Financial topics

[John]

From a web site reader:

> Add Barry Ritholtz to your list of Bears who are calling this a
> bottom.

> Same reasons...there has always been a recovery following equal
> equity lows percentages since '29.

> Maximum ruin has another supporter.

[John]

Market summary, Wednesday, October 15, 2008


Dow 8,577.91 -733.08 (-7.87%)
Nasdaq 1,628.33 -150.68 (-8.47%)
S&P 500 907.84 -90.17 (-9.03%)


Commentary this afternoon and evening has been the most negative that
I've ever heard, although it's framed in terms of a "severe
recession." Still, I believe I've heard the words "1929" and
"depression" more often today than I ever have (since the 1950s).

John

[John]

From a web site reader:

> I would like to reply to your statement in "There's Never Been A
> Day Like This On Wall Street" that Elliot Wave analysis could not
> point to a generational crisis. From my perspective the best
> Elliot Wave analysis has been pointing to this crash for years. I
> subscribed to Elliot Wave International's (EWI) "Financial
> Forecast" about four years ago. I have found their analysis to be
> spot on and, in fact, in almost complete agreement with the
> conclusions that you have reached and shared on Generational
> Dynamics. Indeed the entire reason I read (and enjoy)your sight on
> a daily basis is because your conclusions agree with EWI, yet
> reach that agreement from a very different perspective
> (generational dynamics vs. strict market data). Though I must
> admit that EWI does base their analysis on "socioeconomics" and,
> perhaps, that is the common thread. Anyway, I digress. Thanks to
> the wave analysis of EWI, I put all of my TSP (fed gov 401k)
> exclusively into U.S. securities about three years ago and took
> the necessary measures to pay off ALL of my debt early last year,
> including my mortgage. Heh, EWI made me take evasive action at
> just the right time.....your work made me feel really good about
> the decisions. Oh, EWI's Dow prediction? By the end of this
> current Cycle Wave III.......Dow under 400.

> Having drolled on for far too long, thanks for your work. You are
> truely one of the few purveyors of truth that we have these days.

Congratulations on using Elliott Wave techniques to get out of the
market in time.

In the article you're referencing, I specifically said that Elliott
Wave analysis is valid.

** There's never before been a day like this on Wall Street.
** http://www.generationaldynamics.com/cgi ... 11#e081011

However, it's not designed to identify generational panics and
crashes. As far as I know (correct me if I'm wrong), EW analysis
predicts a recession, perhaps a bad recession, but not a generational
panic and crash.

** System Dynamics and the Failure of Macroeconomics Theory
** http://www.generationaldynamics.com/cgi ... acro061025

All I'm saying is that they're two completely different
methodologies, measuring different things, both predicting "trouble,"
but different kinds of trouble. We'll see which methodology's
predictions come closer to what actually happens.

Sincerely,

John

[browner55]

Hey John-

Thought you would get a kick out of this Dr. Doom link:

http://gawker.com/5063986/credit-crunch ... ok-stalker

Too funny!

Matt

[mannfm11]

Schwab has over $1 trillion dollars in customer funds. I don't think they are counting that as corporate cash.

I am not sure I have done this correctly, but I posted that the article was defective because Schwab had $21 billion in cash on its balance sheet. There is no connection between cash on a balance sheet and how many accounts Schwab has. In fact, I highly doubt over 2% of the trillion would be in cash anywhere, which would clearly be about $21 billion. The best guess of where the customers accounts would be for the most part would be in money market accounts, which would logicallly have very little cash in them and a lot of potentially illiquid commercial paper. My point was that I highly doubt but a very little of this cash belonged to Schwab. If they were talking about XOM or some kind of resource company, I could buy that, but a financial intermediary that isn't a bank and takes deposits, that is another game. There would be no reason for Schwab to have $21 billion on their books other than to finance day to day transactions between them and their customers.

[John]

Dear Isaac,

> So if a dollar collapse is not what happens when the US defaults
> on its loans, what does happen? If the dollar is only backed by
> faith in the US government and the US government defaults,
> wouldn't that make people reluctant to take US dollars? No one
> wants Iceland's currency right now for example and the result is
> that they can not import. It seems if we can't import than prices
> on goods go up because there are less of them available.

We're talking about a speculative situation here, but if the US
government defaults (whatever that means), then it wouldn't
necessarily be any different than when Lehman Brothers defaulted,
except that it's bigger.

Theoretically, even if the US government disappeared, the dollar
could still be used as international currency, provided that some
institution like the Fed took over to manage things. For example,
the US dollar could turn into the United Nations dollar, and things
could go on as usual. But this is all speculation, based on
politics.

> OK then what does happen wehn the US defaults. Something must
> happens. And can the US really default if they can just print
> money any time they want too. I guess if they print money then
> that would be the first category since no one will take the second
> category anymore. They don't really need 7000 Million hundred
> dollar bills. They just need seven million $100,000 bills. I bet
> they could print those in jiffy. They probably wouldn't be worth
> the paper they were printed on.

They can't do that because it would be a violation of US law, even if
the government were in default.

Sincerely,

John

[John]

Dear Gordo,

> Please explain how loans backed by dollars (which is what
> treasuries are), which in turn are backed by nothing, can go into
> default by the US government which can create any amount of
> dollars at any time, with the stroke of a pen (as we've seen in
> unprecedented fashion over the last decade but especially in the
> last couple weeks). This is why all the hysteria about FDIC not
> being able to pay claims in the future was so completely
> ridiculous. I'm not sure why so many people have such a hard time
> grasping this concept. We haven't been on a gold standard in
> decades, and yet people act and talk like we're still on it.

> From the Philadelphia Fed's publication called "The National Debt"
> (page 8) (as cited in How Money is Created): "The Federal
> Government, with the cooperation of the Federal Reserve, has the
> inherent power to create money - almost any amount of it. This
> power makes technical bankruptcy out of the question."
> http://www.freerepublic.com/focus/f-new ... t_id=00024

This stuff does not contradict anything I've written, provided that
you remember that it was written several decades ago when $1 trillion
was considered an "unlimited amount of money."

The kind of money creation described here is debt creation, that's in
category #3 of my money typology.

The problem is what you mean by "an unlimited amount of money." Can
banks really create an unlimited amount of money?

Sure, if you want to create a lot of credit, and let a lot of people
borrow money, even people without the ability to pay it back.

Oh, wait, that's what's been happening the last few years. It was
done through subprime mortgages, auto loans, and credit card loans.

Now all those loans are collapsing, because it was believed that
banks could "create an unlimited amount of money." Well, it turns
out that banks CAN'T do that. There's a natural limit, and that
limit becomes apparent when loan defaults start increasing.

During the credit bubble, commercial banks, investment banks, hedge
funds and other financial institutions did create an almost unlimited
amount of money -- $1 quadrillion in credit derivatives.

What we've now learned that it doesn't work very long.

Now let's get back to your basic question: How can the government
default, since it can create as much money as it wants?

Answer: The government can default because it can't pay its debts.
And it can't pay its debts by creating more debts. And that's why
your suggestion fails.

Sincerely,

John

[John]

> Well, let's say that trend continues and the LIBOR falls 30 points
> per week. A dumbass linear extrapolation would suggest that the
> LIBOR will not reach 80 points (pre-Lehman) until Christmas and
> "normal" values around Inauguration Day. Meanwhile, the market is
> dropping 3-5% a day. How far would two months of a bear market
> like this take us? A 3% fall per day for two months takes the
> market to 30% of its current value - Dow 2800. However, it's
> likely that as LIBOR falls, so does the rate of the bear market,
> so let's say 3% for three weeks, then 2% for three weeks, then 1%
> for three weeks. That takes us to:

> [(.97)^15] * [(.98)^15] * [(.99)^15] = .4022, or Dow 3500.

> This suggests that while the current fall is enough to stop the
> world from starving, it's not enough to stop the market crash. Dow
> 3500 would be a 75% loss from peak.

I don't completely understand this computation, but I'm pretty sure
it's fantasy.

> Remember that Obama does not have to actually fix the economy to
> be hailed as FDR's reincarnation. He only has to stop the
> bleeding. By Inauguration Day, Wall Street may be sufficiently
> prone to accept whatever the new Administration wants... the true
> "capitulation" that the current traders are still having trouble
> imagining.

FDR took office after 3 years of economic cratering, all of which was
blamed on Hoover. Whoever takes office in January will also face 3-4
years of economic cratering. So that analogy doesn't apply.

Sincerely,

John

[scared_sh+tless]

Hi John,


I am new to the site and find the points of view here very interesting and scary at the same time.

You mentioned in a previous post that odds of a generational panic event are about 25% for each week going forward. Hasn't this panic already happened, the DOW has fallen from a high of 14000+ to around 8000, I would call that a major panic. Comparing it with the 29 crash, there might be some retracement and then a further decline to say 3000 but in 29 that last decline took over a year. If we expect this crisis to follow that pattern, then wouldn't it be a slow bleeding death that could span several years (10 to 15 if you just scale the time frames)?

[John]

The inflation report is out, and the CPI (consumer price index) was
flat last month, indicating that inflation is non-existent, and the
deflationary spiral is proceeding.

Those who have been expecting hyperinflation have to explain why
there's NO inflation, after a year of bailouts, each one more massive
than the previous one.

John