Saturday, April 05, 2008

Awaiting the caning

Karl Denninger reports here that the Dow's price-earnings ratio may be overestimated by a factor of 4. And here, that financial institutions will have to bring Structured Investment Vehicles back onto their books within 12 months.

The reckoning - the painful correction - approaches.

Doug Noland (April 4) agrees:

It is my view that our economy will require a massive reallocation of resources. We will have to create much less non-productive (especially mortgage and asset-based) Credit and huge additional quantities of tradable goods. In the “services” sector, there will no choice but to “liquidate” labor and redirect its efforts. Throughout finance, there will be no alternative than to “liquidate” bad debt, labor and insolvent institutions – again in the name of a necessary redirecting of resources. After an unnecessarily protracted boom, there will be scores of enterprises that will prove uneconomic in the new financial and economic backdrop. “Liquidation” will be unavoidable.

Will our wise leaders in the UK learn from this?

P.S. How come (Denninger, here) the Dow p/e appears out of whack by 53:13, but the S&P 500 only 20:14? The latter implies only a possible 30% drop, which is a bit less apocalyptic than the 75+% of the Dow!

Generally the Dow and the S&P have followed similar trajectories over various periods, with a little widening in the last 12 months:

4 comments:

John East said...

It sounds quaintly old fashioned, redirecting resources and having a national strategy.

The last 30 years, in both the UK and US, our economies seem to have been managed on a day to day basis. The central banks have been reactive, and politicians focused almost exclusively on presentation, perception and the next election.

It's hard to see how anything resembling a strategy can come out of this system.

We can but hope that a dire crisis will force the powers that be to act more responsibly, but there seems little chance of this before the elections in 2009/10.

dearieme said...

Things will get worse before they get much worse.

Semaj Mahgih said...

It is my view that our economy will require a massive reallocation of resources. We will have to create much less non-productive (especially mortgage and asset-based) Credit and huge additional quantities of tradable goods.

This is not exactly rocket science, Sackers. But more importantly, in my view, is that unit cost of goods must be dragged back to parity with wages, whatever it costs.

But the bstds won't do that because it is their raison d'etre.

SACKERSON said...

I fear you are all correct.

James, I assume you mean wages must come down, or alternatively there must be much more capital investment to increase productivity.

Is it some terrible flaw in our democratic system of givernment, that we must wish for disaster so that it will overcome the resistance to taking corrective action?