Make That 75 Percent

Hey, I hope some of this will trickle down to the middle class.
Not holding my breath…

Well, bonds are having a mighty rally!
Not a good sign for the economy, of course, but at least some cushion for those with a balanced portfolio . . .
(as to this NYT story, even Nordstrom is down 5% right now . . .)

Gotta have a dip in the stock market to justify spinning up QEIII.

Gotta have a dip in the stock market to justify spinning up QEIII.
agreed.
@kg: this correction has been in the cards for some time, and people have been expecting it since QE2 ended. it has nothing to do with Republicans vs Democrats.
*(for instance, I started posting here around January that we’d likely see a major correction in the end spring/early summer timeframe once QE2 rolled off).
the underlying global economy is seriously weak, weaker than it has been at any other time except perhaps the Great Depression. (some think it’s even worse than GD times).
The stock market has been artificially boosted by Federal Reserve manipulation (ZIRP plus QE) over the last year or so. Thus, removal of that support was bound to cause issues.
This is why I have been continually perplexed by people who think we “recovered” when the government was overtly pumping Trillions of dollars into the stock market, and covertly pumping even more into the stock market.
the overall problems have been papered over temporarily but remain. We have Zombie Banks that continue to operate on sky high leverage and low capitalization, we have very high unemployment with no foreseeable jobs program, we have terribly high debt levels that cannot be serviced, and we have a major trading partner (Eurozone) that has major unresolved obstacles. (including possible breakup of the euro).
NONE of this has been addressed. Instead we simply had the Fed use ZIRP to give cash to the banks which they then used to buy government debt in a circular ponzi scheme… we changed accounting rules to help them lie about their condition, we used QE to purchase Treasuries, we used Fannie/Freddie to covertly transfer crap from the banks to the government, and so on.
the debt has been transferred from Private (banks) to Public (Govt), but the debt remains.
it will only get worse. now that much of the crap has been suckered onto the taxpayer/government, now these same hypocritical bankes have the nerve to squawk about “unrestrained spending” and they have bought all our politicians. Thus, the politicians have taken on the mantle of “austerity”.
whether or not one believes in austerity is immaterial. what is clear is this: even with QE2 real economic activity was very weak. Removal of QE2 and initiation of austerity will cause a further drag yet on future GDP… probably plunging us into recession. (one can argue if this recession is part of the 2007-9 downturn, a so called double dip, or if it is a de novo recession… it’s all semantics).
Most market players never believed in the recovery meme. they simply went along with it because the Fed was playing, and one NEVER fights the Fed. Thus they went all in. But now with the Fed out of the game a drop must happen. Greasing the wheels is the fact that almost every economic indicator was far worse than expected, except some company earnings which don’t count for much because the earnings are coming as a result of cost-cutting and not as a result of sales/revenue.
Eventually, the Fed will come out with QE3. however it won’t be able to call it QE3 because if it does you’ll see Gold go to $3000/oz and worse Oil to $200/bb. Thus, they’ll call it something else and make it more covert. but QE3 it will be.
but the Fed needs cover. Can’t do QE3 when the stock market is near it’s previous high and gold is at $1680 and oil >$100. thus, IMO the stock market will need to fall about 15-20% from its recent high and oil needs to get down to the 80s or so… and I think gold needs to get down to the 1400’s but that is less important. if this happens our leaders (and “the market”) will BEG for QE3.
the big boys understand that too.
Once QE3 happens you will see a bounce in equities and a bigger bounce in Gold/metals/oil. My guess is that the bump will be shorter lived compared to QE2. this is a total guess.
I have no idea the exact date that QE3 will happen, nor how low the market really needs to get before QE3 happens, but the above are some pretty good thoughts off the top of my head.
the Fed playbook has been clear since 2009. One need only read Ben’s famous “helicopter” speech to understand.
The complications are also clear… one just needs to look at the history of the Great Depression and Japan in 1980s for a general understanding, realizing of course that history never repeats exactly.
unfortunately for us all, this still has a very very long way to go.
one last note: this current downturn will not last forever. we are unlikely to fall right to S&P500 of 600 or something. More likely a 10-20% retracement, then a bump up with QE3, then a retracement, then a bump up with QE4, and so on over many many years.
look at the Nikkei from 1985-present or the Dow from 1929-1950 for an example.
the current gamechanger of course is a currency crisis…something I’ve worried about for a few years now watching our “leaders”. I never thought they’d do what they did… but here we are. (both Euro and Dollar currency crisis). If our leaders are lucky, they can continue a very slow coordinated “race to the bottom” so that all currencies fall together, and none too fast or too slow. but it is a hard juggling act to do.
🙁

The luxury category has posted 10 consecutive months of sales increases compared with the year earlier,…
Meanwhile,
Wal-Mart is selling smaller packages because some shoppers do not have enough cash on hand to afford multipacks of toilet paper.
The gap between the rich and poor is indeed growing.

Just looked. Gaaahh!
haha! good one.

I looked at my portfolio. YEEEHAW!
-short equities yesterday (check)
-short silver Monday, Tuesday, Wed (check)
Today is a great day.
Oh and I still rent. As long as rent control is around, I’ll systemically underpay my rent forever.

Great analysis ex-sfer — I have been contemplating when to buy oil and gold stocks in this market. I agree that the market still has to drop more before the government steps in with more easing. Just hoping to time my purchase between those steps.

Yawn. Will one of the experts please tell us what alternate decisions in Washington would have resulted in the equity markets going up 5% today?

Easy. A New Deal version 2.
1 – Tax gold speculation profits at 75%. Gold investing is not producing anything anyway. Tax higher incomes to where they were before the Bush tax cuts.
2 – Take the proceeds to fund massive infrastructure projects. HSR, expand Broadband access and quadruple existing speeds, make public education a priority. In short fix 30 years of neglect on the country we inherited from our parents.
3 – Develop alternative energy/transportation through a gas tax similar to Europe. We’re almost where electric cars are worth it for everyone. We need the final push. We need clean power to make it worthwhile, if only for the pleasure to sticking it up to the Saudis!
Not 5% in one day, but a long sustainable growth.

Yawn. Will one of the experts please tell us what alternate decisions in Washington would have resulted in the equity markets going up 5% today?
There is no such option. I’ve used this analogy before, but it is still functional.
Smoking a ton increases your chance for Lung Cancer. Once you have lung cancer, there are no easy answers. The easy answer was to not smoke. Thus, you have a choice: chemo/radiation, or no treatment. Both suck.
Likewise, we blew a major credit bubble in part to mask stagnating incomes to the majority of Americans. it infested all areas (homes, cars, student loans, personal loans, corporate debt, private equity, mergers/aquisitions, etc). now that we are in a deleveraging mode there are no easy answers. the answer was to not blow the bubble in the first place. All current “answers” lead to serious pain.
All we can do now is try to get through the pain as best as possible, and decide where to allocate the pain.
Our leaders have decided that pain should not affect the creditors. Therefore, all attempts are being made to artificially prop up asset valuations. (Federal guarantees of a lot of debt, TARP and all the other “liquidity” measures done by the Fed, stuffing Fannie/Freddie with tons of toxic debt, Maiden Lane, changing accounting rules for big banks like abolishing mark to market, ZIRP, QE, etc).
Doing so worsens the situation because the debt remains. Worse, the creditor class can then double down on their gambles, knowing that if they fail then they will be propped up by the Federal government. With little to no risk and with significant upside it encourages gambling. Thus, this is what our financial houses have done.
unfortunately, the situation will continue until the debt is cleared. this takes many years to decades because it is hard to force clearance.
in terms of what we “should” have done… I’ve said so many times. It would NOT have lead to a 5% increase in stocks today though. In fact, it likely would have lead to an immediate depression. Politicians are afraid to do these ideas because they don’t want to be blamed for the downturn. But as I said above, there ARE no good answers. If there were we wouldn’t be talking about this.
the answers are and were
1) take over the insolvent banks and clean them up. this includes getting rid of all the failed executives and cleaning up corporate balance sheets.
2) writing down debt that is unrecoverable. Making modifications and workouts to debt that is salvageable.
3) breaking up the TBTF banks. they are the flash points of systemic failure and are too big to exist.
4) reinstate Glass Steagal separating banking and deposits from investment banking. The banks cannot be allowed to use deposits in order to backstop risky investment decisions.
5) wind down most CDS products and other synthetic derivatives. Although they have some purpose in theory, their use should be restricted to suppliers and end-users. no speculators. there is no reason to have a company with oustanding CDS contracts that are hundreds of times the value of the underlying company (as we saw with GM). CDS are and should be thought of as insurance, not a speculative investment.
6) prosecute and jail executives whose banks did fraudulent behavior. Robosigning is not a technicality, it was FRAUD and PERJURY.
7) force as honest accounting as possible. Prosecute all accounting gimmicks with prison. Force the exeuctives to face prison for false representations. If they think they are worth $20M/year, then they better understand their books. If they can’t then they aren’t worth $20M/year
8) Focus on employment. The only way to get out of this is to grow our way out of it… and that takes jobs. it can be a new deal type of jobs program but doesn’t have to be. Trickle down economics has never worked, so it will have to be something different.
9) we may need to focus on tax laws. that’s a thorny one and many will disagree about it. however, I doubt many would be surprised to learn that if 0.1% of the people hold a massive amount of wealth and the majority of people have little to no wealth then aggregate consumption will fall. Since aggregate consumption is a large aspect of GDP…
anyway: these are some of the BARE MINIMUM IDEAS that need to be done. none of them have even been started. in fact, we are going the opposite way.
(for instance, we made the TBTF banks BIGGER, we RELAXED their accounting rules, we hide debt instead of writing it down/modifying, etc).
my ideas are not controversial (most of them). For instance, this is what was done with the S&L scandal. Executives were tried, S&Ls taken over, bad debt written down, and we got through this. It’s also the Nordic example from last decade. Hordes of research shows that zombifying a financial system doesn’t work.

I agree with es SF-er’s analysis. We could also inflate the currency, which would really piss off the banks (and the Chinese). This would make our personal and public debt worth less and would encourage spending, which our economy sorely needs.

No worries, El Bombero.
Democrats will come to the voting booth in record numbers in 2012 and regain all powers, and possibly more than necessary to avoid filibusters.
Teabillies are an awful bunch. Pretty much the scarecrow of the political arena. The gagging reflex is simply too overwhelming. People have seen the beast up close and what it could do.

Agree to most of ex-SFers ideas. Doubt if they ever get implemented.
I also see there are lot of tea party haters. I consider myself fiscally conservative blue dog. I actually liked that tea partiers changed the tone in Washington.
Look, the current problems are caused by both Dems and Reps. They all share the blame. If you pick only one, you are just being blind.
For us to move forward, we need to balance budget, that could be done by closing tax loopholes ( eliminate all deductions) and have a fair tax rate, reducing entitlements, reduce government spending on healthcare (this doesn’t need to just reduce Medicare, but think outside the box and make people healthier to avoid costs), reduce public sector pensions, and get more revenue from corporations(no loopholes).

What this country needs right now is jobs. The way to provide for them is to develop a program, we’ll call it the “American Reinvestment and Recovery Act”. We’ll dedicate billions of dollars to “shovel ready projects” we can implement “right now” to “put Americans back to work”.
Except that we only want to give that money to Union jobs because then they’ll vote for us. So of course that means only half the jobs we could otherwise provide, and only half the benefits to the American people. So, OK, the American people will therefore only get 1/4 of the benefit that would otherwise be possible.
And oh, lets make sure that the money goes to projects that are popular with our constituents, not those that will benefit the most people, so
the 1/4 of the possible benefit realized will be more like 1/8 of the possible benefit.
The other 7/8 will be squandered to buy votes to allow us to get reelected while we continue to ignore the interests of more and more Americans.
I just don’t understand why people don’t want to raise taxes for all of the above. Seems like a worthy cause to “put Americans back to work”. At least for a few weeks, after which they can just file for unemployment like everybody else, because none of the structural problems of the economy will ever get solved when we can just spend taxes or blow bubbles.

What the world needs now is jobs, sweet jobs
It’s the only thing that there’s just too little of
What the world needs now is jobs, sweet jobs,
No not just for some but for everyone.
Lord, we don’t need another bailout,
There are bailouts and taxcuts enough for them
There are cheap loans and reserves enough to loan,
Enough to last till the end of time.
What the world needs now is jobs, sweet jobs
It’s the only thing that there’s just too little of
What the world needs now is jobs, sweet jobs,
No, not just for some but for everyone.
No, not just for some, oh, but just for everyone.

ex SF-er wrote:

…the answers are and were:…
2) writing down debt that is unrecoverable. Making modifications and workouts to debt that is salvageable.

I agree with a lot of what ex SF-er wrote, except for this and even on this point I don’t have a coherent better idea.
Here’s the problem. From a behavioral economics perspective, it seems to me that if you bail people out by reducing their debt, then what you’ll get in the future is more of the debt-loading-up behavior that you set out to reduce when you did the bail out, this making the ultimate cost higher than if you let the natural economic incentives and punishments take their course.
Put another way, if the people who participated in the bubble don’t have to face the negative consequences of their bubble-era behaviors, then they’ll continue that type of behavior in the future.
To take a real estate example, let’s say the banks widely write down the principal on mortgages that people are underwater on. After all, that debt is “unrecoverable”!
When the marketplace “recovers”, faster than it normally would because we reduced lots of people’s mortgage principal, then any rational economic actor is going to immediately load up on more debt by taking out large debt-to-equity mortgages, no doc, no money down loans, interest only loans, “teaser” ARMs, etc., just like they did in the credit bubble up until 2007. Why? Because everyone will know by then that if their mortgage goes underwater, the principal will be reduced when that debt is deemed “unrecoverable”.
This is just another moral hazard creation, except on the demand side.
And make no mistake, banks have begun writing down principal on the mortgages for underwater borrowers. From the same day as ex SF-er’s comment, Bank of America agrees to write down California mortgage principal:

Bank of America …has signed on to the principal reduction component of the Keep Your Home California program, which uses federal funds reserved for the 2008 rescue of the financial system to help homeowners behind on their mortgages.
BofA is the largest of the nation’s major banks to join the program, which was launched this year with $2 billion in federal funds. The California Housing Finance Agency, which runs the program, said BofA has been writing down principal on some mortgages as part of a pilot program since February and is now moving into full participation.

There’s no way to tell how many of the people benefiting from these principal reductions are people who could afford to keep paying their mortgage, but choose not to because they are underwater, or deliberately chose to skip payments because they desired a principal reduction.
Like I said, this is just creating moral hazard, but this time not on the side of the financial institutions. It also tends to delay the much needed reductions in housing price levels, because now many people in houses they can’t afford won’t have to put their homes on the market for a reduced price. Widespread principal reduction can’t be the answer.