Category: Economics & Business

And you’re worried about your portfolio

American stocks are holding their own compared to the rest of the world. Losses since the summer of 2007:

Here’s a sampling (not meant to be all-inclusive):

Markets down more than 70%: Vietnam (-70.5%), Peru (-73.2%), Ireland (-73.4%), Russia (-73.9%), Iceland (-88.7%).

Markets down between 60% and 70%: Hong Kong (-60.1%), Poland (-62.6%), China (-69.8%).

Markets down between 50% and 60%: South Korea (-54.5%), Italy (-55.2%), Egypt (-56.9%), Brazil (-57.2%), Japan (-58.1%), Singapore (-58.2%), Turkey (-58.5%), India (-58.3%).

Markets down between 40% and 50%: Great Britain (-42.3%), Australia (-43.3%), U.S.-S&P 500 (-44.0%), Spain (-46.4%), Germany (-47.0%), Mexico (-48.3%).

Money & Company | Los Angeles Times

The euro is down to $1.262, a two-year low. Paris anyone?

Line of the day so far

“The Jerome Levy Forecasting Center at Bard College, … has been among the most worried — and therefore, most accurate — forecasters over the past several years.”

Floyd Norris Blog – NYTimes.com

I recommend you NOT go and read what the Jerome Levy Forecasting Center at Bard College has to say. Save it for next Friday night — you know the night you want something really scary for Halloween.

The Crash

Though forever entwined, the stock market crash of 1929 and the Depression were distinct. Neither caused the other.

The stock market that crashed in the fall of 1929 was overheated by speculation. The bubble simply burst, as speculative bubbles always do. (What’s amazing is that this lesson of history never seems to keep the next bubble from forming.)

The market stood at 452 on September 3, 1929. On November 13 it bottomed at 224, the end of the Crash. That’s a loss of just about 50% in ten weeks. (I’m relying on the numbers in Galbraith’s The Great Crash and he relied upon The New York Times Industrial index.)

The market was steady after that, rising some in early 1930, then dropping notably in June. From June on the market just kept dropping until the index reached 58 in July 1932. These losses were related to the Depression, a symptom of it, not a cause.

The Recession Is Not Caused by the Credit Crunch

The economy is not in a recession because of the credit crunch. The economy is going into a recession because of the crash of the housing bubble. Homeowners are losing on the order of $8 trillion in housing bubble wealth, $110,000 per homeowner. For most families, this is most of their wealth.

It was this housing bubble wealth that drive consumption and pushed the savings rate to near zero over the last four years. Now this wealth is disappearing and people are cutting back their consumption.

Dean Baker

The Great Crash

NewMexiKen is reading John Kenneth Galbraith’s classic The Great Crash, the story of the stock market crash of 1929, first published in 1954. (I have the 1961 edition.) It’s just 200 pages and worth your time.

History does not repeat itself, but the parallels between 1929 and 2008 are striking — financial speculation run rampant, naysayers shushed or ignored, reassurances abundant, new types of financial instruments, leverage maximized, regulation non-existent. And then the bubble burst, starting in September particularly and accelerating in October. Fascinating.

The Dow Jones Industrial Average

Here are the 30 current components of the Dow Jones Industrial Average, the leading stock indicator for 80 years. Corporations have been removed and added over time, their stock values weighted to keep the Index consistent.

Blue chippers, every one. Even so, collectively their shares lost another 5.7% today (down 7.5% at one point). The Dow closed at 8519.21, down over 22% in 30 days.

(Or, as Atrios puts it, “Another exciting day at the dog track.”)

3M
Alcoa
American Express
AT&T
Bank of America
Boeing
Caterpillar
Chevron
Citigroup
Coca-Cola
E.I. du Pont de Nemours
Exxon Mobil
General Electric
General Motors
Hewlett-Packard
Home Depot
Intel
International Business Machines
Johnson & Johnson
JP Morgan & Chase
Kraft Foods
McDonald’s
Merck
Microsoft
Pfizer
Procter & Gamble
United Technologies
Verizon
Wal-Mart
Walt Disney

Plenty of blame to go around

Award-winning reporter Charles Duhigg of The New York Times on This American Life, October 11, 2008:

The blame for this is absolutely bipartisan. Both parties deserve a great deal of blame for what happened with the subprime mess. And to try and pin the blame on one party or the other really muddies the issue. A crisis like what’s going on right now, can’t develop without everyone fueling it. I mean we’re looking at the biggest crisis in a century. That only happens when basically everyone drops the ball. So there’s enough blame to give to both parties here.

Fannie and Freddie were part of the problem, but not the cause of the problem.

Neither McCain nor Obama have any particular claim to doing either right or wrong.

(We know Duhigg is good because he’s a native New Mexican.)

A billion here a billion there

You know that $700 billion that John McCain and Barack Obama say we’re sending to “tyrants and dictators” because of our dependence on foreign oil? It doesn’t exist. In fact, it appears that Boone Pickens made it up.

I only know this thanks to the A.P.’s H. Josef Hebert, who just did a tremendous piece on the mythology behind the $700 billion number. Pickens seems to have come up with the number by simply multiplying the number of barrels of petroleum products we import every year by $145, which happens to be oil’s peak price this year (and it’s peak price of all time, for that matter).

The Balance Sheet

The actual amount we send to our “enemies” for oil is more likely less than $100 billion. Click on the link to learn why.

Buy American. I Am.

Warren Buffett is bullish on America. He writes why, beginning with:

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks.

A U-shaped recession — that’s the good news

Nouriel Roubini was on Charlie Rose Tuesday.

Roubini, the NYU economics professor, has been proven correct so far in his forecasts of financial doom. In February he laid out 12-steps to financial disaster — and we’ve gone through all 12!

Roubini believes the radical actions taken over the past week have avoided a catastrophe. Instead of an L-shaped recession (10 years to recovery, like Japan), we will have a severe, “long and protracted” U-shaped recession “lasting at least two years.” Hundreds of banks are going to go belly-up. “Very, very painful.”

Swell.

The interview is about 8-minutes and quite interesting, though requiring attention due to Roubini’s Turkish accent and the details of the matters at hand.

Capital gains?

NewMexiKen is trying (somewhat at least) to learn more about this economy thing, but I still confess to a lot of ignorance.

Even so, I have a question.

  • Housing prices are down and most experts expect them to drop some more
  • Stocks are way down across the board, Monday’s boom notwithstanding
  • Businesses are facing a serious downturn — fewer Christmas hires an indication in one story I saw

A major part of McCain’s economic recovery plan is to reduce the tax on long-term capital gains to 7.5 percent from 15 percent for 2009 and 2010.

Where exactly are these capital gains going to be coming from in 2009 and 2010?

Best paragraph of the day, so far

Tell me you’re not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm’s Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That’s like five times the size of the holdings in the NYSE. And it’s all speculation by Wall Street traders. It’s a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable.

Matt Taibbi to Byron York of National Review.

York seemed not to know even what a credit default swap (CDS) is. More from Taibbi:

Do you even know how a CDS works? Can you explain your conception of how these derivatives work? Because I get the feeling you don’t understand. Or do you actually think that it was a few tiny homeowner defaults that sank gigantic companies like AIG and Lehman and Bear Stearns? Explain to me how these default swaps work, I’m interested to hear.

Because what we’re talking about here is the difference between one homeowner defaulting and forty, four hundred, four thousand traders betting back and forth on the viability of his loan. Which do you think has a bigger effect on the economy?

Best line of the day, so far

“Money … has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds (1841), quoted today by Tom Friedman.

Bet he’s fun at a party

Oct. 14 (Bloomberg) — Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to “sputter.”

“There are significant downside risks still to the market and the economy,” Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. “We’re going to be surprised by the severity of the recession and the severity of the financial losses.”

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent.

. . .

“The stock market is going to stop rallying soon enough when they see the economy is really tanking,” Roubini added.

Bloomberg.com

Bank shot

The Bank of Burque Babble (BBB) formally announces that it is foundering, and in need of significant government assistance. We’re not proud of it, but BBB has made a series of imprudent financial decisions in recent years that have left it in a precarious position. We are, of course, referring to our sizable investments in the purchase of foreign and U.S. microbrewery beer, not to mention our Netflix, XM Radio and Broadband cable entertainment holdings.

A Formal Request For Emergency Funds From the Bank of Burque Babble continues. Fun stuff.