Posted on 09/20/2008 8:38:25 AM PDT by TigerLikesRooster
Now the myth that was floating around for many years was that the United States was going to go into its own abyss while the world somehow boomed on its own. According to many of these people, the United States was contained. Did Ben Bernanke give them his early 2007 speech about the subprime market being contained? The recent turn of events are as follows:
(a) U.S. Dollar rally
(b) Commodities falling
(c) Inflation moderating
(d) Housing still declining
These events are occurring because the world has not decoupled. That is, we are still very much intertwined and when the larger economies sneeze, the smaller economies get a severe flu. In fact, in places like the U.K., Spain, Ireland, and Australia they have housing bubbles that are comparable or even larger in size. Many of these countries are simply one or two years behind the United States so if we are in the third inning to use the baseball analogy these countries are barely seeing the players take the field. This reality has taken the market over and many people are returning back to the perceived safety of the U.S. Dollar which is still by far the world’s reserve currency. Decoupling is a myth.
This realization has also pushed down commodities as many investors unwind previous trades. The meteoric rise of oil this year was simply stunning. When oil hit $145.29 the entire conversation in America seemed to revolve around oil. “Hey man, did you see that gas hit $4.25? It cost me $140 to fill up my Hummer with spinners. I think I might have to ride with only one spinning rim and sell the rest off for fuel.” Now that oil is back under $100 a barrel and the subsequent Lehman Brothers debacle, the focus is now shifting to Wall Street. It was fascinating to see that to most Americans, the difference between $4 $3.75 gas and $3.50 was the centerpiece of economic stability. Yes, their home just lost $50,000 in equity but they just paid $15 more at the gas pump so let us focus on those $15. Penny wise and extremely pound foolish. This is more a psychological gimmick because we tend to feel things we interact with on a routine basis. You buy gas often. You shop for food often. You don’t buy and sell homes that often (unless you live in California and ended up flipping houses each time you filled up for gas). If anything, this drop in energy should at least refocus the public’s attention to the main issue of the economy. That is, the suffocating debt of mortgages and the turmoil in the credit markets. Make no mistake that the drop in oil is going to help the bottom line of many Americans but remember that the drop comes because the economy is in disarray. That is, demand is falling and people are buying cheaper more fuel economical cars thus slamming the U.S. automakers into the ground. Many of the big domestic cars were built on a model of $2 gasoline. I’m not sure if we’ll ever see that again.
Back to the decoupling myth, let us first take a look at GDP for the top countries:
*Source: Wikipedia
The United States makes up 25% of the world GDP. If we combine the Eurozone and the United States, we then have 56% of the world GDP. Throw in Japan and now we are 64% of world GDP. Japan is in a recession. The U.S. is in a recession. Many countries in Europe are teetering on recession and given many regional housing bubbles, they will also tilt into recession. How can anyone believe in decoupling? But what about China, Australia, Brazil, or Mexico? Let us take a quick rundown of the largest stock exchanges around the world:
In fact, the United States in relation to many of these other markets is fairing better. You need to remember that the credit systems are now global. Let us go back to AIG for a second. AIG currently as of midyear had reported $441 in credit default swaps. More that 75% of these were held by European banks. Is that decoupling? The financial innovations were spread around the world. Fannie Mae and Freddie Mac which seem like wholesome American companies have enormous amounts of their debt floating around the globe. Is it any wonder that China expressed “concern” when it looked like the government wasn’t going to be bailing them out? The fate of the current global economy is at hand and given the amount of debt floating out there, we can only guess what is floating out yonder.
Ping!
Actually, this is a picture of the mainstream press.
What happened? Was it death by natural causes, or was it, as some suspect, murder? More than a few veteran Wall Streeters believe an investigation by the Securities and Exchange Commission will uncover evidence that Bear was the victim of a gigantic “bear raid”—that is, a malicious attack brought by so-called short-sellers, the vultures of Wall Street, who make bets that a firm’s stock will go down. It’s a surprisingly difficult theory to prove, and nothing short of government subpoenas is likely to do it. Faced with a thicket of lawsuits and federal investigations, not a soul in Bear’s boardroom will speak for the record, but on background, a few are finally ready to name names.Bear Stearns was running one of the worst of the mortgage mills in history (EMC Mortgage). They intentionally defrauded hundreds of thousands of people with deceptive mortgages. Then they sold and resold and resold the same toxic paper via CDOs to pension funds, corporations and foreign investors. All in the name of greed.“I don’t know of any firm, no matter the capital, that could have withstood that kind of bombardment by the shorts,” says a vice-chairman of another major investment bank. “This was not about capital. It was about people losing confidence, spurred on by rumors fueled by people who had an interest in the fall of Bear Stearns.”
He pauses to let the idea sink in. “If I had to pick the biggest financial crime ever perpetuated,” he concludes, “I would say, ‘Bear Stearns.’ ”
I say, "Bear deserved to get taken apart like this. Screw them em all."
This situation is going to get very hairy. It will devolve a little more, then a little more as time goes by
Feels like an episode from Mythbusters:
Myth: NASDAQ tech stocks deserve their massive P/E ratios
Reasson: Its a new economy.
BUSTED!
Myth: Housing never goes down.
Reason: Population growth and a paradigm shift.
BUSTED!
Myth: There is no oil bubble or speculation on oil.
Reason: Speculations isn’t possible unless inventories rise.
BUSTED!
Myth: World economies will soar despite US economic downturn.
Reason: The developing nations are developing.
BUSTED!
In every single one of these busted myths, there has been one over-riding conclusion that lead the experts and those who believed them to delusional conclusions: Past performance MUST guarantee future results.
If tech stocks are booming, they will keep booming.
If house prices are rising, they will keep rising.
If oil prices are rising, they will keep rising.
If developing countries GDP is soaring, they will keep soaring.
The idiots who built these myths and the idiots who followed just ignored the cycles. They couldn’t think beyond the existing trend and caused a wake of destruction in their path for all who heed their sour advice. Unbelievable that “experts” can be that stupid. No, it’s highly believable.
Forgot to add, very good article. The BRICs are tumblings.
There can certainly be speculation on commodity futures even without inventories changing hands, and that speculation can affect current prices. Nonetheless, I would suggest that, in a large market, the only way speculators as a group can make money is if they work to stabilize rather than destabilize prices. Of course, it is quite possible for some speculators to make a lot of money by enticing suckers to enter the speculative market. In that case, the former group of speculators can make money from the latter.
I wrote that reason because of all the Freepers here like “Curiosity” who swore up and down there couldn’t possibly be oil speculation and kept screaming “where is the excess inventory. You can’t have speculation without a buildup of inventory.” No matter what I said, they wouldn’t listen. Now they are proved wrong, and where are they? Hiding in their hidey-holes so they don’t have to eat crow, that’s where.
Do you agree with my point about speculators in aggregate? To be sure, in small markets it's possible for speculators to manipulate the market at the expense of producers and consumers, but I would expect the oil market to be much too large for that to be very effective.
Incidentally, I wish the point about speculators' aggregate profits would be articulated clearly to people who are thinking of getting in the game. The unwise speculators are very bad for the markets; assuming they're using their own money, they hurt themselves as badly as they hurt anyone else, so I don't want to demonize them, but nonetheless both they and the markets would be better off if they stayed out.
To be honesty, I lack the financial sophistication to appreciate your point about “speculators in aggregate”. Sorry. I’m not that savvy.
Speculators make money when they buy goods at a lower price than they sell them. The act of buying goods pushes up prices, and the act of selling goods pushes down prices. Thus, a speculator who makes money will raise prices when they are low and reduce them when they are high, thus damping price swings.
A speculator who buys high and sells low will raise prices when they are high, and reduce them when they are low. This will amplify such price swings, to the detriment of the market. No law is needed to limit the damage from such speculators, however, beyond requiring them to play with their own money. Speculators who are on the wrong side of the market will increase market swings while they're in, but they'll soon run out of money and thus be forced out.
The only way speculators would be able to, on aggregate, increase market swings would be if those speculators were, on aggregate, losing money. While there may be enough fools dumping money into oil speculation markets to contribute to market swings, any such fools will pay dearly for for their actions.
Crystal clear. Thanks for the help understanding.
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