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Generational Dynamics Web Log for 3-Nov-2008
Markets enter another turbulent week, as effects of bailout are questioned

Web Log - November, 2008

Markets enter another turbulent week, as effects of bailout are questioned

Investors seemed very optimistic for the first time in weeks on Friday, according to Art Cashin, UBS floor manager for the New York Stock Exchange. He described it this way, completely contradicting remarks he's made in the recent past: "It looks less and less likely that we’re going to get a significant retest and/or break of the lows. This rally looks like it might have some legs."

The market did close higher on Friday, which was the first time in several weeks that the market went up two days in a row. So it took only two days to turn Cashin from a hard-nosed analyst into a mushy Pollyanna. It's not too hard, is it. These people are really desperate for good news.

If you look at the recent past beyond just two days, you can see something quite different. Here's how John O'Donoghue of Cowen and Company, LLC, described it on Bloomberg tv: "But I'll tell you I've been doing this a long time, and to see the dramatic moves in the last 5 or 10 minutes of every day, where nobody knows where we're going, is quite disconcerting to say the least."

Playing the stock market today is the equivalent of playing a roulette wheel. For the last several weeks, the major characteristic of the stock market is a huge movement at the end of the day, often several hundreds points one way or the other on the Dow within a few minutes. This huge movement is caused by panic buying, but more often by panic selling by hedge funds and mutual funds to meet margin calls and collateral calls.

In this environment, all short-term indicators are totally meaningless. I'm not exaggerating in the least when I say that no one knows what's going to happen in the last half hour of the trading day, since it appears to be completely random.

So betting on stocks today is more likely than not to be a losing proposition in the very short run, but that doesn't even include the expectation of a stock market crash. So for those who are considering getting back into the stock market, unless you're addicted to gambling -- in which case you should start going to Gamblers Anonymous meetings -- do not under any circumstances get into the market at this time, or in the foreseeable future.

Here's how a member of the Generational Dynamics forum sees the current situation:

"I have traded the SPX futures market before, spending an entire year doing nothing else back in the 1990's. I don't know of any trade other than maybe timing some interday options plays that doesn't promise anything short of total financial destruction. The declines and advances going into the close aren't about huge orders on either side, but instead I believe about huge speads between bid and ask being put into the system by the market makers, plus a premium being charged on either side to be in or out of the market over night. I counted the fade into the close when the market bottomed on October 10th and I believe the last 23 minutes lost 438 points. It had just rallied about 800 on a straight line in the prior 50 minutes. The idea that anyone has the skills to get on either side of a move like this is absurd. We are talking about a market full of air. The close Friday bottomed out with 13 minutes left then rallied about 150 points. There have been some hot trading days in the past where a 150 point move would be considered huge, yet we are seeing it in 10 minutes time over and over again. This is more than oversold or overbought as the moves go in both directions. This is about a lot of stock needing to move with no one on the other side.

There is an absolute delusion out there that people are waiting to get back in this market. They didn't get out. I doubt $150 billion of public money got out of this market before the decline, about 2 or 3 days trading volume at best. The biggest problem facing the market are almost zero bonds being issued right now worldwide. A few investment grades and that is it. So, we are going to get this market going again without any bond money? Money can't go in both directions and it is clear the problem is a lack of capital in the system, which portends toward more selling to reduce leverage instead of a plunge back into stocks. We are looking at 3% dividends and lower for the entire market while high grade bonds in the top echelon of companies are returning around 7% or higher from what I can deduce. We are a long way from a final bottom in this market. If John is correct, we still have a generational crash ahead of us or better yet, we have a group that just might go down with the ship."

In fact, many analysts are expect a 20-30% market correction as part of a "crash event" for a "capitulation," and Generational Dynamics predicts that we do have a generational panic and stock market crash ahead of us, as regular readers know.

The major question being debated by investors is whether the $700 billion bailout will work to end the credit crisis.

Once again, we hear a lot of mind-numbingly Pollyannaish statements from commentators. One of the worst and most bizarre I've heard was from CNN commentator Fareed Zakaria on Sunday afternoon. Here's what he said:

"Before we get started, some thoughts on the current economic crisis.

For the last few weeks, I've been something of a contrarian. I've been making the case of optimism, relatively speaking. Yes, we're in a deep financial crisis, yes a deep recession is on its way, if not already here, but the world is not coming to an end.

And I feel this week there's a bit more evidence that things are stabilizing. Look, capital is flowing into the banking system, credit is beginning to thaw, stock markets are stabilizing somewhat.

The next phase of the crisis has spread to emerging markets, but even there, we're seeing a spirited response. The IMF has suspended its usual bureaucratic delays, and very stringent conditions, and it's putting together a loan package in excess of $100 billion for countries like Pakistan, Ukraine, Brazil, and Mexico.

Now, the reason that this crisis will not turn into a Great Depression, fundamentally, is that the governments of the world are throwing everything they have at it. And governments are more powerful than markets. They can shut down stock trading, nationalize banks, print money, whatever it takes. In the end, the government will win.

The next phase of this struggle will begin next Tuesday, when America will elect a new President. That person will have a mandate to make big changes to the economy, to get it moving, which means what, a large stimulus package, investments in energy, support for homeowners, all of which will boost confidence. And confidence produces economic activity. So be an optimist. It's good for the economy."

This is exactly the airhead attitude that's gotten us into so much trouble in the first place, and has continually been making the problems worse.

Why will the government win? China is a country where the government (the CCP or Chinese Communist Party) has almost complete control of the economy. The CCP has been trying for years to cool down the country's bubble economy, with no success whatsoever.

Until this year, when they're finally getting what they wished for, except that the Chinese economy is crashing, as the economic bubble collapse, and now the Chinese are desperately trying measures to blow the bubble up again, which will surely fail.

As I've said many times on this site, mainstream macroeconomics could not predict or explain the dot-com bubble of the 1990s, the credit bubble of the 2000s, the credit crisis, or how we got to where we are today. Mainstream economics has been wrong time after time after time.

So how the hell can Zakaria be so sure that governments even have the vaguest idea what's going on, let alone how to fix it?

It's pretty obvious that Zakaria's views are the standard Obamamania views. The reasoning goes like this: "Obama will win on Tuesday, and the Democrats will win big in the Congressional races, so Obama will be able to do what he wants, and he'll know what he wants to do, and he'll do it, and everything will be wonderful and fine, because President Obama will make it so."

This would be fun to watch if the consequences weren't so serious.

Incidentally, I've quoted Fareed Zakaria before, in a 2006 article called "Learning-disabled journalists and politicians continue to predict Iraq civil war." Zakaria was an ABC commentator at that time, and I quoted him as saying, "If you look at the last 3-4 months, it's absolutely clear that a civil war dynamic has set in. This is happening. ... The trend is moving in the wrong direction on every issue that relates to a building civil war."

Zakaria had been making similar predictions for years, but was apparently too learning-disabled to realize that when you're wrong week after week, then it's time to change your predictions.

Actually, Zakaria's new statement is so bizarre, I could hardly believe it. He said, "And governments are more powerful than markets. They can shut down stock trading, nationalize banks, print money, whatever it takes. In the end, the government will win."

I've given hundreds of examples throughout history where governments most certainly did lose. I can't imagine what Zakaria is thinking.

Commentators have been pleased during the past week, because Libor, and other measures of interest rates for inter-bank lending, have come down, indicating that banks are more willing to lend money to one another.

However, that just means that the Fed is guaranteeing all interbank loans. The Fed's new bailout problem is also guaranteeing some types of commercial paper, and those forms of credit increased last week as well.

But a Financial Times analysis finds that the bailout is having a "negligible" effect on the market as a whole. For companies not on the Fed's Christmas list, the credit freeze is as tight as ever.

According to the article, "If the objective - or rather, objectives - of the world’s governments through their suite of emergency financial measures is to sustainably normalise markets and stabilise the world economy, then they are palpably failing." It points out that even the portions of the program that appear to be succeeding will fail again immediately as soon as the Fed bailout funds are withdrawn.

As I wrote last week in "What's coming next: Understanding the deflationary spiral," it's actually not mathematically possible for the bailout to work. The huge credit bubble of past years is now leaking quickly, probably at the rate of $1-2 trillion per week, and the world's central banks cannot possibly keep up with that loss.

And so, from the point of view of Generational Dynamics, nothing has particularly changed in the last few weeks. Ever since the credit crisis began in August, 2007, we've seen the governments of the world try everything they can, and we've seen pundits and commentators say that the worst was over, and they've been wrong time after time after time.

There is one major event that we're still waiting for, the generational panic and crash, that I've described this way several times in the past:

"A generational crash is an elemental force of nature, like a tsunami.

You'll have millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, not even believing it was possible, and in a state of total mass panic, trying to sell all at once. Computer systems will crash or will be clogged for hours, or perhaps even for a day or two. People who had hoped to get out just as the collapse is occurring will be totally screwed, and will lose everything. Brokers and other institutions will go bankrupt."

This might happen tomorrow, next week, next month or thereafter. We can't predict when it will happen, but it's coming soon with absolute certainty.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (3-Nov-2008) Permanent Link
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Generational Dynamics Web Log for 3-Nov-2008 Markets enter another turbulent week, as effects of bailout are questioned

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Generational Dynamics Web Log for 3-Nov-2008
Markets enter another turbulent week, as effects of bailout are questioned