If genuine mass panic signals a bottom in equity prices, then this is shaping up to be a great buying opportunity. The Vix index has only been higher twice in history: during the peak of the Lehman crisis/financial panic in Oct. '08, and during the great market crash of Oct. '87. The combination of a very high Vix (panic) and a very low Treasury yield (recession/depression fears) has only been worse during the Lehman/financial crisis. This might not be the exact bottom, but we must be getting pretty close.
Adding to the panic, I believe, is the perception that the White House is clueless. Obama's speech earlier today was abysmal. Once again he blamed Republicans and the rich for refusing to cooperate. Once again he insisted that the way to fix things is to extend unemployment benefits, extend the payroll tax cut, and build more infrastructure. These things have been tried and they have failed miserably. Is there no one Obama trusts who can better advise him on how to get out of this mess?
Well, if Obama deserves credit for the economy, then he also deserves credit for this: Inflation is dead.
ReplyDeleteDon't it feel great?
Maybe Bernanke-san gets a hat-tip too, no?
My concerns are that the pullback "panic" will turn into a self-fulfilling prophecy of Great Recession 2.0.
ReplyDeleteIn our businesses, it was great to see the recovery of confidence (of our customer bases) over the last two years. As the market improved, our customers opened the wallets more; the "virtuous cycle" took hold.
Now I fear the lose of their confidence and the tightening in the velocity of money that is so important to commerce (except, that is, if you're the government...).
Blaming Pres Obama for what is happening is not helpful -- the reality is that no single party is ready to advance a 40% immediate cut in government spending -- America's last chance to control its monetary destiny will be for a balanced budget amendment to pass through Congress and the states with haste -- if a balanced budget amendment fails, then America will be victimized by a sudden creation of a new reserve currency by some foreign entity, probably based on precious metals or some other basket of commodities and/or equities -- the outcome would be to devalue the US dollar instantly as the world abandoned the dollar and adopted the new reserve currency in masse -- investors with certied skills and/or high quality holdings in dividend and rent-earning equities will do well under such a scenario -- however, Americans who are dependent on government salaries, pensions, defense spending, "bailout" funding, or subsidies would be ruined -- what is happening now is much more serious than anyone could have imagined -- Federalism is on the ropes...
ReplyDeletePS: Which would you prefer to carry in your wallet (or treasury vault) -- "green money" (i.e., US Federal Reserve Notes) or "blue money" (i.e., some new currency based on gold and/or other precious metals or equities)? Which do you think your physician is more likely to accept...? How about an airline...? A new reserve currency based on gold would cause transparently valued skills and equities to appreciate instantly in value, while non-transparent skills and equities would depreciate -- America is experiencing a reckoning right before our eyes...
ReplyDeleteDr. William,
ReplyDeleteMore than a balanced budget ammend. is needed. Do you want a $5 trillion budget that is balanced or a $3 trillion budget that borrows $300 billion a year?
And when congress can't balance the budget, what happens? Will the courts have to step in? (Like has happened in some states?) You really want the courts deciding funding priorities?
Federal spending needs to be capped. As a percentage of GDP or something.
PS Obama and the dems deserve the blame. How many republicans voted for TARP, bank bailouts, GM bailouts, stimulas, et all??? If we can't even identify the problems, we won't be able to come up with right solutions.
Just to set the record straight, the VIX first hit today's level (48) on September 29, 2008. The SPX closed at 1164. It bottomed on March 9 2009 at a closing price of 676.
ReplyDeleteI doubt a balanced budget amendment would go trough. Dem and rep know how GDP is calculated. Deficit spending is the only thing keeping the ponzi running.
ReplyDeleteA balanced budget = instant 30's depression.
Jeff, Obama's spending are all sunk costs -- the money cannot be recovered -- neither can the money spent by Bush or any other president -- what serious people need to prepare for is the next steps -- by the way, I agree that a balanced budget amendment may not be sufficient, especially given that growth is declining -- nothing the Republicans can do will change that either -- what is needed to fix the US economy is an instand $15 trillion remedy in the form of a default, coupled with the end of all entitlement and overseas military spending, neither of which the Congress (either Dems or Reps) has the will to pass -- thus, I suspect the external creation of a new reserve currency may be imminent and sudden (within a few months) -- the resulting devaluation of the US dollar would mean that Federal Reserve Notes (i.e., "soft money") can still be used to pay all entitlements and other government programs in full -- the problem is that no one will accept "soft money" as legal tender for scarce goods and services as long as an alternative "hard money" alternatives exist -- hold onto your dividend and rent-paying equities and maintain your certified skills -- nothing else will have value in the US once an alternative reserve currency appears -- the reckoning I mentioned above is going to be tough on those who have nothing of real value...
ReplyDeleteGreg Mankiw said interest rates could go lower. I guess he was right.
ReplyDeleteScott asks the question of Obama "Is there no one Obama trusts who can better advise him on how to get out of this mess?"
ReplyDeleteI believe Scott is assuming that Obama has America's best interests at heart... Or at least the best interests of the very people he seeks to tax -- the wealthy. Is taxing the wealthy a solution or is it simply a method of destroying the opposition?
Obama's actions (and inactions) always remind me (hauntingly) of the following opinion published in the Las Vegas Review Journal (I've posted this previously):
http://www.lvrj.com/opinion/obama-s-agenda--overwhelm-the-system-95716764.html
I believe this can explain a lot of the panic in the system the last few days. We have a President who seems intent on holding his "tax the rich and increase spending" rhetoric, even though common sense and logic dictate otherwise.
It's almost as if he's trying to throw the markets and the USA for that matter, into utter disarray.
Cabodog:
ReplyDeleteI hope you find a party to vote for to decrease spending. When you do, let me know.
Actually, the deficit should be curtailed but it is a sideshow.
The real game is the Fed. They have a monetary noose around the neck of the economy, and they are not letting up.
For next six months we see headline deflation, and core goes to zero.
Obama and Bush strike me as peas in the pod.
Scott, I'm reminded of this post from you made just prior to the market low in 2009:
ReplyDeletehttp://scottgrannis.blogspot.com/2009/02/gold-approaches-1000.html
The second paragraph says it all, except today, we got a speech from Obama reiterating the points you make in that paragraph.
The market these days is reacting to "oh my God, this imbecile is still preaching this crap..."
Worth reading:
ReplyDeleteOn Saturday, I sent the following statement via email to several publications (NYT, WSJ, Bloomberg, FT). It is intended to describe why I would vote to maintain the US Aaa credit rating, were I still in my former position. At this time, I have no connection with Moody’s nor any non-public knowledge of what its analysts think about the rating or what they intend to do.
This statement is not a defense of the Administration in its war of words with S&P. I am not a supporter of the Obama team’s economic policies, which have added to the debt and the regulatory burden on the economy. As I see our current situation, the Federal Reserve, with its too-tight monetary stance since the summer of 2008, has allowed nominal GDP to fall far below trend, causing a collapse of output and employment — as described by the monetary bloggers Scott Sumner, David Beckworth, Bill Woolsey, and David Glasner. Had the Fed acted properly, (by, for example, setting a nominal GDP level target) the recession would have been much shallower and fiscal stimulus might not have been undertaken. As it was, the collapse of nominal GDP drove the “fiscal multiplier” to zero, leaving us with more debt and nothing to show for it. Monetary policy always “comes last”.
The solution to avoiding the predicted debt explosion will have to come primarily from major reforms of entitlement programs. Tax-rate increases within our present system are counter-productive and will retard growth. If there is to be some contribution from increased revenue, it should come from structural reforms which reduce the taxation of saving, support entrepreneurship, and eliminate loopholes and exemptions that distort consumption and investment decisions. Despite sharing their fiscal concerns, I see the S&P downgrade as premature for the reasons given below.
David H. Levey
Managing Director, Sovereign Ratings, Moody’s Investors Service (1985-2004)
I don't believe today's fall has much to do with S&P's downgrade, but everything to do with a total lack of confidence in the government's ability to deal with issues in a responsible manner.
ReplyDeleteCabodog: thanks for reminding me of that Feb. '09 post. And I agree with you that the problem today is a total lack of confidence in policymakers. The good news is that the market is sending a very powerful message to those same policymakers, and they have little alternative but to pay attention.
ReplyDeleteWSE: Just to set the record straight, the VIX first hit today's level (48) on September 29, 2008. The SPX closed at 1164. It bottomed on March 9 2009 at a closing price of 676.
ReplyDeleteThanks for the reminder. This is undoubtedly why market indexes are dropping several percentage points on a daily basis.
There are no more balance sheets to pollute because aliens have not arrived yet. The game of kicking the can is running out of suckers...
ReplyDeleteThe full consequences of the 2010 election are upon us. The recovery is dead. Governor Perry leads thousands in prayer.
ReplyDeleteThe full consequences of the 2010 election are upon us. The recovery is dead. Governor Perry leads thousands in prayer.
ReplyDeleteAn alternative interpretation is that the full consequences of the 2006 election are upon us. A housing bubble and trillion dollar annual budget deficits. And a president insisting that the US is really a AAA creditor in the face of the accumulation of the largest debt-to-GDP ratio (ex-Japan) among the OECD countries. How the electorate interprets this will determine the result of the 2012 election.
My guess is that the American people will re-elect Obama and put Democratic majorities in both houses of Congress. The American people have been uncommonly wise in their choice of leaders over a period of two centuries. Their judgment was bound to revert to the global mean, and perhaps over-correct for that past surfeit of wisdom by falling into the abyss. That is the meaning of the Obama's election (and looming re-election) - the odds have caught up with us, and the descent will be far more rapid than the ascent.
Aside from all the "bitching" about Obama -- as if the president controlled economic growth (and please don't talk about additional regulation... you want uncertainty how about the last 30 days of BS on the debt ceiling). The real issues for stock going forward are consumer sentiment, ISM and economic participants.
ReplyDelete10 days ago Walmart's "Secret memo" that sales were off by 2.6% is by far the most worrying element. everyone is talking about low p/e but no one seems to notice that most Q2 earning announcements didn't include forward projections, and that those who did make prediction were all on the downside. Watch W-Street's finest "revise" forward earnings over the next few weeks.
Be prepare for QE3 -- where the Feds work to reduce long term bond yields... wait the market already did that! Speaking of which we're still waiting for inflation here!
The market has been unable to breach price ceiling for stocks for the past 5 months. That alone tells you something about market psychology
Presidents are assigned far too much credit for budget deficits. Congress is the culprit, and the D's and R's share the habit of spending other people's money with gusto.
ReplyDeleteObama does deserve criticsm for constant mantra of villifying the wealthy, free-enterprise, and corporations.
Last Tuesday, Reid, Schumer, and Obama all announced that we can expect tax increases, and more deficit spending, and more regulatory burden in our future.
Yesterday, we got more of the same from O.
I expect election year paralysis, with a flat to negative economy.
The US was down graded by 3 others sources before S&P made it's long over due move. China rating service has the debt rated as 'A'. Why they waited until $US17 Trillion is beyond me - but I do have my suspicions. This downgrade will cost the treasury another $US100 Billion. Who is going to pay for that? Obama's mindless whine about the 'rich' not paying their fair share has sparked flash mob riots of blacks attacking whites! Let's hope it's not too late to snap out of this twisted flawed thought process! The stock market has seemed to figured it out ... just wait until the bond market gets it!
ReplyDeleteI encourage all Calafia Beach readers, and Scott Grannis, to read the bloggers cited in the passage below.
ReplyDelete"As I see our current situation, the Federal Reserve, with its too-tight monetary stance since the summer of 2008, has allowed nominal GDP to fall far below trend, causing a collapse of output and employment — as described by the monetary bloggers Scott Sumner, David Beckworth, Bill Woolsey, and David Glasner. Had the Fed acted properly, (by, for example, setting a nominal GDP level target) the recession would have been much shallower and fiscal stimulus might not have been undertaken."
The above-mentioned bloggers are all Milton Friedman-ites.
Good reading:
ReplyDeletehttp://uneasymoney.com/
European nations with the best economies are those who printed the most money.
That is precisely the flawed thinking process which has gotten the world into this mess. I would exactly call those quality juristictions or economic superpowers. Interestingly Belgium is in the top 3 and shares the 'AA+' rating along with the US. As Ron Paul recently stated, 'If debt is the problem ...how is more debt the solution?' With any luck it won't take us more than a few decades to unwind all of this 'terrific' intervention and stimulus. Paying back those bills ain't gona be pretty!
ReplyDeleteScott - Thank for this very informative post and charts this AM.
ReplyDeleteWilliam