Market crash: are we there yet ?

[chris_gee]

The article seems pretty balanced to me.

Various commentators have different views, but I would suggest although there is a body of knowledge in any field, careful probing is likely to reveal that it is often incomplete and inaccurate. A degree of sceptical appraisal is often wise.

In complex systems like a market which is influenced by economics and politics, it is not possible to identify a single point as causative or definitive. One might point to something as a probable factor. However when it comes to predicting the future I don't think anyone can say with any great confidence that the market will do this in 1 month or six.

One might say the market has for some 20 years delivered exceptional returns despite the 2000 crash. However if one looks at the reasons, particularly that it had come out of a period of stagflation, it was exceptional.

It is tempting to expect past patterns to continue. However, I doubt, whatever the American dream, that there is an easy risk-free way to make money longterm and that one could expect to double one's money every six years with a 12% return by investing in the market or housing or whatever.

Some protection may seem to be provided by printing money as in 1987 and since 2000 as most countries seem to be competing to do. This seems to have encouraged highly leveraged financial speculation. While many have enjoyed big gains this is not a oneway street, as has become apparent. This printing money could continue, but depends on the continuing view of the US $ as a reserve currency. It also subsidises the borrower while hitting the saver in particular the retired.

There are various reasons why the bonanza is unlikely to continue indefinitely. One being the emergence of China India etc with a redistribution of wealth. Obviously relative wages and resources come into it.

The other major ones are that: profits cannot continue to grow indefinitely as a proportion of GDP, there is a repricing of risk and a fallout from speculation and leverage, and the US economy is 70% consumer based with the average person limited by debt and little real wage growth.

While one cannot predict the market next week or month, it would not be unreasonable to say that it is risky.

[Rickm505]

CD, the article echos what my posts have been about. However you cut it, things are going to be getting worse until this bubble flattens out.

Housing gets hit first for reasons set forth in the article and for some that the article did not cover. No matter. it can not be contained. Our economy is built around service industries and many are dependent upon housing.

Although some predict doom and gloom, I feel we are in for a mild recession. The underlying problems are so visible that they will be delt with before the economy really begins to tank. Although I have no idea what the solution will be. Besides 2008 is an election year, no politician will let the economy sink.

[sailaway21]

I wasn't aware that politicians had direct control of the economy. How can the President, let alone any other politician, prevent the economy from tanking? I agree that tax policy can have a large effect on the economy, but I am not aware of any political manoeuvers that can rescue an economy headed for recession.

[sailaway21]

The article from "The New Yorker" takes a measured look at the "crisis".
http://www.newyorker.com/online/2007...?currentPage=1

[Rickm505]

Originally Posted by sailaway21

I wasn't aware that politicians had direct control of the economy. How can the President, let alone any other politician, prevent the economy from tanking? I agree that tax policy can have a large effect on the economy, but I am not aware of any political manoeuvers that can rescue an economy headed for recession.

We aren't communist, we never have direct control of our economy. That's what makes things er... so interesting. But, you must know that you don't need direct control of the economy to rescue it.

Freddie Mac was created by Congress in 1970 with a mission to provide liquidity, stability and affordability to the nation’s mortgage markets using private, not public capital. That was a recession year.

Federal National Mortgage Association is the oldest of the three, formed by Congress in 1938 during the Great Depression to create a secondary market for mortgages insured by the Federal Housing Administration. Fannie Mae, so called for the pronunciation of its initials, FNMA, was spun off from the government as a publicly traded company in 1968.

These are the two biggest buyers of U.S. home loans, along with the Government National Mortgage Association, Ginnie Mae, make up the trio behind expansion of the secondary mortgage market that began in the late 1960s.

Bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae make up the majority of all $3.2 trillion mortgage-backed securities outstanding, representing 16 percent of all U.S. bonds outstanding, according to the Bond Market Association.

But wait...there's more...

An agricultural recession beginning in the mid ‘80s lasted well into the mid 90’s before Congress took action. That action was the ’96 farm bill.

Federal Deposit Insurance was created by Congress to deal with the bank runs during the Great Depression. This was protection, but it had a direct impact on the economy as people took their cash out of their mattresses and put it back into banks.

These are just quick examples of how politicians of both parties react to recession, you already mentioned another and there are more.

[sailaway21]

None of which actions affected the recession current at the time.

[Rickm505]

Of course they did. I'm afraid that history does not agree with your statement.

Ask the farmers about the farm bill. Pick up a history book about the Great Depression.. Or ask anyone who bought their first home using Fannie Mae in the '70's .....me

[sailaway21]

Good thing you edited (g) because, yes, I am too young to remember the Great Depression! WWII ended the Great Depression; all the Fed Gov's actions went for naught. The "farm depression" was nothing of the sort, as the economy, after the early eighties recession, was growing strongly-despite a shakeout in farming (which was long overdue and the Farm Act did nothing but acknowledge the new order).

I think you are more than a little myopic on this one, Rick. The MBS market is not the be all and end all of the US economy. Have you noticed that manufacturing is up? Also; how has the economy been able to do so well with the auto industry in the dumps for the last three years? An amazingly resilient economy continues to grow, albeit somewhat slowly, in spite of war and some sections of it depressed. I doubt the shakeout in MBS will change it's course. I believe you are failing to see the forest for the trees.

[Rickm505]

It's entirely possible. However, I've lived through enough recessions to recognize the beginnings of one. Experience is one of the few perks of being old ...

This is a paper written by our government dealing with employment in the construction industry. Have a look.

http://www.bls.gov/opub/mlr/2006/10/art1full.pdf

The paper deals with construction employment vs general employment. I want to use the graphs they use in the report to make my point, not the article itself. It was the only place I could quickly find the correct numbers.

6% of all non farm jobs are construction. Most residential. The result of the current crisis in mortgages will mean that the mortgage market has to contract by 60% unless the government bails it out somehow. These are straight up numbers which no expert will argue. To date 147 mortgage companies have closed since January. Not Mortgage Brokers, these are mortgage lenders and comprise about 45% of the market. We are well on our way to hitting the 60% figure unless something is done soon.

We now have a 16 month supply of new housing at 2006 sales rates. At the new rate, that translates into roughly double the supply. So if no one builds another structure for 3 years, no one will notice.......or will they? If they stop construction they sure don't need 6% of the non farm work force, do they? On the other hand, if they stop building, you must think they'll keep all these employees?

And these numbers in the report are direct government employment numbers. What about the indirect consequences? How many Walmarts close? 7/11's go out of business, insurance agents, reat estate agents mortgage people, and on, and on..

There is trouble ahead

But there is more.

The very nature of the construction industry involves both large and small contractors. Large ones lay people off when things get slow, but small ones just go out of business. Since they are either self employed or 1099, they NEVER show up in unemployment numbers. They just disappear. Our economy could never absorb these kinds of numbers. This is why all those articles I posted the other day written by "experts" were published. There's no smoke an mirrors. The problem is in plain sight for anyone to see. As manufacturing disappeared, where do you think everyone got jobs? In the booming construction industry of course.

Myopic?.... Yep,

but the real question is...Now what?

[chris_gee]

I said the market is a complex system influenced by economics and politics. An influence does not mean that politics will prevail in preventing a recession at a particular time.
Politics can include formal structures or informal. Political actions that have been taken include cutting tax on dividends, tax breaks for companies repatriating overseas earnings, not too mention cutting interest rates to below the inflation level. Although the last was a FED action it would be naiive to say this was not influenced by political considerations.
One could also look at the Plunge Protection Team. Bernanke when asked about its workings evaded answering and referred to it as a loose collaboration with major bankers and brokers.
On a wider basis one might look at collaboration between central banks.
Japan seems to have trouble raising interest rates because of Government interference, indeed it is also trying to keep the yen down to maintain exports. Other countries are expanding their money supply rapidly in in effect competitive devaluation.
One way of avoiding recession is to expand government spending. Some say a war helps. One can also run a large deficit, fail to fund impending social security obligations, lower tax rates, and not discourage excessive gas consumption via taxes.
All those are political decisions. As such unpopular and difficult ones may not be taken.
The appointment of key financial figures is also political.
Turning to the present situation which the German banking President called a financial crisis, the presenting issue is that the complexity of modern financial machinations has led to a situation where the tide is outgoing and there is uncertainty as to who is swimming naked. Pouring money in doesn't seem to have helped with confidence between banks, nor the repricing of risk.
Increasing liquidity when the precipitant was excessive liquidity may not work but may well be seen as politically desirable. Indeed the decision as to whether to seek short term gain at the expense of longer term pain may indeed be political albeit not decided in congress.