The ongoing financial turmoil and financial discussion thread

[Slava]

Originally Posted by Claeren

The scary part for me is (putting it the same way I have read a couple times) that the economic system has cancer yet the system/government is trying to sell you a car crash.

Once they clean up this alleged car crash there is STILL cancer to deal with....


I am not so concerned about where the bottom is in the equities market as I am about where the upside is within the next 2-10 years? Companies values are based upon easy credit, low interest, high leverage, etc. This stock drop is just the beginning.

The effects are just starting to be felt and who knows what will happen with the American dollar, inflation, interest rates, etc. But I do know one thing, this is far far far from over and keeping cash on hand may be better than investing back into the market too soon. Seems to me the real bottom will be when even those trying to sell people on the 'stocks on sale' concept have faded into the night...

And I would be super careful with equities priced in USD. You would have to be up 50% just to overcome the loss on the dollar over the past few years, and that dollar could plummit at any moment that foreign debt holders finally pull the plug....



Claeren.

I know what you are saying here Claeren, but you also have to be careful in that type of analysis. If you look at the underlying areas that make up the GDP in the United States things are not as bleak as you might think. In fact if you removd just two of these the growth this year would be %3.5! Housing is one of the underlyers that matters and it is down by 0.5% this year for example...but with the market being decimated as far as it has been there is not much more than it can go.

Another factor to consider is that the recovery will begin in the markets sooner than it will appear in the marketplace. In other words you will see some share price recovery in the nearer future. My suggestion to you is to expect that the bottom of the market will be somewhere between now and December, and the top of the market sometime in the next millenium all things considered!

[Claeren]

The thing that is scary is that the term "depression" is for when the economy is in a car crash. It hits a few quarters in a row of negative GDP growth.

Of course sustaining that over time is a "depression".

What no one talks about is 'lower than inflationary growth' but 'higher than negative growth' for a very extended sustained period. This sort of economic 'cancer' is more what I think we are looking at but a lot of 'experts', especially those too close to the problem, are having trouble labeling.


As I have said with Japan before here, there is no reason that an economy cannot just flatline for decades and decades on end.

Once this mess is stablilized I think that is what we see -- not sure what it will be called.



Claeren.

[Claeren]

Originally Posted by Slava

I know what you are saying here Claeren, but you also have to be careful in that type of analysis. If you look at the underlying areas that make up the GDP in the United States things are not as bleak as you might think. In fact if you removd just two of these the growth this year would be %3.5! Housing is one of the underlyers that matters and it is down by 0.5% this year for example...but with the market being decimated as far as it has been there is not much more than it can go.

Another factor to consider is that the recovery will begin in the markets sooner than it will appear in the marketplace. In other words you will see some share price recovery in the nearer future. My suggestion to you is to expect that the bottom of the market will be somewhere between now and December, and the top of the market sometime in the next millenium all things considered!

Unless 'real industries' in the 'real economy' have been reliant on all of that easy capital in order to grow. In which case they would lag the financial equities market first, and then drive the equities market even lower later.

And that is before factoring in the fact that a 50% depreciation in the USD has made the American economy seem a lot healthier than it was for the past 3 years.

If the USD drops another 50% (which IS a very possible policy option especially in light of the billions in currency the US-gov is printing right now) it won't matter how individual companies look on paper when you have lost 50% off the top on the exchange.

Tied up in all of that is inflation. "Core inflation" is a joke of a measurement, REAL inflation has been higher than GDP growth in the States for a couple years now and it is not going to ease. In fact hyper-inflation could well be next on the agenda.


I guess I just start sounding like a perma-bear versus all of these perma-bulls but I have been very close to dead-on in my rantings (more real estate but economics in general) for the past 18-24 months or so.... although much of what I am saying is just mean revision -- which is scary in that we are that far from the mean!



Claeren.

[Bobblehead]

Except that there were lessons learned from Japan.

This bailout was, in large part, developed because of what was learned about what it took to end the Japanese crisis. On top of that, Bernanke specialized in the economics of the depression.

So I think that many lessons from the past have already been put into play here. But if there is anything I know, it is that Economics is a relatively young science. Even if all the lessons of the past are followed, this may be a new lesson to learn.

Based on what has been learned, the correct steps are being taken. Now it will take time to figure out if these are the right steps for this crisis.

[Table 5]

Didn't the Japanese gov't really only step in to the picture in 1999, after almost a decade of languishing and hoping the problem will fix itself? While not as fast as it should've been, it seems like the U.S is being a lot more proactive about things.

[Nancy]

Originally Posted by Bobblehead

Except that there were lessons learned from Japan.

This bailout was, in large part, developed because of what was learned about what it took to end the Japanese crisis. On top of that, Bernanke specialized in the economics of the depression.

So I think that many lessons from the past have already been put into play here. But if there is anything I know, it is that Economics is a relatively young science. Even if all the lessons of the past are followed, this may be a new lesson to learn.

Based on what has been learned, the correct steps are being taken. Now it will take time to figure out if these are the right steps for this crisis.

Say what... What I remember of the Japanese crisis was that the Japanese government was criticized for continuing to prop up bad banks, thereby delaying the restructuring that was required.

[Slava]

I think that the Japanese example and the US example are far different cases for a lot of reasons. In your case Claeren you might want to stick to GIC's if you really feel that the economy is as bad as the case you make (not a shot at you; just being realistic).

[Table 5]

Probably not a bad time to buy gold either huh? I mean if the economy tanks, your gold will go up. And if it recovers, gold might go down, but hey, everything else will go up.

[Phanuthier]

Originally Posted by Table 5

Probably not a bad time to buy gold either huh? I mean if the economy tanks, your gold will go up. And if it recovers, gold might go down, but hey, everything else will go up.

I've thought alot about why people buy gold ... but really, we don't even use gold as any sort of metric anymore. Unless the entire currency system collapses, is there any point in buying gold?

[Claeren]

Originally Posted by Nancy

Say what... What I remember of the Japanese crisis was that the Japanese government was criticized for continuing to prop up bad banks, thereby delaying the restructuring that was required.

Exactly.


The banks have to either be completely nationalized with their bond and/or shareholders completely wiped out or they have to be allowed to fail completely with their bond and/or shareholders completely wiped out.

The longer they put that off the longer this lasts.

Just like in Japan where they tried to help everyone and make sure no one had to live up to their mistakes and poor risk taking.

Trillions in bad debt needs to disappear off the books before the markets can recover and to do so trillions of dollars supporting that debt must be forfeited by someone. At this point it seems to be mostly the tax payer but frankly the American-gov cannot afford to absorb ALL of those losses (as they are bigger than the ecomomy itself) so something has to give.

Right now America is headed in the Japan direction where they will keep printing more money, they will keep propping up companies that should be dead and they will keep their 'friends' out of trouble as much as they can. No two scenarios are ever perfectly alike but their are similarities and similar moral hazards.

Over a long enough run the markets always balance. You cannot do all of the things that have been allowed to happen in America over the past 5, 10 and 20 years and not have a sustained and major fallout.




Claeren.

[MoneyGuy]

Originally Posted by Phanuthier

I've thought alot about why people buy gold ... but really, we don't even use gold as any sort of metric anymore. Unless the entire currency system collapses, is there any point in buying gold?

Gold is a decent hedge against disaster. If you believe the world is going down the toilet (I don't), buy gold. Interesting to note that gold goes nowhere for years, then spikes up big time and crashes also big time. If you look at its performance over many years, except for the fact we're in a big spike up now, it's basically done pretty well nothing. I don'gt want gold. Those bricks make big lumps in my mattress.

[Phanuthier]

Originally Posted by MoneyGuy

Gold is a decent hedge against disaster. If you believe the world is going down the toilet (I don't), buy gold. Interesting to note that gold goes nowhere for years, then spikes up big time and crashes also big time. If you look at its performance over many years, except for the fact we're in a big spike up now, it's basically done pretty well nothing. I don'gt want gold. Those bricks make big lumps in my mattress.

Thanks for the reply MoneyGuy. So let me get this straight. Everyone who is pouncing on gold (aside from speculators, and speculation is still a idea I struggle to understand - not how it works, but how it even survives) ... are those thinking the monetary system is going to fail?

I can understand if you're in Zimbabwe or Moldovia or Chechyna and you don't trust your countries currency. But jesus ... if the US money system fails, there's more to worry about they your portfolio.

[Mccree]

Since were are talking about gold, if the US needed to raise alot of money could they not just sell the gold they have at Fort Knox?

Why do countries even stock pile gold?

[Slava]

^ If the US monetary system fails to that point you should buy some chickens and shotgun.

Speculators survive because they can make an enormous amount of money in a short period of time. I tend to agree with MG on the gold point though; but to really capitalize you would've had to been in when things were horrific for the gold market and bailed out at the top...in other words time the market.

[Bagor]

Originally Posted by Mccree

Since were are talking about gold, if the US needed to raise alot of money could they not just sell the gold they have at Fort Knox?

I was thinking that too and wiki'd it.

Suggests their reserves wouldn't cover it.

The United States' holding of gold is worth approximately $241 billion (July 2008).

http://en.wikipedia.org/wiki/Official_gold_reserves

Was speaking to my brother about all this this evening who works in the financial sector. He seems to think that currently the two economies that will be able to absorb the global impact of this the best are the $Aus and SA Rand.

[Nancy]

Oh My God...

On the Glen Beck show tonight they are discussing the economy and a couple of guys on the panel are telling people to put all of their money into staples like food and supplies and not in cash or investments. The D- word is being thrown around like crazy. On CNN.

[MoneyGuy]

Originally Posted by Phanuthier

Thanks for the reply MoneyGuy. So let me get this straight. Everyone who is pouncing on gold (aside from speculators, and speculation is still a idea I struggle to understand - not how it works, but how it even survives) ... are those thinking the monetary system is going to fail?

I can understand if you're in Zimbabwe or Moldovia or Chechyna and you don't trust your countries currency. But jesus ... if the US money system fails, there's more to worry about they your portfolio.

Not necessarily. They may just have a very pessimistic view of the situation, but not necessarily that the monetary system will fail.

[LChoy]

Originally Posted by fotze

Those Peter Schiff clip that someone posted are a brilliant description of all this (like a destruction for dummies). He has been shorting the subprime loans since 2006. Actually explains how all this came to be in laymans terms. I guess the wall street guys in the $9000 suits on the same panel were laughing at him when he was giving this speech

http://www.youtube.com/watch?v=6G3Qefbt0n4

http://www.youtube.com/watch?v=8hFmoTjljpw

http://www.youtube.com/watch?v=qBk4PhdhCFQ

Wow, I took the time to watch it all. It's a really good watch. Really answers all my questions about how all this came to be

[RougeUnderoos]

Originally Posted by Nancy

Oh My God...

On the Glen Beck show tonight they are discussing the economy and a couple of guys on the panel are telling people to put all of their money into staples like food and supplies and not in cash or investments. The D- word is being thrown around like crazy. On CNN.

That may be their opinion, but there are a lot of other economists who are considerably more optimistic. Unfortunately "optimistic" these days usually sounds like "it's going to be bad, but the sky isn't falling, and we are a long way from a depression".

[Table 5]

Originally Posted by Bagor

He seems to think that currently the two economies that will be able to absorb the global impact of this the best are the $Aus and SA Rand.

Curious what that opinion is based on?