If 12,800 doesn't hold, we're going below 12,000 and the devil take the hind most.
Posted on 01/08/2008 11:12:01 AM PST by Travis McGee
Bush convenes Plunge Protection Team
By Ambrose Evans-Pritchard, International Business Editor
Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.
It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.
The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.
Judging by a well-briefed report in the Washington Post, a mood of deep alarm has taken hold in the upper echelons of the administration. "What everyone's looking at is what is the fastest way to get money out there," said a Bush aide.
Emergency measures are now clearly on the agenda, apparently consisting of a mix of tax cuts for businesses and bungs for consumers. Fiscal action all too appropriate, regrettably.
We face a version of Keynes's "extreme liquidity preference" in the 1930s - banks are hoarding money, and the main credit arteries of the financial system remain blocked after five months.
"In terms of any stimulus package, we're considering all options," said Mr Bush. This should be interesting to watch. The president is not one for half measures. He has already shown in Iraq and on biofuels that he will pursue policies a l'outrance once he gets the bit between his teeth.
The only question is what the president can manage to push through a Democrat Congress.
The Plunge Protection Team - long kept secret - was last mobilised to calm the markets after 9/11. It then went into hibernation during the long boom.
Mr Paulson reactivated it last year, asking the staff to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis", he said.
It seems he failed to spot the immediate threat from mortgage securities and the implosion of the commercial paper market. But never mind.
The White House certainly has grounds for alarm. The global picture is darkening by the day. The Baltic Dry Index has been falling hard for seven weeks, signalling a downturn in bulk shipments. Singapore's economy contracted 3.2pc in the final quarter of last year, led by a slump in electronics and semiconductors.
The Tokyo bourse kicked off with the worst New Year slide in more than half a century as the Seven Samurai exporters buckled. The Topix is down 24pc from its peak. If Japan and Singapore are stalling, it is a fair bet that China's efforts to tighten credit are starting to bite. Asia is not going to rescue us. On the contrary.
Keep an eye on Japan, still the world's top creditor by far, with $3 trillion in net foreign assets. The Bank of Japan has been the biggest single source of liquidity for the global asset boom over the last five years. An army of investors - Japanese insurers and pension funds, housewives and hedge funds borrowing at near zero rates in Tokyo - have sprayed money across the Antipodes, South Africa, Brazil, Turkey, Iceland, Latvia, the US commercial paper market and the City of London.
The Japanese are now bringing the money home, as they always do when the cycle turns. The yen has risen 13pc against the dollar and 12pc against sterling since the summer. We are witnessing the long-feared unwind of the "carry trade", valued by BNP Paribas in all its forms at $1.4 trillion.
The US data is now relentlessly grim. Unemployment jumped from 4.7pc to 5pc - or 7.7m - in December, the biggest one-month rise since the dotcom bust and clear evidence that the housing crunch has spread to the real economy.
"At this point the debate is not about a soft land or hard landing; it is about how hard the hard landing will be," said Nouriel Roubini, professor of economics at New York University.
"Financial losses and defaults are spreading from sub-prime to near-prime and prime mortgages, to commercial real estate loans, to auto loans, credit cards and student loans, and sharply rising default rates on corporate bonds. A severe systemic financial crisis cannot be ruled out. This will be a much worse recession than the mild ones in 1990-91 and 2001," he said.
Sovereign wealth funds stand ready to rescue banks, as they have already rescued Citigroup and UBS. But as Moody's pointed out this week, the estimated $2,500bn in lost wealth from the US house price crash is more than the entire net worth of all the sovereign wealth funds in the world.
Add fresh losses as the property bubbles pop in Britain, Ireland, Australia, Spain, Greece, The Netherlands, Scandinavia and Eastern Europe, as they surely must unless central banks opt for inflation (which would annihilate bonds instead, with equal damage), and you can discount $1,500bn in further attrition.
Not even a Bush New Deal can hold back the post-bubble tide that is drawing in across the globe. What it can do is buy time. Fortunately for America - and the world - the US budget deficit is a healthy 1.2pc of GDP ($163bn). Washington has the wherewithal to fund a fiscal blitz.
Britain has no such luxury. Our deficit is 3pc of GDP at the top of the cycle. Gordon Brown has shut the Keynesian door.
That’s not the real Plunge Protection Team. The real one stays out of sight and is always on the job. This is a decoy.
~~Irving Fisher PhD, leading U.S. economist , New York Times, October 17, 1929
"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."
~~Harvard Economic Society, October 19, 1929
"This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."
~~R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929
Yesterday’s action from about 3:40 to 3:50 was either PPT or the most amazing group short-covering rally on no news whatsoever of all time.
Nice to know that even eighty years ago, financial gurus had no idea what they were talking about.
Some things never change.
If 12,800 doesn't hold, we're going below 12,000 and the devil take the hind most.
I don’t think any PPT will make much of a difference.. At least Jim Rogers isn’t too optimistic.
http://www.youtube.com/watch?v=XGmEFVpmg3o
We can't post Bloomberg articles, but check this out. Scary stuff afoot. The rotten chickens are coming home to die.
Credit Derivatives May Lose $250 Billion, (PIMCO CEO Bill) Gross Says
Jan. 8 -- Credit-default swaps, used to help protect against the risk a company won't pay its debt, may cause losses of $250 billion this year, helping send the U.S. economy into a recession as corporate defaults rise, Pacific Investment Management Co.'s Bill Gross said. ``Credit-default swaps are perhaps the most egregious offenders'' in today's banking system, Gross wrote on the company's Web site today. ``Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.''
Same author, article from 2006...”The bonds markets are alert, even if equities are not. Interest rates on 10-year Treasury bonds (4.46 per cent) have dropped below short-term rates (5.25 per cent) for five months. This is the “inverted yield curve” of satanic fame, flag of recession. Ignore that at your peril.”
So two years later, no recession. That’s not to say that he won’t be right this go...but financial analysts aren’t infallible.
Remember, as do we all, the DJIA was at 12,000 when grandma Pelosi took control of her House.
ROTFL!
Amen.
Why not simply cut tax rates? That’s all the economy needs.
I’m against gov’t intervention in the markets but i have to admit it would be satisfying to see, if only once, the shorts get the ass kickin’ of all time.
The same tools that have helped to delay the inevitable, will deepen and strengthen the crisis when it comes.
With all due respect, Jim Rogers has been “Chicken Little” hysterical for a long time.
Great Quotes
Our structural problems are now so deep, that the old tools (tax cuts, interest rate cuts) won't touch them.
I buy quality companies, reinvest dividends and distributions and sit tight.
"We're not about to go into a situation where (real estate) prices will go down. There is no evidence home prices are going to collapse."
~~Alan Greenspan, May 21, 2006
"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
~~E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.”
~~"Only Yesterday: An Informal History of the 1920’s" by Fredrick Lewis Allen
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
~~Ludwig von Mises
"All safe deposit boxes in banks or financial institutions have been sealed...and may only be opened in the presence of an agent of the I.R.S."
~~President F.D. Roosevelt, 1933
Let’s borrow money from the ChiComs! Heck, let’s just print it! Free liquidity for everyone!
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