Monday, October 13, 2008

Where to the markets?

I think there is more downside to the equity markets over the next 12 months, but I think that the worst of the panic selling is over for now. One good thing about this market crash, I think, is that it is a chance to clear out the pent-up fears over how much of a threat the mortgage and asset backed/derivatives situation presented to the economy. Once fears are realized, they become a known quantity and therefore lose much of their hold over the imagination. So now that the damage is done, we can work our way through it and get to the other side.

That working through process will take some time, and will lead to some further downside in the markets over the next 12 months. We still don't know what the future regulatory scheme will look like, both in the US and worldwide, but we do know that it will be very different from what it is today. Once the new scheme is in place, the players will evaluate how to make money in the new environment, and will restructure themselves to take advantage of it. There will be winners and losers, and the adjustments will take the markets lower as capital flows out of the losers and starts seeking the winners.

Conventional wisdom will be the biggest loser. This is one of those Duckian moments where the average amateur observer knows as much about the future as the experts, whose expertise is vaporizing along with the bubble capital. A lot of good can come of this moment, both politically and economically, but the window of opportunity will be short before a new regime of conventional wisdom reasserts itself.

19 Comments:

Blogger Hey Skipper said...

+936 points today.

I sold off all my FedEx stock a couple months ago.

Now would be a perfect time to reinvest that cash. Unfortunately, when it comes having a clue what is a good pick, I am thick as a brick.

October 13, 2008 3:03 PM  
Blogger Harry Eagar said...

Nobody ever went wrong with Berkshire Hathaway, but you might not be able to afford a whole share.

You can buy shares of Mesa Airlines for the deposit on six empty soda cans. You'll never own an airline any cheaper than that.

October 13, 2008 5:32 PM  
Blogger Harry Eagar said...

Down 36 as of midday Tuesday. Markets ask gummint: What have you done for me lately?

Comin' up: muni bond defaults, quadrupling of credit card defaults, pension fund reserve shortfalls, resets of alt-A mortgages, Xmas retailing disaster, big jump in unemployment.

October 14, 2008 10:51 AM  
Blogger Harry Eagar said...

It's morning in America and the Dow is down another 300 points, just about where it was Friday.

Enjoy your Reaganomics, everybody.

October 15, 2008 10:44 AM  
Blogger Susan's Husband said...

I think you mean "Clintonomics". I did enjoy my Reaganomics while it lasted.

October 15, 2008 12:03 PM  
Blogger Harry Eagar said...

Ahem, 733 points.

Unsupervised financial markets are the hallmark of Reaganomics.

What you were enjoying was Keynesianism pushed to the firewall, plus an unpredicted technological bump, akin to a combination of the invention of the steam railway and the (near simultaneous) introduction of packet sailings.

October 15, 2008 2:33 PM  
Blogger erp said...

Goodness Harry, don't you question the timing? The CRA push toward lending money to those who can't repay the loan began in 1973 and crash came in time to elect the second coming.

October 15, 2008 4:21 PM  
Blogger Harry Eagar said...

I have been meaning to post this anecdote about how and why CRA was a good idea.

When I was in Iowa, I knew a real estate agent who came late to the business and had some social conscience that's pretty rare in the biz.

Thanks to CRA, she felt able to work with buyers to purchase downmarket properties, which they could afford but had been prevented from aspiring to by redlining.

Once she assisted a nurse, a single woman, to buy a house for $12,000. You could get a very modest house in a plain folks neighborhood for $12,000 in Des Moines back then.

All deals have to be approved by the broker-in-charge. My friend's broker signed the deal, reluctantly, and dressed her down for wasting time and energy on a sale that returned a very small commission (broker gets a cut).

Since then, mortgage practice has gotten stupider but it is as antisocial as ever.

October 15, 2008 7:34 PM  
Blogger Susan's Husband said...

I just find it amusing to hear Mr. Eagar refer to Fannie Mae and Freddie, creatures of the government directly overseen by Congress, as "unregulated". It's not that Eagar lives on a different planet, just in a different semantic space.

October 15, 2008 8:26 PM  
Blogger Bret said...

Yes, it's always important to state the definitions of key terms and agree on those definitions before having a serious debate with Harry.

October 15, 2008 9:43 PM  
Blogger Harry Eagar said...

The financial markets are not only unregulated but not even supervised. I suggest you think about hedge funds.

FMx2 are not 'the financial markets.'

They worked very well when the regulations were sensible. The regulations were changed in a stupid way, largely to answer the demands of the unregulated and important sectors of the financial system.

The demand had the additional attraction of allowing pelf to be spread around to politicians' friends. It's sorta like when the mayor of my county arranged for paving of a country road. The people who lived at the far end of the road thought it a wise policy. That the road went past the mayor's pig farm was just, so to speak, gravy.

October 16, 2008 11:14 AM  
Blogger Susan's Husband said...

OK, I'll think about hedge funds, which it turns out are not suffering nearly as much as more standard financial institutions. What was your point again?

As for FMx2, they dominated the mortgage market, hold what, about half of all mortgages in the USA? That makes them effectively the market.

October 16, 2008 11:52 AM  
Blogger Harry Eagar said...

FMx2 didn't write any mortgages, just bought paper.

The hedge funds have gone down quite a bit, though not as much as equities indices. However, they are very shaky and although they are entering the race a bit late, may pull a tortoise to the stock market's hare.

October 16, 2008 7:56 PM  
Blogger Susan's Husband said...

You achieved lift off velocity with that one, on your journey to a planet where a consumer that buys half the total production of X has no influence on the market in X.

October 16, 2008 10:00 PM  
Blogger Harry Eagar said...

And that explains the similar overunderwriting in other countries how?

While what FMx2 got involved in was unwise and politic, there isn't any evidence that it had any impact on what happened.

Completely untransparent credit swaps, hedge funds etc. turned finance into a bucket shop. While individual bundles of mortgages are not transparent, the overall status of the paper was obvious to anyone who looked, eg, Warren Buffett, who wrote about it in the 2002 annual report for Berkshire Hathaway.

October 17, 2008 9:59 AM  
Blogger Susan's Husband said...

The same way the unregulated American market tanked the heavily regulated European banks.

October 17, 2008 7:31 PM  
Blogger Harry Eagar said...

Not so heavily regulated as all that. The Icelandic banks appear to have been unrestrained, for example.

So far, with the exception of Iceland and one Swiss bank that drank the American Kool-aid, the only big bank in Europe that has gone down was the victim of buying a sick insurance company.

October 19, 2008 5:07 PM  
Blogger Susan's Husband said...

What about HBOS in Scotland? Why is PM Gordon Brown acting to ban selling naked shorts? Or the Royal Bank of Scotland? Do it not count if a government performs an emergency nationalization before the literal collapse?

October 19, 2008 6:47 PM  
Blogger Harry Eagar said...

You are sticking with your idea that the European banks are heavily regulated. I say they aren't.

I say BOS and B&B did just what the American banks did, but without the spur of FMx2 or CRA.

It was unrestrained financial markets.

October 19, 2008 11:25 PM  

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