zed.

in the meantime put options have some potential returns.

THEY CHEATED,they made the stocks worthless,with their insider trading,and crony capitalism,killed the goose

Let them all fail!

Hi
What little $ I had went to gold 8 months ago just so I might have some money for food. I feel for those who thought they had 401s. Yep you might be wrong about that 6000, 3500/4000 maybe. I spent a lot time getting my garden ready this winter. Sad day on the planet.
jo6pac

Been wondering when you might revise your 6k optimism, Ian.

Dugg

Just catching up on the day, but did Obama give a press conference where the questioners were members of Congress?!? Just saw a short clip with McInsane asking a question, er I mean showboating, and Obama making him look silly and petty.

I’ve never heard of anything like this. Fantastic.

Yep. And Obama was in charge. It was great.

i was playing around with a leveraged earnings model the other day, and came to the conclusion that 4700-5500 is the bottom quartile, at any reasonable confidence interval.

yup hes a silly petty old goat

Ian…what will this do to the dollar value. As gold made $1,000.00 do we have inflation comming?

What? no one has made the obvious edit?

So hang onto your hats, while we wait to see what the market gods, whose members include Bernanke and Geithner and Santelli, have in store for us.

I can’t understand economics, but I understand snark! I also understand that it’s about paychecks, not portfolios, dammit!

Your predictions from several months ago have been eerily close to on target, even ones that seemed quite unlikely at the time, such as the precipitous decline in the price of oil.

I particularly like your understanding that TPTB tried to arrange for things to fall apart after Obama took office, but you figured they would screw this up and it would begin to collapse ahead of time. Well done.

I hope you will be making a new list of predictions for us. Information is always good, even when the content of it is something we do not initially wish to hear.

Thank you Ian for all you are doing on our behalf.

Yep, that was like “oh gosh, I was going to get this really cool helicopter until you were elected, now I think we need a review of procurements”. Big thinker that McCain. Is Phil Gramm still on speed dial?

Watch it again right here

The big issue I see, as a small-time investor, is the uncertainty with the banks is taking the whole market down. Sure, a lot of companies are cutting back and lowering projections. But the huge declines are happening very quickly, and it’s because of the weight of the zombie banks that are only in business as long as the government pumps taxpayer dollars into them.

It’s time to stop saving the banker barons and their investors that chose poorly and take over these banks, fire the incompetent managers and reset the whole system. And then everyone has to accept that the fantasy economy created by the globalization freetraders is over. We’re going to have to become a country that’s more self-sufficient and have lower expectations for financial growth.

Thank you Ian.

I shall always believe that privatizing Social Security at the beginning of W’s second term had as its primary goal the putting-off of the reckoning that instead arrived a little earlier than TPTB planned.

Ian.

sincere question here. This is a get out the Monopoly money and just play around type of question.

What if the “toxic” mortgages were just paid off directly? That is, what if the bailout money was not lent through banks, but simply zeroed out the loans? What would happen with that scenario?

Just very curious. Not that that would happen in a million GOP dog years.

Ian, you’re scaring me. Oh, wait. It’s not your fault.

Still doofusizing here after all these posts on the economy…
Is the DOW the final and definitive measure of the health of the economy?
When historians write about this period, will they conclude that “And on the day the DOW hit xxxx number, it was truly over for the US economy, and with it, the world economy…”?

Now I lay me down to sleep,
Those old stocks I bought on the cheap
are worth less now than they were then.
When will this stop, I ask you; when?
Amen. Amen. Amen. Amen.

G’nite.

Globalization was a bullshit strategy that created more risk than reward.
We shrunk the middle class. It destroyed the labor movement and made the consumer economy obsolete. It moved our manufacturing base that made America a titan, of shore.
With shrunken job market a majority of Americans are headed to a thrird world lifestyle.
When the clobal economy was sustainable it was good for third world now not so much.

The bottom might be a multi-year trough, not a “V” or a “U”.

Geithner ain’t gettin’ this. The credit bubble will continue to deflate for some time, nothing will prop up prices. The banks, the people, the businesses, the government…. we are insolvent…

“Let them all fall”?

Be careful what you ask for. “All” includes the pensions of the middle class, premiums saved by insurance companies, bank accounts of municipalities counties and states, university endowments – I will write more on this frightening development – and the 401k’s of people who already retired and are now being impoverished. Among many others including the very charities we hope will take care of us in troubled times. Stay tuned and it’s not pretty.

They = us.

So again I ask what does that do the the value of currency? What is currency really tied to? What really makes the dollarable as an assest? What does currency express?

Thanks for that reminder, egregious. I was sitting here thinking, “wait, I am insolvent, too.”

I have dollars in the bank in the wallet…when does it become confererate paper like the cdos and other certificates?

This is so interesting. I remembered a few days ago your post from months ago about your 6,000 prediction. I looked it up and then tried to find a P/E for the DOW but couldn’t find one. I was wondering where the DOW was now and if earnings had changed and so changed the price bottom.

I agree as the market deflates the floor sinks. For all the talk, defense, and hoopla surrounding the plans of Obama and his team, it is clear that the markets aren’t buying it. I think the financial establishment did its work too well. It created a passive political establishment. Now when it needs strong, decisive political action, it gets what it paid for: politicians going through the motions.

One other thing. selise brought up AIG coming back for what is it now? its 4th bailout. I was wondering where all that money is going. I’m guessing naked CDSs which I think is criminal. But I was also wondering who and it seemed to me that hedge funds were likely culprits. So if Geithner’s plan goes through. He may take crap from banks and sell it with government guarantees to hedge funds buying with money they got through AIG. Again just a possible scenario but despite all the claims of transparency just about every aspect of where government is going and how it is spent remains opaque.

Is the DOW the final and definitive measure of the health of the economy?

It is just one indicator to try to figure out where we are in all this.

In the short term it raises the value of the dollar as the de facto world currency and because other currencies are also in bad shape (except the Yen)and debt is globally denominated in dollars, returning to dollars when paid off.

Long term, who knows? Probably devaluation, debt forgiveness, messy business.

Your cash is still good, your bank accounts up to FDIC limits are good for now, and your money market accounts are good for now. [insert here all kinds of caveats about this not being financial advice, ymmv etc]

I have been advocating for the last 3 years to have tangible things which cannot be taken away from you. Pay down your mortgage so that YOU own your house, not the bank. Same with your car. Cut back on unnecessary expenses. If you had half as much money next year what would you have wanted to take care of this year? I think that’s a little pessimistic but points you in the right analytical direction.

Buy things which are immensely practical. Insulation for your home. Blankets. Lanterns and flashlights and a generator. Second amendment stuff. Practical clothes and shoes [sigh]. Plant a garden and learn where your food comes from. Develop closer relationships with your family, friends, and neighbors because you are going to need each other in ways currently unknown.

More: take steps now to become healthy because you might not have that job with health benefits a year from now. Many jobs that you think are “safe” will have their benefits slashed and some of those safe jobs will be gone soon. Time to give up the smokes for real, start walking, drink less, take care of yourself to stay healthy because the safety net is fraying badly.

If you know where the bottom lies: share. If you can’t, how does that square with the other predictions. Timing is everything. A lot of folks were sharing predictions on either side of this recession. The only useful information has to do with when. Otherwise we have the broken clock model where the advice is useful once a day.

watertiger is upstairs!
McCain & Palin: Make Way for the Republican Whiner Krewe

There are some pretty good comments about the whole thing here.

To all, a bit of practical advice from a pesimist, an experienced stock market watcher, and, a perma-bear:

I will start looking for a bottom to the DJIA *beginning* at 5000. I do not believe President Obama will be as irresponsible as President Hoover was, but even if he makes *all* the right decisions I believe we are doomed to a bottom below 5000. If he fucks up, even a little, we may see a DJIA bottom nearer to 13-1400. You may not know this but the DJIA dropped from ~800 in 1929 to ~80 in 1932. If history repeats itself (as farce, to remember Karl Marx), then 13-1400 is our destination.

I am “all cash” (actual cash, CDs*, and Treasury bonds) at this point in the cycle and will remain so until I see one of the following…
(a) a return to 6000.
(b) an inflation rate above 5%.
In the first case, I am looking at equities (stocks) and in the second, I am looking at precious metals.

*many banks are bust, but they are offering high rates (4-5%)(relative to 0-0.15% Treasury bonds) in their search for cash. They are desperate? I’m taking advantage! As long as it is FDIC insured**, the worst that can happen is that I need to move the money when the bank goes bust.

**if you are worried about FDIC insurance, then you are one step ahead of me on the paranoia scale. Yes, the FDIC *could* go bust, but if it does, then the currency is gone and we’re back to barter. If it comes to that, I’m bust, so are you, and I go back to being a carpenter.

There may be people who actually know where the bottom is, if you are into that kind of tinfoil, but show a little mercy to a writer who was way, way out there saying it would fall to 6k when no one else was saying that. And who now is revising his own predictions to say that 6k might not be where we end up.

Your broken clock model gives us very helpful information — the market will either go up or down. Thank you for that. More nuanced predictions will come from people who are doing their best to help us understand what’s going on in the markets.

yves smith at naked capitalism: From the Banking Officialdom: So This is Meant to Reassure?

Guess the continuing deterioration in the stock market is beginning to capture the attention of the financial regulators. The Treasury, FDIC, OCC, OTS, and Federal Reserve issued a joint statement just after 4:00 PM

- snip –

Pretty much no one in the private sector (except bank management on their more delusional moments) believes the large US banks have enough equity. Back to the release:

Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.

Yves again. The boldface verges on comedy. The financial firms HAVEN”T been well managed, but evidently you’ve been asleep for the past six plus years. And there is no acknowledgment of what you intend to do about deficient private management, save throw more money at it, which does not sound reassuring.

The markets want action, not more words, I doubt anyone with an operating brain cell will take much comfort from this.

**if you are worried about FDIC insurance, then you are one step ahead of me on the paranoia scale.

It’s on my list. However, higher up on the list is their institutional capacity to process bankruptcies. Processing 3 or 4 small banks a week, when they are straining to find new hosts, is a very slow way to work their way up the food chain. FDIC does not have the manpower to process the bankruptcies of the largest organizations. You are looking at a forest fire and you have a garden hose. Good luck with that.

one of the strange things about the last few weeks is that my head says deflation, but my pattern matching emotional response say capital flight (the phase where the imf is still propping up some country while the elite get their money out and the debts get transferred to the public).

Hey, whoa, there, egregious, I made over 200 litres of hard cider from apples I scavenged in my ’hood from juice made from my own cider press…. now y’all are telling me I cain’t drink it?

Pass the cider, please? Apples are good for you. Especially macs.

it’s not just manpower – it’s also expertise. the fdic does commercial banks, not big multinational investment banks.

this is not an argument against nationalization, i don’t see any other way. but that doesn’t mean i see it as a panacea either.,

Right. People say, well just “close the banks”. That is not so easy, unless folks are willing to have the account of every person, and every municipality, charity, insurance company, and pension plan also go down.

Hi Selise, I see deflation as long as banks don’t lend and people don’t spend, no matter how much the Treasury borrows and prints money. The rich have no place to stash their cash except the mattress like us regular folk.

There are going to be some spectacular bankruptcies in the next 2 years. Some real surprises. My hope is that we can keep the banking system alive well enough to keep things from being beyond bad.

capital flight

Where’s it going to go?

Solace: in all liklihood we really have seen the last of the Bushes for a while.

Yes, but you have to ask yourself where can the money fly to?

Do I hear 2500, where the market was before electronic trading/computer-based modeling put an artificially steep upward kink in the staid old DOW around about 1980 to 1985?

In the Fall of 1974 I picked 3,500 bushels of macs in NH. But I prefer Northern Spy for its keeping qualities.

The rich have no place to stash their cash except the mattress like us regular folk.

if i were a country with a big dollar reserve, right now i’d want to be making massive investments in commodities like oil or materials needed for building alternative energy production. stuff that has a real value to peoples’ lives regardless of what the markets do.

how does one save for food 5 years down the road? petroleum.

at least that is my simplistic pov.

Sorry. I meant 1500. in 49 above

my head guesses being destroyed via deleveraging.

6,000? Who was predicting 5,400 based on P/E ratios? Guess it wasn’t Ian. But that’s been my target for switching my 401K back in a stock index fund (and I didn’t come up with it myself, that’s for sure). But I gotta say, I don’t know that there is a floor left underneath us. So much is falling apart so fast lately (not to mention the last 18 months since the start of the credit crisis). I’m definitely waiting until the dust settles. Even if stocks are a bargain, I doubt they’ll take off on a rally like we’ve become accustomed to since the early 80s.

Which is exactly what the Chinese are doing all over the dang place. Not simplistic at all, it has been their plan for years as they accumulated dollars form of our debts.

I thought they stashed their cash in tax haven countries? Much more upscale than a mattress with embarassing stains in the middle.

egregious,

the government will, I truly believe, be nationalizing (or pre-privatising, or whatever else you want to call it) 80-90% of the banking system within the next year or two. The bankruptcy of the majors (Citi, BofA, Wells Fargo, etc) is only the first wave. Once the Commercial Real Estate bankruptcy wave peaks, most of the small and intermediate banks will also fall.

At that point we’re back to FDR’s “bank holiday” no matter what Mr. Geitner wants and we get to see how well the federal government is at running a banking system. I believe they will do well and that the system can be broken up and returned to private ownership in 2-3 years.

One of the smartest catch phrases I’ve heard recently is “too big to fail is TOO BIG!” and I believe we need to go back to community banks doing 3-6-3 banking*

* 3-6-3 banking = deposits at 3%, loans at 6%, golf course by 3PM. In other words, simplestupid banking. The last thing you want is a banker that is “innovative.”

Screw that. It’s carnival time. I know the season is wrong, but in the spirit of N.O. this catastrophe needs a hurricane party.

brad setser has been on vacation, but i just checked and he’s back today (setser is the guy i read for china – he used to be at RGE with roubini but is now at cfr). here’s a bit that’s going to make me crazy: China’s record demand for Treasuries (and all US assets) in 2008

On one point though there should be no doubt: China’s government is no longer adding to its foreign assets at quite the pace it once was. Something clearly changed in q4 2008. The growth in China’s foreign assets slowed even as China’s trade and current account soared. The most likely explanation is a rise in speculative capital outflows.

wtf? as everyone asked – where could it be going? usa t-bills?

i guess we’ll find out in a year, but i’d kinda like to know now. anyone have any thoughts?

am going to have to read setser again in the am when i’ve had some sleep and coffee.

house prices go up when people have money to buy houses

people have to eat
they don’t have to own stocks

the put has come to shove

“…The last thing you want is a banker that is “innovative.”

Nicely articulated. I second the motion.

I understand that people run to gold when things get dicey. What I’ve never quite understood about that strategy, however, is that gold has no inherent value. You can’t eat it, you can’t use it as fuel, you can’t wear it, etc. Barrels of rice and petrol sound like a better bet to me.

Thank you, Shoto. I work at a place that “does” economics and we regularly rate low in “innovation” in organizational surveys… and I like that! Our numbers are good, and we are consistent over time.

What if the “toxic” mortgages were just paid off directly? That is, what if the bailout money was not lent through banks, but simply zeroed out the loans? What would happen with that scenario?

The tax payer would bear ALL of the cost of the fraud and all the speculators, stupid banks and mortgage companies would walk away without so many scars.

It would be totally unfair.

Houses have lost a lot of value, so those who hold those mortgage-backed-assets need to bear some of the cost of this disaster. Question is, how much should be borne by banks, mortgage companies, brokers, home owners, tax payers.

Well, the government has helped prop up big banks, but an awful lot of firms have had to write off huge amounts of value because of the declining housing values their assets are tied to. Should they bear a lot more of it or do home owners have to lose more?

These are political questions as well as economic or a matter of justice or practicality.

Definitely, make arrangements to get that health checkup NOW if you have insurance. Any deferred health care or dental work. Extra pairs of prescription glasses. Some extra locks for windows or doors. If you do have a lot of money above the FDIC level break it down and put it in separate accounts. Get a passport.

Is the DOW the final and definitive measure of the health of the economy?
When historians write about this period, will they conclude that “And on the day the DOW hit xxxx number, it was truly over for the US economy, and with it, the world economy…”?

No, not at all. There was a time when it was a much closer indicator, but that was probably pre ‘93.

I think a lot of people were confused by the apparent growing wealth of the 1990s when an awful lot of it was actually going to the financial sector (New Yawk). Now that paper bubble has burst and they’re suffering and dragging everybody else down too.

At least the direction the Dow is heading is indicating where the economy is going and perhaps how fast.

I may be overly optimistic, but I’ve felt that since Obama took office it has been a good time to buy non-financial stocks. If the market completely tanks everybody’s screwed, but if it turns around you’ve got good stocks at good prices.

I’m still more worried about deflation.

It’s only part of the puzzle but it would help a lot. It’s not how I would necessarily do it, because it rewards investors and banks who invested in and created fraudulent securities, but it’s better than what they’re doing now.

Sorry, I’m not that good a market timer. Few people are (though I did predict the month the market would collapse in last year, but I consider that very lucky and not repeatable). If that makes my info useless to you, so be it. My own opinion is that knowing what will happen is useful. I regularly have people tell me that listening to me a year and a half ago saved them a LOT of money. And I regularly hear people say that not listening to me a year and a half ago is a big regret of theirs.

That said, this is not trading advice. Again, I am not a market timer and I am not giving market timing advice. If that’s what you want their are services that provide it, but the reputable ones generally don’t know months in advance. When I did trade my general rule wasn’t to necessarily know in advance it was to know when a bear market had probably turned and when a bull market had gotten so over-bought that you were in danger territory and should be in cash.

It’s easy to know what will happen and hard to know when, for a good analyst. But even a year and a half ago most analysts were saying what has happened wouldn’t happen.

Have Uncle Sam nationalize the big ivestments banks and declare all of those CDS void – last I read, that would wipe out 30-50 TRILLION DOLLARS in CDS debt the banks owe. Because to have the tax payers fork over that kind of moneys is just not possible. Also, I have heard nothing said by the administration or MSM on CDS’s or other types of this kind of garbage.

Any floor is optimistic

Stocks only have the most tenuous underlying value. Yes, they are a part ownership of the company. But this only comes into play on liquidation, in that owning a share doesn’t allow the holder to demand from the company any valuation of that share of the company’s worth. And, if the company is forced into liquidation, debt-holders will be made whole before shareholders, who would get nothing in most cases. Yes, owning a share buys you that share in the governance of the corporation. But, aside from any but really huge shareholders not controlling enough of a shar of this franchise to make its exercise meaningful, corporate governance is so screwed up that even these large shareholders can’t exercise any control. Corporations are mostly the creatures of their CEOs and his clique, however much, formally and theoretically, the CEO is just hired help. You only even get the attention of the ruling group if your stock control gets close to the 51% you need to be the next emperor.

To almost all intents and purposes, the only value stocks have is market value, what you can get the next sucker down the line to pay for them. Yes, yes, they can pay dividends, but since most of the “investors” in this market expect to make their ROI from the appreciation in market value, the corporation is only forced to give out dividends to whatever extent it thinks it needs them as window-dressing for the occasional kvetch and noodge. What most people buying in this market want drives what everyone can get, and these days that’s the promise of appreciation. But a market driven by such promises has to bubble, guaranteeing that the promise won’t be kept. At which point people start to leave the market, and the folks left in can’t find that next sucker.

P/E ratios, or Q-values are wonderful theoretical exercises, but you have to remember that whatever validity they could possibly have at fixing a market price is strictly empiric, not based on any deep understanding of how the market works. I don’t think that we have data on a timeline more extensive than, say, the last century, to base such empirical validity, and this past century has not clearly been at all typical or representative of what we have to expect going into the next century. Stock markets have been around for many centuries, and resets essentially to zero such as the crash of 1929 were what was expected for most of this time, not some anomaly.

Before I started law school in 1972, the Dow Jones was at about 700 and I was advised by various brokerage firms I interviewed with that there was no future in this business. Life goes on.