Top graph: Dollar versus trade weighted basket of currencies, over the past year. (Source: St. Louis Federal Reserve)
Bottom graph: Dow Jones Industrials Average, over the past year (Source: Yahoo! Finance)
Almost a mirror image.
Heard some very disturbing things about the economy over the weekend from a reliable source in the upper echelons of the financial world:
Gold to hit $2000 - by summer of 2010
Oil to hit $130 a barrel - by summer of 2010
Unemployment in the US may hit 15% (U3) before stabilizing - end of 2010
My point about the stock market was due to the mouthbreather serving as a newsreader commenting about how the US stock market was over 10,000 and she used it as a reason why the US was out of the recession.
There are going to be some significant change to the defition of recession before it actually ends. GDP doesn't mean #### when 20% of your population isn't working.
"Speak English! said the Eaglet. "I don't know the meaning of half those long words, and what's more, I don't believe you do either!"
The Eaglet from Lewis Carroll's Alice in Wonderland
Top graph: Dollar versus trade weighted basket of currencies, over the past year. (Source: St. Louis Federal Reserve)
Bottom graph: Dow Jones Industrials Average, over the past year (Source: Yahoo! Finance)
Almost a mirror image.
I'd be careful about listening to anyone who claims to know what gold, oil, or any other commodity will cost 9 months from now. There are a lot of variables in the picture and nobody really knows. Barring a significant supply disruption, oil at $130 would suggest a pretty robust recovery, as demand would have to notch up considerably to support that kind of price, and demand increases with economic activity. That kind of recovery would not be likely to drive the price of gold to $2000.Originally Posted by Ski
Not impossible, but it doesn't seem the likeliest scenario.
Considering the source - an economist working for one of the largest banks in the world who has a track record of predictive success...take it or leave it, doesn't matter to me.
As for oil, the price can go higher due to demand outside the United States, which is possible.
As far as I'm concerned, there are no more "likely" scenarios to be played out within macroeconomics and the economy. The "changes" that have been applied after the last collapse have only reinforced the same system...there have been no structural reforms.
Caveat emptor as usual.
"Speak English! said the Eaglet. "I don't know the meaning of half those long words, and what's more, I don't believe you do either!"
The Eaglet from Lewis Carroll's Alice in Wonderland
http://www.telegraph.co.uk/finance/e...-collapse.html
Very interesting story here. Hits a lot of the core issues of why this economy is nowhere near healthy - private debt becoming public debt, inflation, junk bonds, etc...
Societe General is the 11th largest bank in the world.
"Speak English! said the Eaglet. "I don't know the meaning of half those long words, and what's more, I don't believe you do either!"
The Eaglet from Lewis Carroll's Alice in Wonderland
You might want to ask your economist exactly why he expects oil prices to respond to a renewed crisis in a manner opposite from what experience and common sense would suggest. It's worth noting that the SG worst case scenario report that you link to sees oil dropping to $50 a barrel in a renewed crisis.
Interesting how we see what we are conditioned to see. The article cites deflation as a threat, not inflation; junk bonds are mentioned only as a symptom (junk bond yields dropping in the event of the worst case scenario), not a cause.Hits a lot of the core issues of why this economy is nowhere near healthy - private debt becoming public debt, inflation, junk bonds
This is a worst case scenario, not a forecast. many of the big financial houses are doing this now, they put out 3 forecasts instead of one, best case, worst case, median. It's basically an ass-covering maneuver, no matter what happens it will be within the forecast range. Focusing entirely on the worst case scenarios gives as distorted a view as focusing on the best case scenarios would.
There's a tendency these days to confuse the financial services industry and the financial system with the economy; it's neither honest nor useful. Financial issues, debt particularly, are certainly matters of concern but they are not at the core of what troubles the US economy. The core issue to me is American competitiveness, or the lack thereof.
My eyebrows are raised at the striking correlation of weakening dollar and rising stock market prices (reposted below for convenience). This would seem logical if the weaker dollar were spurring exports, but it's not.
I'm not sure there's any direct relationship beteen the sliding dollar and the rising equity markets at this point. It could be argued that a cheaper dollar makes it cheap for foreign investors to put money into US equities, but that would tend to push the dollar up.My eyebrows are raised at the striking correlation of weakening dollar and rising stock market prices (reposted below for convenience). This would seem logical if the weaker dollar were spurring exports, but it's not.
I'd say the falling dollar runs back to 2 basic causes: very low interest rates make dollar holdings unattractive, and rapid increases in emerging market indices make it attractive to borrow cheap dollars and invest them in non-dollar markets that seem to offer higher returns, a dangerous practice but not an unusual one.
Stock markets are up in a lot of places, partly because there's a lot of cheap money around and partly because of an anticipated economic recovery: stock markets tend to respond more to expectations than actual conditions. I personally think stock markets have outrun fundamentals and are walking on pretty thin ice - and that many emerging markets are moving into bubble territory - but I'm by nature suspicious of such things.
It's always hard to base a conclusion on the relationship between two data points - in this case the dollar and US stock markets - simply because there are so many other factors out there that influence both.
Moody's has put out a rather disturbing report:
http://www.telegraph.co.uk/finance/e...t-spirals.html
"Speak English! said the Eaglet. "I don't know the meaning of half those long words, and what's more, I don't believe you do either!"
The Eaglet from Lewis Carroll's Alice in Wonderland
If only they'd been so pessimistic when rating SPVs.
Looking for good background material regarding the financial crisis, with specific emphasis on the following...
- Decision-making process for repealing provisions of Glass-Steagals and the hindsight analysis
- Rationale for eliminating the uptick rule and the hindsight analysis
- Impact of foreign investment on housing bubble (would it have happened without it?)
- How AIG got so deep into credit default swaps
- The role of Fannie Mae in the increase of subprime lending
- Changes or proposed changes for corporate governance, leverage requirements, and other legislative responses made or proposed
Non-controversial articles that lay out the facts as most would agree on them are ideal - at least to start off. I'm not looking for "inside accounts," such as books that detail the minute-by-minute deals that resulted in Bear Stearns being purchased or Lehman Brothers failing. Big picture, policy-maker perspective is ideal, preferably stuff worthy of inclusion in a bibliography.
Any takers? The only book on my list, for the moment, is the one by Barth (it looked good when I flipped through it at B&N, but the $60 price tag was a bit steep for a book that I wasn't sure I would regret buying - I now see it for half that at amazon - and, yes, I will "tweak the surge"). There seems to be dozens of books that are similar, but each seems to have an ideological agenda to lay blame, rather than hashing out what happened.
The first chapter of Thomas Friedman's Hot, Flat, and Crowded (version 2.0) is the best explanation that I've read so far as to what happened. I haven't read the whole book yet, but I thought he did a good job of explaining the various factors (deregulation, lowering risks, inflating expectations, and collusion between gov't/business) of the last two decades in both the stock and housing markets. Friedman breaks it down (with references) into good prose not economic text. Well worth the read.
James Galbraith's website with index to his papers pick and choose as you want. Also Malcom Gladwell's new book (can't remember the title) but he is supposed to have a chapter in there on certain persons who saw the whole coming just by Reading certain documents at least according to the TV interview I saw.
http://utip.gov.utexas.edu/JG/publications.html
One source...
The Economist, Jan 22nd 2009, A special report on the future of finance , The uneven contest
It helps that the intellectual fashion has been for deregulation and free markets. Politicians such as Phil Gramm, formerly a senator from Texas, sponsored the repeal of the Glass-Steagall act, a Depression-era separation of investment and retail banking. That move has since come under attack as the sort of “market fundamentalist” project that caused the bubble. However, the supporters of the repeal argue that it was really a first step towards modernising a system which had outgrown Glass-Steagall. The original act described the world in categories that no longer fitted the industry it was supposed to regulate. The problem was not so much deregulation but regulation’s failure to evolve with the so-called “shadow banking system”.
This is a nexus of private-equity and hedge funds, money-market funds and auction-rate securities, non-banks such as GE Capital and new securities such as CDOs and credit-default swaps. It was erected over decades, partly on useful innovations and the desire for higher returns and partly as a way to avoid the cost of regulation. On the eve of the crash, more capital was flowing through it than through the conventional banks. Now that it has imploded, the banks cannot fill the hole.
To see the system at work, look at auction-rate securities, a sort of long-term debt invented in the 1980s. The innovation was to set the interest rate in an auction, typically every seven, 28 or 35 days, giving lenders the chance to sell out each time. In theory, this offered the best of both worlds. Borrowers got long-term debt at near short-term interest rates. Lenders got almost instant access to their cash at a higher yield. At its peak the market was worth some $330 billion.Regulators are not the impartial, omniscient judges that legislation so often presumes. How could they be? In banks even senior managers have often lacked the timely and detailed information they needed to rein in their own traders. Regulators would struggle to do any better. They live in the financial markets. Many of them come to see the world in the same terms as their charges do. Rather than cast doubt on their own judgment by announcing that a long-held practice has ended in humiliation, regulators are tempted to hang on just a little bit longer.If something needs rescuing, it is a sign that it needs regulating. By that test, an awful lot needs to be rethought after this past year. The rescues of banks, insurers and mortgage lenders have also left some cleaning up to do. It seems harsh to criticise decisions improvised under pressure over a series of autumn weekends, but the authorities were inconsistent. The rescue of Bear Stearns wiped out the common shareholders. The rescue of Fannie Mae and Freddie Mac junked both the common shares and the preferred shares (which rank above them in a bankruptcy). With Lehman Brothers, everyone lost their money. When AIG was saved, only the common shareholders suffered. But the bail-out of Washington Mutual hit both shareholders and senior-debt holders.
Any rescue is a balance. The immediate aim, to support the system, suggests an indiscriminate bail-out. Even punishing shareholders is counterproductive, because that makes raising capital harder just when capital is what the financial system needs most. On the other hand, capitalism requires the possibility of failure. Investors must pay for their mistakes.
The authorities’ inconsistency left everyone guessing about whom they would rescue and how. It spread uncertainty among potential lenders and hope among petitioners. If you had been about to buy senior bank debt, it meant that you would think twice. If, like the car industry, you wanted a soft loan, you were encouraged to press your case.
After the rescues, the state is now the biggest owner of bank shares in many economies. Some governments may be tempted to direct their banks’ lending, especially if the credit markets are not working. And forced mergers and rescues have created some banks that are unambiguously too big to fail. The market will break some of these apart, as at Citigroup. But regulators need to re-establish the idea that intervention is based on rules. The best way to do that is through re-regulation.
Sapere Aude
Thanks. Anyone read the Barth book? Just curious how useful it is before I pony up $40 for a tome as thick as the NYC phone book.
A good resource is ....
Some decent background stuff:
Fool's Gold by Gillian Tett. Tett gives a great background on the origins of CDO and CDS, and how CDO originated as an instrument of both regulatory arbitrage and a way to actually reduce systemic risk. Instead it became a way to leverage oneself to previously unthought of levels while infecting the entire system with systemic risk.
Tett is superb at explaining complex credit instruments and their effects in layman's terms. Her focus is on leverage and the big banks --- no real focus on the retail end of subprime. To my mind this puts the emphasis where it belongs. Subprime and the real estate bubble itself would never have been a system-threatening problem if not for the way the shadow financial system leveraged itself into bailout country.
Nassim Taleb, Black Swans for an (easy) understanding of the math. Then every issue of the economist in the last 10 years (I'm not kidding). Then sit back and thing about it. Everybody is trying to equate this depression to the "Great Depression" even when all the economic indicators are MUCH worse. You also need the 1970s through late 1990s education in economic indicator abuse by the US and International organizations. After 1974 fuel crisis they started really messing with the numbers but Clinton made it high art. Bush just followed the script. As such comparisons are hard and that means you need to look for the changing patterns. The real estate debacle has good roots in the 1980s Japanese bubble which led to their lost decade. Lots of good literature on that too.
Sam Liles
Selil Blog
Don't forget to duck Secret Squirrel
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Does The Fed Manipulate The Stock Market
Yes it does. Link Below.
http://themoneymasters.wordpress.com...-stock-market/
That seems a bit alarmist to me. Let's concede that the indicators are genuinely worse. Part of the reason for the depth and slowness of recovery of the depression were poor responses by the Fed (see Friedman and Schwarz). But we've learned from that. So, even if it is worse, our response can make it less painful. Thus far, that seems to be the case. No Hoovervilles in my neck of the woods. Out here, the "poor" are still driving cars, watching TV, and about one Ho-Ho away from type-2 diabetes.
Latest from William Engdahl on Economics and A'stan and Yemen.
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