Bail Harder, Hank
October 3rd, 2008 by 
reality
Well I went flat yesterday near the close expecting a jam higher with the passage of the Paulson Bankers and Traders Bonus Pool Replenishment Act. Like a lot of others, I suspect. What we got was a classic “buy on mystery, sell on history,” as the market basically sold off all afternoon. I got back on the bus basically where I got off yesterday, and then went flat again at the close. We’re very oversold and should get a bounce, but it looks like there’s a lot of retail liquidation going on, causing the mutual funds to sell into any strength.
Rumors are flying of an emergency rate cut. I’m actually surprised that Ben has stayed his hand this long.
We’re still way up in the overvalued zone in terms of P/E, facing a deep and long recession. There’s a lot of downside to go. A good piece by Carl Swenlin, whose excellent Decision Point site I use.
As you can see, current prices are very overvalued, and possibly near the selling opportunity of a lifetime. To those who think this is the time to buy, I must ask, based upon what? Clearly, prices can rise even when stocks are overvalued, but current economic fundamentals makes that outcome a long shot.
There’s a saying in sailing that the most effective bilge pump is a terrified man with a bucket. Hank, you need to bail faster, the water is still rising.
And this has nothing whatsoever to do with finance but is such a spectacular picture that I think it is worth making an exception.
Posted in Government, Rogues and Rascals, Stocks, Strategy & Scenarios, The Fed, The Fisc | 
October 4th, 2008 at 7:31 am
Saturday readings.
Roubini’s bailout program:
http://www.rgemonitor.com/blog/roubini/253853/financial_and_corporate_system_is_in_cardiac_arrest_the_risk_of_the_mother_of_all_bank_runs
Temporary guarantee of all US bank deposits, expansion of emergency lending facilities to a broad range of finance market participants (auto leasing, student loan, credit card providers etc.) and direct lending to corporate sector, orchestration of global 100bp interest rate cut.
And Prudent Bear Doug Noland:
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10125
The “Freidmanites” thought they understood the (post-crash) policy mistakes that led to The Great Depression. They believed the “Roaring Twenties” was the “Golden Age of Capitalism.” The great bust could have been avoided with a simple ($5bn or so) banking system recapitalization. As we are witnessing today, the issue is not some manageable amount of new “capital” to replenish banking system losses. Instead, the predicament is the massive and unmanageable amount of new Credit necessary to, on the one hand, sustain a mal-adjusted Bubble Economy and, on the other, the Trillions more required to accommodate a gigantic speculative de-leveraging. I have a very difficult time seeing a way out of this terrible mess.
October 4th, 2008 at 8:14 am
Decent reading from inflationary camp, for opinion balance. The next assets bubble candidate is … commodity extraction sector.
Global Capital Flows and the Global Business Cycle. The Institute of International Finance (8 page pdf, requires registration) http://iif.com/gcm/article+156.php
Excerpts:
Each of the three discernible post-1992 global cycles has indeed been associated with financial booms and busts. Invariably, the bust phase of each of these cycles has been described by serious commentators as the “worst financial situation since the Great Depression”.
(Vytas: funny)
In looking ahead, it is natural to ask two sets of questions. First, what will the next capital flow cycle look like? Second, what can, and should, be done to influence, and possibly temper, future capital flow cycles?
In spotting the next 5-6 year cycle, it is important to remember that the seeds of the next upswing tend to be sown in the midst of the previous downturn. In this context, the global commodity extraction sector would seem to be the most likely candidate…
The surge of commodity prices in 2006-2007 is one early indicator that such a cycle is underway and corresponds to phase one of the stylized cycle described above. Recent declines in commodity prices, and the attendant flow of speculative capital out of commodity investments suggest that we have entered phase two of this cycle. If this view is correct, then what comes next (in the next two to three years) is the “sweet spot” in the cycle, corresponding to a stabilization of real prices at higher levels and a massive allocation of real capital to commodity extraction.
(Vytas: two column pdf is not so easy to copy, so I omit the anti-cyclical receipts :)
October 4th, 2008 at 10:05 am
Thanks.