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Generational Dynamics Web Log for 23-Nov-07
CNBC's Steve Lieseman talks about Armageddon

Web Log - November, 2007

CNBC's Steve Lieseman talks about Armageddon

In a discussion on Friday morning on CNBC, CNBC's chief macroeconomics commentator compared what's happening now to the worldwide credit crisis that occurred in August. That crisis, you'll recall, was resolved by unexpectedly large interest rate cuts by the Fed. Lieseman described what he's been hearing people say lately:

"I want to give you the flavor of what I'm hearing from people in the credit markets. And the story I'm hearing is that it's worse now than it was back in August. I'm hearing worse comments, like Armageddon out there in some of these credit markets.

ABX and Swap Spread screens referenced by Lieseman (Source: CNBC)

ABX and Swap Spread screens referenced by Lieseman (Source: CNBC)

It's an easier story to tell than it was back in August, because you're seeing it reflected in equity markets.

I want to run through a couple of screens here.

Take a look at the ABX. This is a market for insuring mortgage bonds or mortgage derivatives, and that's down - this is the close of business on Wednesday. That's not good -- it's below the August level by quite a bit.

Then take a look at a wider market, which is the swaps market, and this is a swaps to treasury spread -- and you can see that it's actually higher now than it was back in August. And what you see there -- this is just a measure of risk aversion. The higher that number is, basically, the more risk averse people are. ...

Bottom line is that relative to August -- and equities have caught on to this it seems -- credit markets are doing worse.

We're awaiting a fix. There is increasing talk about a government fix here -- not letting the market sort this out on its own."

Jack Bouroudijian of Brewer Investment Group gushes over stock market (29-Dec-06) (Source: CNBC)

Jack Bouroudijian of Brewer Investment Group gushes over stock market (29-Dec-06) (Source: CNBC)

Before continuing with this, I'd like to remind the reader of an article that I wrote in December of last year, entitled "Financial analysts gush at stock market's meteoric rise." In that article, I quoted what Jack Bouroudijian of the Brewer Investment Group said on on CNBC:

"This has been a wonderful six months for the market. And the worst thing about it is that we underperformed the rest of the world. So it's really of question of whether we're at the beginning of a multi-year run in equities. I guess that's the big debate. When you've got these superstar fund managers like the Bill Millers of the world, that are underperforming that are still unbelievers out there, that makes me even more bullish than I am. And we see all this data coming out and this is absolutely everything that you want."

Bouroudijian's extremely gushy remarks were contrasted to the more sober remarks of others.

Randall Dodd, director of the Financial Policy Forum (29-Dec-06) (Source: CNBC)

Randall Dodd, director of the Financial Policy Forum (29-Dec-06) (Source: CNBC)

In particular, in that same article, I also quoted Randall Dodd, director of The Financial Policy Forum, who gave a warning about the coming crisis in credit derivatives:

"I don't want to be alarming, I'm just trying to raise people awareness about these issues. I would look at the credit derivatives market. We've had some problems in clearing and settlement of those contracts. We've had problems with people trading more credit derivatives than there is underlying debt. And right now there's one big issue we have to look at -- it's that a lot of our major banks and broker dealers are moving their credit risk off their books and into hedge funds. So you have financial institutions with capital requirements reducing the amount of capital they use by moving that credit risk into hedge funds which have no capital requirements and often use very high leverage to manage their credit risk of selling credit protection through this credit derivatives market."

Now that these warnings about credit derivatives are coming true, it's interesting to look at how attitudes have changed in the past year.

Randall Dodd's warning is no long considered "alarming"; it's part of the general discourse today, and now for the first time there's even talk of "Armageddon."

Bouroudijian appears on the CNBC panels pretty often, and he's consistently gushy. To him, the market can go in only one direction -- up, then up some more. He uses words like "unbelievers out there" to indicate that it's all a matter of faith.

Well, now the question is this: Has Bouroudijian changed at all recently, now that the market has been falling fairly steadily since the October 9 high?

Here's how he responded on Friday morning to a question about what would be necessary for a year-end rally to occur:

"I think one of the things we're going to have to see is the dollar stabilizing a little bit. You and I know that one of the problems out there is the speed at which the dollar is deteriorating. It's OK for the dollar to go down in a controlled manner, but what's been happening lately has been scaring a lot of portfolio managers.

One of the things that I like is that there is so much negative press out there. If you read the NY Times today, then there's an article about the Japanese basically calling it quits in America. Remember that this is the same group that bought the top.

Lieseman and Bouroudijian argue about government intervention. (Source: CNBC)

Lieseman and Bouroudijian argue about government intervention. (Source: CNBC)

And as far as Steve is concerned, Steve, you're talking to people who were looking at NO PROBLEM WHATSOEVER early in the summer. And now they're looking at Armageddon, now that all the news is out. Well that tells me that we're very close to a bottom. I love that kind of press."

Well, Bouroudijian is always good for a chuckle. But there are some very interesting things about what he said:

He's conceding, for the first time ever that I've heard from him, that the market is going down, and may continue to be going down, at least for a while.

He refers to the "speed at which the dollar is deteriorating." This is an interesting phrase because it indicates that he's seeing signs of panic.

He quickly returns to the usual "bad news is good news" attitude that we hear from bubblehead investors. The news is very bad, therefore we must be near a bottom, and therefore the news is very good. Things like this drive me absolutely crazy.

Lieseman responded to Bouroudijian as follows:

"I'm going to take you on a little bit on that. I think this is one of those things where "negative" is not a marginal consideration -- it's a real consideration. And I think in order to turn the market around you need two things -- visibility on one, the problem, and two, the solution. And I don't think we're close to that.

You need a sense that you're not going to come in in the morning and get whacked from the side that you've never heard of before, which keeps happening. Almost every day we hear a new thing coming out. That's one.

And two, you need a sense that either the government or the markets or some combination of the markets and the government have their hands around how to put a fix into the system. I don't think we're anywhere near the bottom on either one of those two stories yet."

There was some further arguing between the two over whether it's appropriate for the government to intervene in the market system, with Bouroudijian firmly opposed to any such intervention.

What's interesting about that discussion is the unstated assumption that there IS a government fix that would work. Is there really a government fix for everything? What if there ISN'T any government fix? No one considered that possibility. After all, the government has been so successful at fixing everything else, so naturally they have a fix for the credit crunch crisis as well, don't they.

Let's take a look at one more indicator:

MarketPsych Fear Index -- 23-Nov-2006 to 23-Nov-2007 (Source: Marketpsych)

MarketPsych Fear Index -- 23-Nov-2006 to 23-Nov-2007 (Source: Marketpsych)

I've referenced the MarketPsych investor fear index several times in the past, most recently on November 3, when I wrote that it was forecasting sharply increased market turbulence. The graphic above presents the index as of Friday morning.

Notice that there's a sharp upward spike on the right-hand side. That spike may or may not hold. In watching this index, I've noticed that spikes often disappear within a day or two, as more data comes in. So that spike may or may not disappear.

What IS significant, however, is the permanently elevated level of the index for over a full month. This is at the same level as the one-day spike in February over the Shanghai stock market panic, and it's almost as high as the August level. This index was at a low on January 19, and has been trending upward ever since, indicating an increasing level of investor anxiety throughout the year.

And this is the main point that I want to emphasize today.

When I wrote my August 17 article entitled "The nightmare is finally beginning," I wasn't referring to what was happening to the stock market indexes; I was referring to what I perceived as a sharply increased level of investor anxiety.

Because really, nothing special has happened to the stock market indexes in the last few months, or even this year. You could take this year's stock market performance and drop it into almost any year in the past six decades, and it wouldn't be considered particularly exceptional or noteworthy.

From the point of view of Generational Dynamics, what's important are the changes in attitudes and behaviors of masses of investors, entire generations of investors. The ups and downs of the stock market are irrelevant, except insofar as they reflect the changes in attitudes and behaviors of the masses of investors.

What's different now is that something big has changed since July 19, when the market reached the historic high of Dow 14000.

The triggering event appears to have been the July 18 Bear Stearns announcement that its hedge funds were almost worthless, thanks to writedowns of CDOs. By August 17, when I wrote the "nightmare" article, it was very clear that things had changed dramatically.

What we're seeing now is a huge change since July 19. Attitudes and behaviors have changed enormously. And the market itself is reflecting these changes, through its steady downward drift since it reached its new history high of Dow 14164 on October 9.

As I've been saying since 2002, Generational Dynamics predicts that we're overdue for a generational stock market panic and crash, as happened in 1929. This is based on the simple fact that price/earnings ratios have been astronomically high by historic standards, and that the stock market is overpriced today by a factor of about 250%, same as in 1929. (23-Nov-07) Permanent Link
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Generational Dynamics Web Log for 23-Nov-07 CNBC's Steve Lieseman talks about Armageddon

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Generational Dynamics Web Log for 23-Nov-07
CNBC's Steve Lieseman talks about Armageddon