid me I think I feel for it

  3. Hell -

    Any thoughts on inflation? There has to be a long-term cost to money printing?

  4. Re: inflation

    The Fed and Treasury are combating big deflation right now. So far, they have just "printed" money to replace what has been "torn up" by debt destruction and mark to market losses. That's in no way inflationary.

    What happens next? I don't know and I'm pretty sure Bernanke & Co. don't know either. This has never been attempted before.

  5. Hell, there is no "absolute" when it comes to money- well, maybe the Greenback ;-)

    But IF the world were on a Greenback standard, according to your own logic, we would be headed into a Great Depression.

    I say this not to criticize your Greenback proposal (far from it), I say this to illuminate where I think many of us (the market?) are getting confused. My hope is you can correct our confusion.

    If we look at what has happened in absolute money terms, it becomes the great depression.

    If we look at it on relative money terms, it does not.

    How do you reconcile these two incongruities in one investment/behavioral call to action?

  6. Hell,

    You are right on everything up to the last sentence, "markets have overly discounted on the downside." Look at the balance sheets and corporate borrowing costs. Once unemployment rises, there will be a lot more bankruptcys and lower stock prices for those that remain muddling through. Otherwise, agreed; the one downer compared to the 1930's is that there are a lot more urban dwellers than in the 1930s and moeurs have certainly declined for the population as a whole. This could lead to a lot of civil unrest. Let's hope not.


  7. Hell,

    Congrats on a great April Fool's day joke post.

    Joe M.

  8. Well, I thought "hmm mhm hmm WTF sounds almost like Ben himself wrote it!?", and then remembered about the good old april fools day...
    To avoid confusing any future readers trying to read past material, you better add "Ha ha, suckerz" or "No, I'm serious. Signed 02.04.2009"! :)

  9. Hel,
    May I recommend this article by Mike Hudson which presents a strong case for the destabilizing effects of $flows (and the consequent foreign push back) which may impact on your assessment of economic recovery:

    If the US can't continue to enforce acceptance of the $, will that affect your outlook?

    "...and moeurs have certainly declined..."; what does that mean?

  10. Maybe no 1930's depression, but the economy will linger sideways for a very long time like it did in the 1970's.

  11. @yoyomo

    Sorry, I had a Debra moment and showed some French, I could swear mores was spelled like that when I grew up. Anyway mores are cultural habits, courtesy, ways people interact, moral and immoral behavior, all of which have declined. Thanks for catching the mistake.


  12. I'm totally clueless as to where markets are going. I think in this environment you have to learn to change your mind a lot, and adjust your thinking. I think the bears that think the world is coming to an end are wrong. This is not WW3, and to me the worst case scenario is living like the Japanese for 25 years. Which would be an upgrade considering how well they live. On the other hand the people that think we are going to recover from this fast are probably wrong because so many Americans are deeply in debt and it will take time to repair that.

    Personally, I'm comfortable going long stock when the Sp500 was around 700. When it goes back there again I'll be picking up more shares.

  13. Speaking of MP, I think "bring me a shrubbery" would be more appropriate considering the absurdity of what we have witnessed thus far.

  14. I doubt that more speculators are shorting right now. If you look at the CBOE put/call ratio, it is at 0.90. That is a really low number to be calling a bottom.

    I hope that you are right, but fear that you are not.

  15. I remember in one of your you were saying that the US govt is trying to force all CDS trading from OTC to exchanges.

    Since the issuers of CDS tend to short stock to hedge their position, the reduction in CDS should cause stock price to go up.

    However if i am not wrong this reduction in CDS is also somewhat similar to a reduction in money supply, which should cause deflation.

    If this post is not an April fool joke, i presume that you are saying the fed will succeed in their quantitative easing unlike Japan?

    What about unemployment?

    Is it possible for you to further expound on why you think the mkt had hit the bottom?

    It would be great to know your view.

  16. I know that there are times when I am an incorrigible pessimist, but I think that heads are going to roll.
    Perhaps FIGURATIVELY...
    But heads are going to roll.
    And I'm not sure that things are going to get any better until TRUST emerges, which I do not see happening in all of this.
    "Moeurs" is just fine by me.
    I think that a smattering of ANY foreign languages in this blog will do wonders to improve our global understanding, and reduce U.S. EXCEPTIONALISM, if you see what I mean.

  17. "let them eat cake" vs "we need to keep the best and brightest"

  18. I agree with the analysis except that in the depression stock prices fell, I think, 85% in nominal terms and have only fallen 50% this time.

    We would need to have prices drop in half again, and then some more to replicate the depression.

    So I agree that, for the reasons you explain, that will not happen.

    That does not mean the the price drop we have experienced so far is overshooting.

  19. DK, it took 36 months for stocks to fall 89% to the trough as opart of the Crash that started in 1929; when we hit the 16.5-month point 5 weeks ago, we were matching the Crash of 1929-32 at 50%.

    You can monitor the fun at this great website by DShort where he compares the 4 Bad Bears.

  20. Not sure if this was an April fool.

    If not, where did rational expectations go? Knowing that the Fed has rescuing capacity should make risk-taking more severe.