It's all about liquidity, D'uh.

Discussion in 'Politics' started by Drifterwood, Oct 11, 2008.

  1. Drifterwood

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    The D'uh is aimed at myself.

    I have been racking my little head, like many others, as to what is going on in the markets and when it will all stop. Where is the base line?

    Well, I don't think we are there yet, and maybe by some way. The reason is all to do with why things are happening the way they are. It seems to me that we are in phase two of this crisis and there may be many more phases to come.

    Phase one was the Bank generated bubble bursting. Blah blah blah, banks are greedy, politicians are short sighted. Phase two is the rush for liquidity. Global and local business is having a fire sale in a rush to get liquid so that they are not sucked into the vacuum that the Banks' troubles are causing. You sell what you can, that which is liquid. Stocks and currencies.

    I couldn't understand why the £ and the Aussie $ were taking such a hit against the US$. After all, it is particularly the US economy that is in the mire. But the simple explanation is that those who were holding foreign currencies in the US are selling them and getting less for their $. This will ultimately be bad for the US economy, however if you are sitting on $ deposits, I would look at some foreign currencies. The same with stocks.

    There are some bargains no doubt in the NYSE, but personally I am now looking at areas that have been over affected by the US' woes. I can see global investors avoiding the US for some time. Another phase will be what happens to fixed asset values, such as homes and factories, when they need to be realised. It doesn't look good.
     
  2. Mr. Snakey

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    The answer is plain and simple. Its a one world economy. Whats happening here will soon happen around the world and it may be even worse.
     
  3. Drifterwood

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    I'm not so convinced anymore, my friend. Well, you are right in that what is happening right now is because we are so intimately entwined financially. However, as we come out the other side, we may see different scenarios or rather the emphasis of relationship will be more precisely defined. Australia for example has very little trade link with the US, their significant trade partners are growing economies. For example, 85% of China's growth is within its internal markets. Many other emerging economies are the same.

    I think that we can expect to see a somewhat different world order as it were. I think though that you can say that the current global response shows that we are all actually quite pro the US.
     
  4. D_Tully Tunnelrat

    D_Tully Tunnelrat New Member

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    Exactly. It gets scarier from here as at least two countries are virtually running out of money: Pakistan and Ukraine. As we all know, Pakistan has lots of nukes, and fundamentalists. The Ukraine is a vital ally to both the US and Russia.

    The only currency in the world right now is confidence, and it's in short supply.
     
  5. lucky8

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    Youre forgetting about gold, that shit seems to be popping up everywhere...
     
  6. faceking

    faceking Well-Known Member

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    you nailed it. sorry I missed your post... i just pretty much echoed it in the "Obama proof thread".

    liquidity , or lack thereof, is the finality of it all.

    noone really gets it. this isn't about the Dow Jones or Obama/McCain (notice how these guys are now giving empty rhetoric about economic recovery... they either don't have a clue and/or hopefully know it's out of their hands).

    you've got:

    - debtors that are increasing more risky each day (as their wealth, jobs, income are in danger)
    - banks already spooked to loan money (this started last summer, those who have a freaking clue know this already)
    - a nice basic wave of foreclosure on residential real estate (what's shocking is why it happened... not unemployment or inflation either)
    - then the shit hits the fan, as one domino falls, so do many
    - the secondary market (ppl who provide liquidity) take it on the chin, and if they don't fold or sign off... double down (yikes) or shut the doors
    - those who shut their doors, cause liquidity to dry up, and it's effect goes into multiplicity
    - then, as everyone loses money and/or gets out... there's no liquidity even if they wanted to provide it (and that is a VERY big if, given they were already gun shy.. but now who's going be the bozo).

    yes you can restore some confidence... but too many institutions will be battered, there will be hesitancy and there will be a ton of oversight and regulation and nickel and diming banks. just as they start to walk again, the government (and perhaps rightly so) will tell them which foot to step with first, how fast they can walk, and so on.

    plan accordingly folks.
     
  7. Drifterwood

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    I wish the world would get over Gold. Nano particles are useful, otherwise it's bullshit, a hiding place for the timorous.

    I am going to look at essential services and raw materials required in developing economies. Bet I find the Chinese already there, along with Goldman of course.
     
  8. B_Nick4444

    B_Nick4444 New Member

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    there's actually plenty of liquidity

    what's lacking is confidence to invest or to loan
     
  9. B_Nick4444

    B_Nick4444 New Member

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    Chicken Little might yet be wrong:


    • OCTOBER 11, 2008
    What History Tells Us About the Market

    The breathtakingly volatile week has left investors numb. A close study of the Great Crash, and the decades that followed, offers some unnerving context, and some reasons for optimism.

    By JASON ZWEIG



    more in Markets Main »




    [​IMG] Hulton Archive/Getty ImagesNew York's Sub-Treasury Building (now Federal Hall National Memorial), in the early 1930s.



    July 9, 1932 was a day Wall Street would never wish to relive. The Dow Jones Industrial Average closed at 41.63, down 91% from its level exactly three years earlier. Total trading volume that day was a meager 235,000 shares. "Brother, Can You Spare a Dime," was one of the top songs of the year. Investors everywhere winced with the pain of recognition at the patter of comedian Eddie Cantor, who sneered that his broker had told him "to buy this stock for my old age. It worked wonderfully. Within a week I was an old man!"
    The nation was in the grip of what U.S. Treasury Secretary Ogden Mills called "the psychology of fear." Industrial production was down 52% in three years; corporate profits had fallen 49%. "Many businesses are better off than ever," Mr. Cantor wisecracked. "Take red ink, for instance: Who doesn't use it?"
    Banks had become so illiquid, and depositors so terrified of losing their money, that check-writing ground to a halt. Most transactions that did occur were carried out in cash. Alexander Dana Noyes, financial columnist at the New York Times, had invested in a pool of residential mortgages. He was repeatedly accosted by the ringing of his doorbell; those homeowners who could still keep their mortgages current came to Mr. Noyes to service their debts with payments of cold hard cash.
    [​IMG] Berenice Abbott/Commerce GraphicsA view of the New York Stock Exchange, taken by Berenice Abbott in 1933





    Just eight days before the Dow hit rock-bottom, the brilliant investor Benjamin Graham -- who many years later would become Warren Buffett's personal mentor -- published "Should Rich but Losing Corporations Be Liquidated?" It was the last of a series of three incendiary articles in Forbes magazine in which Graham documented in stark detail the fact that many of America's great corporations were now worth more dead than alive.
    More than one out of every 12 companies on the New York Stock Exchange, Graham calculated, were selling for less than the value of the cash and marketable securities on their balance sheets. "Banks no longer lend directly to big corporations," he reported, but operating companies were still flush with cash -- many of them so flush that a wealthy investor could theoretically take over, empty out the cash registers and the bank accounts, and own the remaining business for free.
    Graham summarized it this way: "...stocks always sell at unduly low prices after a boom collapses. As the president of the New York Stock Exchange testified, 'in times like these frightened people give the United States of ours away.' Or stated differently, it happens because those with enterprise haven't the money, and those with money haven't the enterprise, to buy stocks when they are cheap."
    After the epic bashing that stocks have taken in the past few weeks, investors can be forgiven for wondering whether they fell asleep only to emerge in the waking nightmare of July 1932 all over again. The only question worth asking seems to be: How low can it go?
    Make no mistake about it; the worst-case scenario could indeed take us back to 1932 territory. But the likelihood of that scenario is very much in doubt.
    [​IMG] AFP/Getty ImagesA trader on Oct. 19, 1987.



    Robert Shiller, professor of finance at Yale University and chief economist for MacroMarkets LLC, tracks what he calls the "Graham P/E," a measure of market valuation he adapted from an observation Graham made many years ago. The Graham P/E divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation. After this week's bloodbath, the Standard & Poor's 500-stock index is priced at 15 times earnings by the Graham-Shiller measure. That is a 25% decline since Sept. 30 alone.
    The Graham P/E has not been this low since January 1989; the long-term average in Prof. Shiller's database, which goes back to 1881, is 16.3 times earnings.
    But when the stock market moves away from historical norms, it tends to overshoot. The modern low on the Graham P/E was 6.6 in July and August of 1982, and it has sunk below 10 for several long stretches since World War II -- most recently, from 1977 through 1984. It would take a bottom of about 600 on the S&P 500 to take the current Graham P/E down to 10. That's roughly a 30% drop from last week's levels; an equivalent drop would take the Dow below 6000.
    Could the market really overshoot that far on the downside? "That's a serious possibility, because it's done it before," says Prof. Shiller. "It strikes me that it might go down a lot more" from current levels.
    In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have to fall to roughly 400, more than a 50% slide from where it is today. A similar drop in the Dow would hit bottom somewhere around 4000.
    Prof. Shiller is not actually predicting any such thing, of course. "We're dealing with fundamental and profound uncertainties," he says. "We can't quantify anything. I really don't want to make predictions, so this is nothing but an intuition." But Prof. Shiller is hardly a crank. In his book "Irrational Exuberance," published at the very crest of the Internet bubble in early 2000, he forecast the crash of Nasdaq. The second edition of the book, in 2005, insisted (at a time when few other pundits took such a view) that residential real estate was wildly overvalued.
    [​IMG] Click to see long-running bear markets



    The professor's reluctance to make a formal forecast should steer us all away from what we cannot possibly know for certain -- the future -- and toward the few things investors can be confident about at this very moment.
    Strikingly, today's conditions bear quite a close resemblance to what Graham described in the abyss of the Great Depression. Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it's hard to avoid stepping on them. Out of 9,194 stocks tracked by Standard & Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year -- or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash -- an even greater proportion than Graham found in 1932. Charles Schwab Corp., to name one example, holds $27.8 billion in cash and has a total stock-market value of $21 billion.
    Those numbers testify to the wholesale destruction of the stock market's faith in the future. And, as Graham wrote in 1932, "In all probability [the stock market] is wrong, as it always has been wrong in its major judgments of the future."
     
  10. B_Nick4444

    B_Nick4444 New Member

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    In fact, the market is probably wrong again in its obsession over whether this decline will turn into a cataclysmic collapse. Eugene White, an economics professor at Rutgers University who is an expert on the crash of 1929 and its aftermath, thinks that the only real similarity between today's climate and the Great Depression is that, once again, "the market is moving on fear, not facts." As bumbling as its response so far may seem, the government's actions in 2008 are "way different" from the hands-off mentality of the Hoover administration and the rigid detachment of the Federal Reserve in 1929 through 1932. "Policymakers are making much wiser decisions," says Prof. White, "and we are moving in the right direction."
    [​IMG] Associated PressA trader on the floor on Oct. 10, 2008



    Investors seem, above all, to be in a state of shock, bludgeoned into paralysis by the market's astonishing volatility. How is Theodore Aronson, partner at Aronson + Johnson + Ortiz LP, a Philadelphia money manager overseeing some $15 billion, holding up in the bear market? "We have 101 clients and almost as many consultants representing them," he says, "and we've had virtually no calls, only a handful." Most of the financial planners I have spoken with around the country have told me much the same thing: Their phones are not ringing, and very few of their clients have even asked for reassurance. The entire nation, it seems, is in the grip of what psychologists call "the disposition effect," or an inability to confront financial losses. The natural way to palliate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb.
    The market's latest frame of mind seems reminiscent of a passage from Emily Dickinson's poem "After Great Pain a Formal Feeling Comes":
    This is the Hour of Lead --
    Remembered, if outlived,
    As Freezing persons recollect the Snow --
    First -- Chill -- then Stupor -- then the letting go.
    This collective stupor may very likely be the last stage before many investors finally let go -- the phase of market psychology that veteran traders call "capitulation." Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.
     
  11. Drifterwood

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    No. There may be plenty of money, but the fact that noone who has it or controls it, is willing to invest or loan it, is what is causing the lack of liquidity via the banking sector. People are liquidating what they can to provide their own working capital and to avoid further losses in instruments that are beyond their control.

    Should the performance of Lehmans give anyone any confidence? If the people in the industry have no confidence, why should Joe Public?

    The real question now is which of the listed companies have been able to guarantee their liquidity and which haven't in the face of other factors effecting their markets. Then there is the question of how small and medium sized businesses are equipped to cope, something which is worrying the politicians, and finally you and I as the general public. If you have ever run a business for long enough, you will know what it is like to have a constricted cashflow coinciding with a reduced market. Not a great place to be.

    Listed companies may have been through a lot of their issues, but the same issues are just beginning for the huge number of small and medium enterprises that account for the majority of employment in our economies. The massive injection of cash into the UK system is aimed at saving this sector; they don't have treasury departments managing global funds and I can tell you from the street that this sector is also being squeezed and bullied by their big customers to prop them up during this situation.

    It's all about liquidity.
     
    #11 Drifterwood, Oct 12, 2008
    Last edited: Oct 12, 2008
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