Thanks to Michael Panzner at Financial Armageddon, we can read for free an interview with 70-year-old money manager Jeremy Grantham. Grantham points out that business is run by managers, not by Old Testament prophets, and so he philosophises that crises will recur.
He also believes that this one isn't over yet:
The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap... it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging.
My 26 June guess at the trend for the Dow was c. 7,000 - 10,000:
If that means a midpoint of 8,500 and the overcorrection is 20%, then the momentary low point could be around 6,800, which at least suggests that the gap between my two red lines is approximately correct.
Friday's lowest point during the day was 7,773.71, still 10% away from the theorised minimum; and the Dow closed at 8,451.19. Yesterday it remained above the latter figure throughout, and rose to 9,387.61.
In short, Grantham must be reading this as a bear market rally, and it's not very silly to think that the Dow could come back to 7,000 at some point.
Good luck to the day traders, I haven't the nerve and speed to try to make a fortune on the bucking-bronco stage of the market.
Jesse relays a couple of charts from Steve Williams at CyclePro, and adds one of his own. As I read it, the implication of the CyclePro charting is that the end-point for the Dow at the bottom of the bear market could be around half its present value, in a process that might take 8-10 years.
Jesse's chart relates the Dow to the price of gold, and the implication of his is a drop of some 60% - but that could be achieved by a rise in gold, as well as a fall in the Dow.
Perhaps it is time for us to be making quiet, regular withdrawals from the cashpoint and building up a stash of truly instant-access cash. I shall start today.
This blog looks at the implications of failed investment bank Lehman's call on their "insurance" in the form of derivatives contracts. If everyone can handle the the cash call when it comes, good; if not, maybe a domino effect - one failure unbalancing another in a chain reaction. In particular, will hedge funds , who tend to play with borrowed money, be able to honour their contracts, or will they be the weak link in the chain?
Next up, says "George Washington", are the insurance and auto companies. It seems Standard & Poor's fear these could be the last days for GM and Ford.
I'm given to understand that players in derivatives usually balance their position with bets both ways; but they tend to be big bets. It's like a seesaw with an elephant at each end: if one elephant steps off, or turns out to be a baby compared to the other... What's the chances of $55 trillion of derivatives being well-balanced at all points?
So there are good reasons to think that next week is going to be more exciting than most of us would wish. Friday's Dow volatility may be repeated.
On Financial Sense, F. William Engdahl speculates that asset-backed securities ("toxic waste" mortgage packages) were sold to European banks in order to poison their wells and leave the world banking system dependent on the USA - and an elite group of American bankers.
One startling fact cited in this conspiracy theory, is that the office responsible for overseeing Credit Default Swaps had its staffing reduced from 100 to... ONE person. Giving evidence to Congress, the Chief Accountant of the Securities & Exchange Commission said "... there has been a systematic gutting, or whatever you want to call it, of the agency and its capability through cutting back of staff."
Oh dear, I thought conspiracy theories were for nutcases. Maybe I'm wrong.
This is a measure of monetary inflation. Increases here will eventually work their way into prices and wages. An explanation is offered here. Note that there has been nothing close to the highlighted "spike" in the last 25 years.
TBRRob posts a very useful YouTube interview with big investor Jim Rogers (the best analyses come from people who back their own judgments with their own money).
Despite the recent strengthening of the dollar, he is buying Japanese yen and Swiss francs; and commodities (especially agriculture), because they lead the way out of recession and their fundamentals are (he says) sound.
In the interview, he is challenged on his inflationary hypothesis: surely we are seeing "deleveraging" (reduction in borrowing) and don't we need more money in the system to deal with the liquidity crisis? Rogers cites past history and sticks to his guns
I think it was Marc Faber's comments that first helped me understand why all this public-money-throwing isn't going to help. It's NOT a liquidity crisis: liquidity is what has caused the problems (and anticipating the movement of the money tides is what has helped Faber grow his funds!).
It's a SOLVENCY crisis. If all your possessions are worth less than your total debts, borrowing more money will not help. So when the government creates massive extra funds for you to use, you will not wish to use them. And if your fellows are in the same position, you certainly won't wish to lend them any money you still have.
When you are insolvent, there are two ways out. One is to declare bankruptcy, in which case the money invested in you is lost and so excess liquidity goes down the drain. Good, though it's also painful (personal fortunes lost, people laid off).
The other way is to be unbelievably lucky, and have someone else pay-off your debts. When the government chooses to do the latter for the banks, it has to get the funds from somewhere, and ultimately that is the citizen/loyal subject. In this case, the liquidity is still in the system, and there is no drain to take it away. Sooner or later, it leaks out into the general economy and prices rise, because there is more cash to bid for the usual limited amount of goods and services.
(Or the government increases taxes, and uses the extra to pay-off debt. Nice idea, but increasing taxes slows the economy and creates more benefit dependants, which requires more taxes even as less revenue is coming in because business is suffering because people now have less spending money because taxes are higher, and...)
So there are two problems created: inflation, and moral hazard - the people who have been bought out in this undeserved way have no incentive to change their habits.
You may think that it's only a temporary problem and the government will recoup its investment when things get back to normal. The trouble is, "normal" means house prices dropping to about half what they were worth last year, because they doubled for no good reason in the five-year period before that. In the long term, I understand, houses are priced at 3 times income, not 6 times as during the recent period of monetary inflation.
So either the value of the excess credit is destroyed by bankuptcy, or by inflating away the money saved by more prudent people. Either the guilty (or foolish) suffer, or the innocent.
And here's another either/or: either we go this process again and again, or banks are prevented in future from increasing the money supply in the way they just did.
