Where to now?
I am not convinced that we have seen THE LOW of this market. It is possible that we have seen the low for 2008, but I doubt it. I believe that we have another low (Dow, SPX, NDX?) to be seen soon in November. It may be that not all of the major indices reach a new low. If so, this could signal a rally. How strong is the important question, because regardless of any new lows, we have become oversold enough for a bear market rally to occur. Ironically, a new low with non-confirmation by some major index and some leading stocks could produce the conditions for the sharpest, strongest rally. One lasting into early 2009 and possibly taking the Dow back to the 11,000 mark. This would signify a recovery of approximately one-half of the recent loss and would signal to many that all is clear. But, in reality, such a rally is consistent with a bear market. Such rallies were common in the 1930's and one such rally occurred between November 1929 and April 1930. Could such a rally happen again? Quite possibly and quite probably. It would coincide with the first 100 days of an Obama administration. After all of the "liquidity" the US and European Central Banks have flooded the global financial system with in the last two months, it seems almost impossible that it would not have the effect of inflating the global financial system, at least temporarily. But the longevity of any such revival is questionable. Because the quality of the US Federal Reserve's "book" is now questionable. The truly revolutionary changes the US Fed and Treasury have wrought on the US financial industry will undoubtedly have a significant impact, although not necessarily the one Ben and Hank intend. For example, AIG has been rapidly burning through the more than $100 billion the government has promised. At this rate, they will need another captial infusion before the year is over. But it seems likely that if they can make it through December 31st (they probably can) then the next crunch could occur at the end of Q1.
The $168 billion fiscal stimulus package has been squandered. Now it has to be paid for. Bear Stearns required $29 billion in guarantees from the Fed and more than $3 billions has already been lost. Freddie and Fannie have gobbled up $200 billion. The real estate/mortgage market has been temporarily stabilized, but eventually the bill must be paid. The aforementioned AIG has already consumed about $80 billion with another $50 billion in the bucket. Nancy Pelosi and Henry Reid have written Hank Paulson a blank check for $700 billion. $125 billion has already been spent with another $125 billion to be disbursed in the next few weeks. My math says that this totals $1.23 billion in promises, with about $700 billion already spent. Add in a likely $300 billion fiscal stimulus package being discussed and the total tab will be about $1.5 trillion. With the "subprime", foreclosure, real estate or whatever-you-want-to-call-the-bursting-real-estate-bubble crisis likely to destroy $2 trillion in "value", the total cost of these two major hits to the economy will be $3 trillion in wasted capital. Add in the annual cost of our multiple military adventures of $150 billion plus per year and a likely financing cost for the annual budget deficit of $250 billion, a looming commercial real estate breakdown and a potential credit card collapse and it seems likely that we will see total federal debt balloon to at least $15 trillion over the next few years , possibly even as high as $20 trillion. The US Treasury issued $725 billion in paper in the fiscal year just ended and it is estimated that next year they will need to issue $2 trillion in bonds, notes and bills. These sums are truly staggering. And this does not even necessarily address the issue of the $62 trillion (notional amount) of toxic waste (CDS, etc) that is sitting on the books of major financial institutions waiting to sink balance sheets. And yet Congress is somewhat reluctant to bailout Detroit to the tune of $25-50 billion. Small changed by current standards (using that term very loosely). It is hard to imagine that the US dollar will survive all of this. Even though it may be difficult to fathom, it may be even more difficult to imagine the global financial system surviving intact in anything resembling its current form. Too much damage has been done. Too much bad debt has been created. In some way, the deadwood in the system must be cleared out. The next two years will indeed be interesting times.
The $168 billion fiscal stimulus package has been squandered. Now it has to be paid for. Bear Stearns required $29 billion in guarantees from the Fed and more than $3 billions has already been lost. Freddie and Fannie have gobbled up $200 billion. The real estate/mortgage market has been temporarily stabilized, but eventually the bill must be paid. The aforementioned AIG has already consumed about $80 billion with another $50 billion in the bucket. Nancy Pelosi and Henry Reid have written Hank Paulson a blank check for $700 billion. $125 billion has already been spent with another $125 billion to be disbursed in the next few weeks. My math says that this totals $1.23 billion in promises, with about $700 billion already spent. Add in a likely $300 billion fiscal stimulus package being discussed and the total tab will be about $1.5 trillion. With the "subprime", foreclosure, real estate or whatever-you-want-to-call-the-bursting-real-estate-bubble crisis likely to destroy $2 trillion in "value", the total cost of these two major hits to the economy will be $3 trillion in wasted capital. Add in the annual cost of our multiple military adventures of $150 billion plus per year and a likely financing cost for the annual budget deficit of $250 billion, a looming commercial real estate breakdown and a potential credit card collapse and it seems likely that we will see total federal debt balloon to at least $15 trillion over the next few years , possibly even as high as $20 trillion. The US Treasury issued $725 billion in paper in the fiscal year just ended and it is estimated that next year they will need to issue $2 trillion in bonds, notes and bills. These sums are truly staggering. And this does not even necessarily address the issue of the $62 trillion (notional amount) of toxic waste (CDS, etc) that is sitting on the books of major financial institutions waiting to sink balance sheets. And yet Congress is somewhat reluctant to bailout Detroit to the tune of $25-50 billion. Small changed by current standards (using that term very loosely). It is hard to imagine that the US dollar will survive all of this. Even though it may be difficult to fathom, it may be even more difficult to imagine the global financial system surviving intact in anything resembling its current form. Too much damage has been done. Too much bad debt has been created. In some way, the deadwood in the system must be cleared out. The next two years will indeed be interesting times.
posted by Matt Butler at 9:48 PM
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