Redstate

As Obama and Clinton have said, the people overseas are listening intently to what the democrats are saying. Our European friends must not like what they are saying!

this is going to be pinned squarely on GW's resume (somewhat unfairly, to be honest, given the limited influence the president has on the domestic economy - we really should be blaming the derivatives traders and mortgage brokers). Bad way to go out - eight years, bookended by recessions at the beginning and end of his time in office.

Things were going well? The sub-prime problems happened well before 2006 and has been a problem slowly brewing for years.

I don't blame any party, it's just how economies work. We have good runs and bad runs. We're on a bad run. Companies overreached, it's correcting itself. I guess you can point the figure at the Fed and say they were a bit late to lower rates. You can also point the figure at ourselves for taking out bad mortgages and running up big credit card bills. Either way this is the culmination of a lot of things. It could be a rough start to the year but it will correct itself and things will get back on track.

If there is any good news, refinancing your mortgage is attractive (although I think we still have half a point of cuts still to come). And if you wait a bit, there are going to be some undervalued stocks you can pick up at a huge discount.

...this morning during the AM news broadcast. I'm in London this week, and it's been interesting hearing their take on the whole situation. The general comments have been rather dire, but I've yet to hear reactions to the Fed moves (have had the TV off all day for work). It will indeed be interesting to see where all that cash gets re-invested.

the market has stabilized from pre-rate forecasted opening (down 500+). I didn't think the cut would help, given yesterdays foreign results. They crashed on fears of US recession, so its likely they'll bounce back tomorrow.

Very attractive today.

Higher taxes. More Spending. Regulation. Government intervention in the economy. Price fixing interest rates. Deadbeat borrower bailouts.

You couldn't mix up a stickier goo if you tried.

It really comes down to overvalued stocks and a speculative housing market. Toss in a monumental government debt and a weaker dollar and rising fuel costs and Explain to me how a market correction and recession can be avoided?

Democrats have plenty of things to get blamed for. this isn't one of them. Trying to pin it on them is disingenuous at best.

---
"The bass, the rock, the mic, the treble, I like my coffee black, just like my Metal." - MSI

Do you *still* think stocks are overvalued? I have my own opinion but I'd be interested to hear yours.

**********************************
And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_

Keep in mind, despite the recent drops in the last few months, (from 14,000 or so down to 12,000) We're essentially even with the market level this time last year. So what we've given up the since October is just gains.

There are some indicators that indicate that the stocks are actually *undervalued*, but right now, obviously, the stock market isn't placing much credence to those indicators.

I think it's still a bit overvalued. You'll see some profit taking going on, but when the profit taking stabilizes the market for a few weeks, then at least psychologically, the market won't be over valued.

My big worry is the housing market. I think until it shakes out, it's going to be a big lead Anchor on everything else. and that may take another couple of years.

---
"The bass, the rock, the mic, the treble, I like my coffee black, just like my Metal." - MSI

I won't address your points about valuation, other than to recall the aphorism famously attribute to none other than Keynes: markets can stay irrational longer than you can stay solvent.

But I've been meaning to address the point about the coming problems in the housing market. It's clear that (absent distortive action by a presumptive Democratic President) a lot of mortgages will be resetting at higher rates over the next few years. That's going to be painful for a lot of individuals and may well impact consumer spending patterns.

But I believe the impact on financial markets will be low.

That's because everyone got marked to market and taken out of the game last year. That's the meaning of the all the blood running in Wall Street these last few months. Markets are prospective. As soon as a future effect (like mortgage resets) becomes predictable, markets will adjust immediately.

1. Happy New Year BH, can't remember if I wished you one, so here it is :>).
2. We had about $300B in mortgage ARM resets in '07. We'll have about $800B in '08. Option ARMs will likely start to reset in late '08 and '09.
3. You ain't seen nothin' yet with respect to mortgage defaults. This year should at a minimum match last year and when the Option ARMs start, all hell will break loose, primarily in the high end of the market. Think most of SoCal.
4. The current govt effort to help subprime borrowers will have marginal effect. The same program won't work on A Paper borrowers or those holding Option ARMs.
5. Real estate in most major markets is looking at a downturn of 35% to 40% off 2005 high valuations.

I've covered most of my reasoning for these points last year so I'm not going to beat a dead horse. And, I've gotta make some money today. :>)
____
CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

I don't disagree with any of your points. My point was that the impact of mortgage resets on the financial sector will be muted, because they already took the hit.

Consumer spending, the construction industry and housing values all have a lot of pain yet to go through.

I wouldn't be at all surprised to see some additional - and significant - pressure on the financial sector primarily due to Option ARMs resetting. Those puppies will start resetting with a vengence in about 12 months due to the contractual net am caps being hit. That gives us an additional year for market values of homes to deteriorate and those loans will be at 110% to 125% of their original balance. And they tend to BIG loans in expensive housing markets. Bottom line I wouldn't be surprised to see another hit next year, first or second quarter.
____
CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

I mean the Wall Street firms (sell-side) and all the various buy-side institutions out there. Most of those companies with exposure to mortgage-backed securities have already marked to market.

Perhaps you're anticipating additional distress in banking, warehousing and servicing?

(Also I guess you'd have to include Fannie and Freddie in the "financial sector," no doubt about that.)

Warehousing has already pretty much run it's course.

I think the impact on F/F will be minimal, what's left out there isn't F/F compatable & if the idiots in Congress try to move the risk to F/F we're in for a freaking disaster.
____
CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

I agree. I am also very concerned about the state of the global economy. In particular, many analysts are predicting growth in the East Asian market to be around 6-7%. The 6-7% of estimated growth, IMO, does not incorporate a sharp cutback in exports and the impact of East Asia's greatest trading partners (namely, US, Japan, Germany) seeing rapid economic slowdown, if not a recession.

*********************************
And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_

then please don't ignore my " there MAY be a connection" coupled with "but I doubt it's the only reason".
Still, the sometimes heavy hand of government action is not to be ignored, note your "monumental government debt" comment. For some of the reasons I mentioned this condition will only get worse should a certain party take both the WH and Congress in '08.

So rather than disingenuous at best I could live with mistaken at worst.

"a man's admiration for absolute government is proportinate to the contempt he feels for those around him". Tocqueville

sorry johnt,

I made an assumption that I shouldn't have. You are correct, I was reading a little bit too much into your post.

---
"The bass, the rock, the mic, the treble, I like my coffee black, just like my Metal." - MSI

Had to. If they hadn't, and the US markets had crashed, it would have further fuelled an Asian sell-off, and contagion would have completely taken over. Fundamentals are irrelevant at the moment, because no one's doing deals. All the PE firms, et al are waiting for the bottom to hit before looking for value acquisitions.

MT, fundamentally, I don't think it mattered whether the Fed cut rates today or at the meeting. However, they eliminated uncertainty as to how much Bernanke would cut and provided some badly needed confidence to the markets. Depending on the index, we are down 1.5% - 2.35% on the day. Imagine how bad things would have been had the Fed not cut today and waited until the meeting at the end of the month.

***********************************
And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_

Since the Fed caved this month, what makes one think they won't cave next month. When do people start speculating on what will be the rate cut for next month?

How so?

http://www.treas.gov/press/releases/reports/treasurydynamicanalysisrepor...

Money quote:
“The analysis presented here suggests these policies will result in substantially more economic activity if they are financed by a future reduction in government spending than if they are financed by future tax increases. If the tax relief is financed by future tax increases – that is, if the aggregate amount of tax relief is temporary – then it may result in lower output in the long run"

Warren Buffett has some (just sold out of PetroChina last fall. Looked like an idiot at the time. Now he looks like a genius again.)

Bill Gross has some. He's been talking the bond market down for nearly two years.

From what I can tell, emerging-market investors have gotten just plain slaughtered. As touchy as our markets have been, things are far worse elsewhere.

Having said that, everyone has to make his own decision about when to start buying again. (I bought a little today, but I might be a seller tomorrow.) It's entirely possible that a few weeks from now, the recession fears will have been validated and we could be on the way to 10,000 or lower on the Dow. Or maybe not.

I'm enjoying reading your thoughts, but are we running the risk of having a situation similar to what happened in Japan develop (circa late 90's economic issues with deflation)?

---
"The bass, the rock, the mic, the treble, I like my coffee black, just like my Metal." - MSI

There is a longer answer, but it'll have to wait for another day.

I think it's a pent-up response to three key items:

1) Sky-high oil prices and the impact on the world economy (yes, I realize the bbl price is down considerably over the last week or two, but it's way, way higher than a year or so ago). I think we're just now seeing the trickle-down in an uptick in the inflation rate. I agree with you that the price may well be properly-set, but that doesn't change the impact it has on numerous facets of the economy (goods transportation, petrol-based raw materials, not to mention fuels)
2) The profoundly bad housing market. Housing drives the consumer economy in the USA, which in turn has kept the overall economy out of the doldrums. It's not just real-estate - it's construction materials, household goods (appliances, carpeting, fancy decorations, etc.) that this impacts.
3) A(nother) poor Christmas season - see item 1) and 2)

But I'm nowhere near the economist that you are, so I'm pretty much talking out of my hindquarters...

I'm a businessman. I take a practical rather than a theoretical perspective on business and markets.

before that, too, creates problems of it's own? (I have heard the experts say that if they are too low, money leaves our market looking for greener pastures)

I find it amazing that Bernanke is being credited for a panic reaction to a mess he caused in the first place with his remarks last Thursday before Congress. He should never have spoken his last two paragraphs. What is the Chairman of the Federal Reserve doing commenting on such fiscal policy matters.

It's not that Bernanke is a "rookie", it's that he was always suspect when it came to having the will to resist political pressure to restrain inflation. And with President Bush's proposing a nonsense "stimulus" package the next day, those fears were realized.

The difference between now and the 1970s is that now the unions do not have the leverage to force wages to rise setting off an inflation spiral. But what I am worried about now is that we are going to have a close election (all national elections these days are close), probably with Hillary Clinton as the Democratic nominee, and she knows that her best appeal so far as been to older voters. In Bernanke's remarks last Thursday, he mentioned rising health care costs, costs that say the AARP has not been shy in mentioning to its members. What will Hillary Clinton promise to seniors to get herself elected, and could that set off this generation's version of an inflationary spiral?

It's too early to judge his tenure, and it will be too early for maybe another year or two.

Having said all that obligatory stuff, however, I'm leaning to agreement with you on the question of whether he has what's needed for his job. With Greenspan there was never a question that he would act boldly and proactively when necessary. With Bernanke, that's a question.

I think it's too much to say that Bernanke's testimony in Congress last week touched off this panic (if that's what it is). The stock markets have been in a swoon since New Year's.

The big question for market participants is: what will the next several weeks bring?

One really key thing that contradicts a lot of recent conventional wisdom is that the theory of "decoupling" has been emphatically disproved.

It turns out that the economic outlook in the US really does have a big impact on the rest of the world. This recognition will have all kind of interesting consequences.

I agree that Bernanke's actions don't come across with the confidence that we expected from Greenspan - and if anything we should once again learn that the Fed does not have a superhuman ability to predict the economic future any more than I do. But, I would argue that Greenspan's confidence masked some boneheaded moves that worsened economic conditions when he would have been better off leaving them alone. There must be a healthy balance between confidence and humility in our Fed chairs.

Also, that conventional wisdom on 'decoupling' was absurd on its face. The U.S. economy is both too large and too intertwined with the world to decouple from it - and this works both ways we do not and cannot (at least for the forseeable future until we are a twilight of our glorious self like the British today) operate without impacting and without being impacted by the global economy.

...or on the stock-exchange floor. (I say this with respect because you seem generally knowledgeable about markets and you might be a Chicago Merc bond trader for all I know.)

Trading is a blood sport. Traders are exactly like animals. They look for confidence (which on the Street goes by a different, cruder name).

When they smell fear, they go nuts, just like sharks and piranhas. And most top Wall Street execs are traders.

That's the water Bernanke swims in. People are always going to second-guess whatever boneheaded moves a Fed chairman makes, after the fact. But as far as reassuring the markets in the clutch is concerned, it's that other word for confidence that matters.

I did my time as a trader, now I make money the easy way as a two bit con artist (i.e. consultant). I don't think you are wrong about the trader mentality and the impact it has there but I have never been convinced that the job of the Fed was to make traders or markets feel better in the short term.

I think Greenspan relished his image as 'hero' a bit too much and it clouded his judgement. Bernanke may be too far the other way right now, but I'll give him a more time to prove himself.