If this doesn't qualify as an epic stock market panic selloff, I'd truly hate to see the real thing. This ranks almost right up there with the Crash of '87. The VIX hit a high of 59 this morning as the S&P hit a low of 970, almost 30% down from its high last October.Now, as the dust settles and the bottoming action takes place, we have the following winds at our back: coordinated, massive and unprecedented central bank intervention, a significant decline in swap spreads (reflecting a big drop in systemic risk), a rebound in pending home sales (HT to David Gordon), a significant downward repricing of US housing prices (25-30% is my guess in most major markets), significant writeoffs of subprime losses, recapitalizations of global banks coupled with a significant consolidation of banks.
It means simply that an awful lot of positive things have happened recently. The real estate mess that got everything started is in the advanced stages of fixing itself. The vast majority of the losses have been realized. The economy is shifting resources away from the overbuilt housing sector and into new areas. Governments got us into the mess, but they are figuring out how to help us get out (let's worry about the ugly consequences of that later).
There will still be plenty of people prepared to jump out of windows, and pundits calling for an extended and deep global recession, but I'm willing to bet that things won't be nearly as bad as the pessimists are predicting.
Scott,
ReplyDeleteOn CNBC this afternoon, an Adjusted Monetary Base chart was presented (not sure if it was long term or short). The commentators were VERY pleased with the chart data. Since I walked in at the tail end of the discussion I do not know the significance of what the chart represents. What are your thoughts of why the CNBC commentators are pleased with the AMB chart?
Without success, I attempted to locate and provide a link to the most recent AMB chart.
Thank you,
CDLIC
You can find the chart here:
ReplyDeletehttp://research.stlouisfed.org/fred2/series/BASE?cid=124
This is considered to be important because it is the part of the money supply that is directly controlled by the Fed. When it grows a lot, the Fed is creating money by the bushel. I think adjusted reserves tell a cleaner story, because currency makes up 90% of the base. Both are growing hugely. The Fed is really trying to put a stop to the liquidity squeeze.
Scott,
ReplyDeleteThank you.
You may be interested in the following article titled 'The Fed is Bankrupt' by Fred Szabo.
http://www.kitco.com/ind/Szabo/oct082008.html
CDLIC
Sorry, but I don't think Szabo knows his monetary policy very well. Only the Fed can create money. That they have refrained from doing so (except possibly their recent actions) is the remarkable thing. If Treasury sells bonds and gives the proceeds to the Fed, this does not create money. The Fed will use the money to buy distressed securities. There is no new money printed in this process, because Treasury gets the money by selling bonds.
ReplyDeleteHowever, the Fed has allowed bank reserves to surge, and if they don't reverse this as the crisis subsides, then we could have a big problem on our hands. I think the problem is only going to be minor. But we have to watch this closely.