August 13, 2009
Regular readers of this blog (all four of them) know that I have been very skeptical about the current “bear market rally” in the stock markets. Nevertheless, the rally has continued. However, we are now beginning to hear opinions from experts claiming that not only is this rally about to end — we could be headed for some real trouble.
Some commentators are currently discussing “The September Effect” and looking at how the stock market indices usually drop during the month of September. Brett Arends gave us a detailed history of the September Effect in Tuesday’s edition of The Wall Street Journal.
Throughout the summer rally, a number of analysts focused on the question of how this rally could be taken seriously with such thin trading volume. When the indices dropped on Monday, many blamed the decline on the fact that it was the lowest volume day for 2009. However, take a look at Kate Gibson’s discussion of this situation for MarketWatch:
One market technician believes trading volume in recent days on the S&P 500 is a sign that the broad market gauge will test last month’s lows, then likely fall under its March low either next month or in October.
The decline in volume started on Friday and suggests the S&P 500 will make a new low beneath its July 8 bottom of 869.32, probably next week, on the way to a test in September or October of its March 6 intraday low of 666.79, said Tony Cherniawski, chief investment officer at Practical Investor, a financial advisory firm.
“In a normal breakout, you get rising volume. In this case, we had rising volume for a while; then it really dropped off last week,” said Cherniawski, who ascribes the recent rise in equities to “a huge short-covering rally.”
The S&P has rallied more than 50 percent from its March lows, briefly slipping in late June and early July.
Friday’s rise on the S&P 500 to a new yearly high was not echoed on the Nasdaq Composite Index, bringing more fodder to the bearish side, Cherniawski said.
“Whenever you have tops not confirmed by another major index, that’s another sign something fishy is going on,” he said.
What impressed me about Mr. Cherniawski’s statement is that, unlike most prognosticators, he gave us a specific time frame of “next week” to observe a 137-point drop in the S&P 500 index, leading to a further decline “in September or October” to the Hadean low of 666.
At CNNMoney.com, the question was raised as to whether the stock market had become the latest bubble created by the Federal Reserve:
The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create. But along the way it may have pumped up another bubble, this time in stocks.
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But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout.
One important event that gave everyone a really good scare took place on Tuesday’s Morning Joe program on MSNBC. Elizabeth Warren, Chair of the Congressional Oversight Panel (responsible for scrutiny of the TARP bailout program) discussed the fact that the “toxic assets” which had been the focus of last fall’s financial crisis, were still on the books of the banks. Worse yet, “Turbo” Tim Geithner’s PPIP (Public-Private Investment Program) designed to relieve the banks of those toxins, has now morphed into something that will help only the “big” banks (Goldman Sachs, J.P. Morgan, et al.) holding “securitized” mortgages. The banks not considered “too big to fail”, holding non-securitized “whole” loans, will now be left to twist in the wind on Geithner’s watch. The complete interview can be seen here. This disclosure resulted in some criticism of the Obama administration, coming from sources usually supportive of the current administration. Here’s what The Huffington Post had to say:
Warren, who’s been leading the call of late to reconcile the shoddy assets weighing down the bank sector, warned of a looming commercial mortgage crisis. And even though Wall Street has steadied itself in recent weeks, smaller banks will likely need more aid, Warren said.
Roughly half of the $700 billion bailout, Warren added, was “don’t ask, don’t tell money. We didn’t ask how they were going to spend it, and they didn’t tell how they were going to spend it.”
She also took a passing shot at Tim Geithner – at one point, comparing Geithner’s handling of the bailout money to a certain style of casino gambling. Geithner, she said, was throwing smaller portions of bailout money at several economic pressure points.
“He’s doing the sort of $2 bets all over the table in Vegas,” Warren joked.
David Corn, a usually supportive member of the White House press corps, reacted with indignation over Warren’s disclosures in an article entitled: “An Economic Time Bomb Being Mishandled by the Obama Administration?” He pulled no punches:
What’s happened is that accounting changes have made it easier for banks to contend with these assets. But this bad stuff hasn’t gone anywhere. It’s literally been papered over. And it still has the potential to wreak havoc. As the report puts it:
If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value. Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix.
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In a conference call with a few reporters (myself included), Elizabeth Warren, the Harvard professor heading the Congressional Oversight Panel, noted that the biggest toxic assets threat to the economy could come not from the behemoth banks but from the “just below big” banks. These institutions have not been the focus of Treasury efforts because their troubled assets are generally “whole loans” (that is, regular loans), not mortgage securities, and these less-than-big banks have been stuck with a lot of the commercial real estate loans likely to default in the next year or two. Given that the smaller institutions are disproportionately responsible for providing credit to small businesses, Warren said, “if they are at risk, that has implications for the stability of the entire banking system and for economic recovery.” Recalling that toxic assets were once the raison d’etre of TARP, she added, “Toxic assets posed a very real threat to our economy and have not yet been resolved.”
Yes, you’ve heard about various government efforts to deal with this mess. With much hype, Secretary Timothy Geithner in March unveiled a private-public plan to buy up this financial waste. But the program has hardly taken off, and it has ignored a big chunk of the problem (those”whole loans”).
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The Congressional Oversight Panel warned that “troubled assets remain a substantial danger” and that this junk–which cannot be adequately valued–“can again become the trigger for instability.” Warren’s panel does propose several steps the Treasury Department can take to reduce the risks. But it’s frightening that Treasury needs to be prodded by Warren and her colleagues, who characterized troubled assets as “the most serious risk to the American financial system.”
On Wednesday morning’s CNBC program, Squawk Box, Nassim Taleb (author of the book, Black Swan — thus earning that moniker as his nickname) had plenty of harsh criticism for the way the financial and economic situations have been mishandled. You can see the interview with him and Nouriel Roubini here, along with CNBC’s discussion of his criticisms:
“It is a matter of risk and responsibility, and I think the risks that were there before, these problems are still there,” he said. “We still have a very high level of debt, we still have leadership that’s literally incompetent …”
“They did not see the problem, they don’t look at the core of problem. There’s an elephant in the room and they did not identify it.”
Pointing his finger directly at Fed Reserve Chairman Ben Bernanke and President Obama, Taleb said policymakers need to begin converting debt into equity but instead are continuing the programs that created the financial crisis.
“I don’t think that structural changes have been addressed,” he said. “It doesn’t look like they’re fully aware of the problem, or they’re overlooking it because they don’t want to take hard medicine.”
With Bernanke’s term running out, Taleb said Obama would be making a mistake by reappointing the Fed chairman.
Just in case you aren’t scared yet, I’d like to direct your attention to Aaron Task’s interview with stock market prognosticator, Robert Prechter, on Aaron’s Tech Ticker internet TV show, which can be seen at the Yahoo Finance site. Here’s how some of Prechter’s discussion was summarized:
“The big question is whether the rally is over,” Prechter says, suggesting “countertrend moves can be tricky” to predict. But the veteran market watcher is “quite sure the next wave down is going to be larger than what we’ve already experienced,” and take major averages well below their March 2009 lows.
“Well below” the Hadean low of 666? Now that’s really scary!
The Broken Promise
September 21, 2009
We expect those politicians aiming for re-election, to make a point of keeping their campaign promises. Many elected officials break those promises and manage to win another term anyway. That fact might explain the reasoning used by so many pols who decide to go the latter route — they believe they can get away with it. Nevertheless, many leaders who break their campaign promises often face crushing defeat on the next Election Day. A good example of this situation arose during the Presidential campaign of George H.W. Bush, who assured America: “Read my lips: No new taxes!” in his acceptance speech (written by Peggy Noonan) at the 1988 Republican National Convention. Although he didn’t enact any new taxes during his sole term in office, he also promised the voters that he would not raise existing taxes after telling everyone to read his lips. When he broke that promise after becoming President, he was confronted with the “read my lips” quote by everyone from Pat Buchanan to Bill Clinton.
Back on July 15, 2008 and throughout the Presidential campaign, Barack Obama promised the voters that if he were elected, there would be “no more trickle-down economics”. Nevertheless, his administration’s continuing bailouts of the banking sector have become the worst examples of trickle-down economics in American history — not just because of their massive size and scope, but because they will probably fail to achieve their intended result. Although the Treasury Department is starting to “come clean” to Congressional Oversight chair Elizabeth Warren, we can’t even be sure about the amount of money infused into the financial sector by one means or another because of the lack of transparency and accountability at the Federal Reserve. (I seem to remember the word “transparency” being used by Candidate Obama.) Although we are all well-aware of the $750 billion TARP slush fund that benefited the banks to some degree, speculation as to the amount given (or “loaned”) to the banks by the Federal Reserve runs from $2 trillion to as high as $6 trillion. So far, the Fed has managed to thwart efforts by some news organizations to learn the ugly truth. As Pat Choate reported for The Huffington Post:
President Obama’s failure to keep his campaign promise of “no more trickle-down economics” is rooted in his decision to rely on the very same individuals who caused the financial crisis — to somehow cure the nation’s economic ills. These people (Larry Summers, “Turbo” Tim Geithner and Ben Bernanke) have convinced Mr. Obama that “trickle-down economics” (i.e. bailing out the banks, rather than distressed businesses or the taxpayers themselves) would be the best solution.
On Saturday, Australian economist Steve Keen published a fantastic report from his website, explaining how the “money multiplier” myth, fed to Obama by the very people who caused the crisis, was the wrong paradigm to be starting from in attempting to save the economy. Here’s some of what Professor Keen had to say:
You can be sure that if we head into a “double-dip” recession as Professor Keen expects, the President will never hear the end of it. If only Mr. Obama had stuck with his campaign promise of “no more trickle-down economics”, we wouldn’t have so many people wishing they lived in Australia.