Texan From New Zealand, joined Dec 2003, 4303 posts, RR: 52 Posted (6 years 7 months 2 weeks 4 days 19 hours ago) and read 2200 times:
Well, folks, we did it. On October 9, 2007, the Dow Jones Industrial Average hit 14,198 points. Today, on October 8, 2008, 365 days later, the DJIA hit 9,194 points. 5,000 points, or a 35.2% loss, over 365 days. On average, it only lost 13.6986 points per day for 365 days.
However, just since May 19, 2008, the DJIA has dropped from 13170.97 to its present position. And on September 19, 2008, the DJIA hit 11628.63. So the DJIA dropped almost 2500 points in 13 trading days, or an average of almost 200 points per day.
More telling than the decline of the DJIA, however, is the decline of the S&P 500. While the DJIA is the sexy, most known index, the S&P 500 is a broader index that more accurately tracks trends and the economy. The S&P closed today at 984.94. If the S&P hits 967, which at this rate it will by Friday, the S&P will have lost 50% of its inflation adjusted value since 2000, when the S&P hit its high.
One of the troublesome ideas behind these numbers is that they are occurring while the "fundamentals of the economy are still strong." True, there is a lot of fear, both justified and unjustified, in the marketplace. One of the huge problems with the market, however, is the complete overvaluation of stocks for many years. That, however, is just one of the many problems.
The fun word a few weeks and months ago was "speculation." Some in power believed that if we stopped the short term speculation, both the short and long term outcome of the markets would be viewed in a completely different light. So we, along with other countries, banned short selling of some stocks and instituted other control measures that would theoretically help liquidity in some companies and industries. Very few people wanted to admit, however, that we were, and still are, in financial trouble.
What are some other factors that have contributed to the decline of the markets? The obvious ones are the bursting of the housing bubble, which helped precipitate the sub-prime mortgage crisis as well as the personal and corporate credit crunches. Housing and building were propping this economy up for a few years, similar to the tech bubble of the late 1990s. But you can only build so many houses and have people with good credit occupy those houses. In order to truly fill all the houses being built, everybody had to be able to purchase a house. That is where the sub-prime loans came into play.
And theoretically, it was a good gamble. See, if we loaned money to people at a sub-prime rate for a few years and then had them facing a balloon payment, the natural result is that people will move every few years to avoid the balloon payment. In other words, I buy a house in 2002 for $175,000 with a sub-prime loan. The reason the bank lends me money is their belief that the resale value of the home will greatly appreciate over time. I make low payments on my home until 2006, when the balloon payment is due. Now, I only make $40,000 per year, so I cannot afford the $25,000 balloon payment the bank seeks. So I put my home on the market. By this point, since I bought a home in a new suburb, the resale value of my home has increased to $250,000. I sell my home, make the payment, buy a new home with a new sub-prime loan, and expect to be able to sell my home in 2009 or so at a premium.
However, there are limits to both the amount of people who will move into an area and buy homes, and the amount of jobs available in any given area at any given time. When other parts of the economy begin to slow down, people start getting laid off. Their income decreases to unacceptable levels and they are no longer able to make payments on items like their house, car, furniture, etc. So they put their homes up for sale. Except when these homes sell, the sellers take the money and do not move into a new home. Now there are excess homes in the market. Supply now exceeds demand, which starts driving prices down. As prices keep declining and more people are removed from the workplace or are underemployed, the number of uninhabited dwellings increases exponentially, while the sellers cannot sell their investment homes for even a fraction of their initial outlay of money. The banks start foreclosing on people's homes and driving them out. Now the banks own homes that cannot be sold: they are receiving absolutely zero Return on Investment. The loans they made are now worthless.
This is where it gets tricky, and part that I do not understand all that well. An underground trading market developed for these mortgages and other loans. The riskier a loan, the cheaper a company could purchase the loan. If you purchase a loan on the cheap, you do not need to collect as much on it to break even or make a profit. So financial institutions would purchase these junk loans for pennies on the dollar. When collection time came, they only needed a couple of borrowers to actually repay the full amount in order to make a profit. Put that together with the money the lenders made by selling some of their own loans and they could show a large gain in Accounts Receivable for only a nominal outlay of cash. This helped inflate the value of the companies by making it appear that the companies would have a steady flow of income for the next few years simply by collecting these junk loan payments. Again, this worked fine in theory as long as people kept buying and trading houses. If the economy did not sour, people could keep making payments by trading houses. As we already discussed, however, you can only build so many houses before a glut of houses causes the market to deteriorate.
So where are we at this point in the discussion? The collapse of Bear Stearns and the investment banking structure of the United States. Bear Stearns heavily invested in these junk loans in addition to making some other poor decisions. I am not familiar enough with all the details of Bear Stearns finances to delve deeper in depth here. However, because the economy took a downturn, people stopped paying their loans since they didn't have either jobs or money. B.S. and the other banks, investment banks, and financial institutions had a choice: they could either write down the value of their investments or wait for the money to simply dry up. The majority of companies opted to write down their investments in order to show a more accurate picture of the amount of money they actually possessed and the amount they actually expected to receive on the loan repayments.
One problem with this, however, is that it wiped billions of dollars of capital from the companies. When a company is worth $15 billion one day and the next day it is not worth even half as much, it spooks ordinary people, not just investors. So people start pulling their money out. B.S. and the other investment banks ended up facing atypical bank runs. People started pulling their money out of the banks while nobody put money back in. All of a sudden the companies had no capital and no cash reserves. The only options were liquidation or government intervention.
Investors, politicians, and the general public fear large scale liquidations. When a stalwart of industry is about to collapse, it initiates economic panic. Moreover, liquidation hurts more than the individual company that is on the verge of collapse. For instance, where did the company receive their financing? Who backs up the company's loans? Who backs up those guarantees? Who will end up paying for the mess?
Had B.S. been allowed to collapse, the fear was that it would cause a global financial meltdown. Here is why: B.S. collapses. B.S.'s investors, the largest of which are institutional investors, now lose billions of dollars of investments. But that is not all. Insurance carriers backed the loans B.S. took on from individuals. Those loans are now worthless and the insurance company is out billions of dollars. The reinsurance industry, the people who insure the insurance agencies (or where the real money is), now faces a liquidity crunch. They are forced to start calling in capital in the form of loans or debt. The pressure on these companies could cause one of them to collapse. If a major insurance or reinsurance carrier collapses, millions of people worldwide are affected, but so are the majority of major corporations. Now they have no insurance coverage for their loans and other assets. Nor can they receive any new financing. That was the feared domino effect.
However, even government intervention may not be enough to stave off a panic when the perfect storm hits. That is what we have occurring right now. People have little money so they cannot buy consumer goods, much less homes (reports are that the economy and jobs actually shrunk by as much as 3.5% in September, while initial projections called for up to 2.5% growth). That is why you are seeing stocks of grocery stores and supermarkets do well while stocks of restaurants and retail stores are taking a nose dive. People are buying the basics only.
Moreover, there is widespread belief that the government does not know how to bring the economy out of this mess. This fear started with the panic bailout of B.S. orchestrated by the New York Fed. Strangely, that has led to something rarely seen in the West recently: governments investing in corporations to keep their liquidity. In other words, some financial institutions are becoming partially nationalized (re: Britain's move to purchase large amounts of bank shares on the heels of the failure of the Royal Bank of Scotland; or, it can even be argued that the government loan to AIG smells a bit like nationalization).
What it boils down to for now, though, is the days of freewheeling spending, for both individuals and corporations, are dwindling. No longer will people or companies be able to borrow large sums of money, because that money no longer exists in the market.
So what caused this mess? All kinds of things. Hell, you can probably trace the roots of it back to the 1980s and the Savings and Loan scandal. I for one cannot tell you how this mess started. To move forward, though, that is what we need. We need to look back and see where this all went wrong. Was it lack of government regulation? Is it simply a normal business cycle? Perhaps the theory of free market economics has some gross flaws in it, as President Bush suggested in a speech (he said something to the effect of "For years the free market has allowed the economy to run smoothly, but now we are seeing that might not be the case."). Whatever the causes, we must find them before we can move forward. Blaming other people is great fun, but it does not get you anywhere. This Administration certainly could have handled the economic situation better, but same goes for Clinton. And Bush Sr. And Reagan. And definitely Carter and Ford. So don't worry, there will be plenty of blame to spread around.
What we need now are solutions, though. We need to find people to pull their heads out of their butts long enough to research this information and report back on individual causes. Once we have the causes, it is a whole lot easier to come up with a comprehensive solution. The nearly $1 trillion dollars of bailout money the government has approved is simply a Band-Aid. It means nothing if we do not learn from this process and figure out how to stop this kind of thing from happening again in the future. But good luck finding that kind of forethought in Washington these days.
Two other concerns: while employment numbers technically rose in the past, those numbers were all menial jobs at low base salaries. Moreover, the percentage of people receiving under the table income has increased to around 10% recently. Which brings us to taxes and spending. Whichever idiots think we can reduce taxes enough that we can spend our way out of this crisis have not been paying attention. Excessive spending is one of the main catalysts behind this mess! Plus, if we give people more money now, they are not going to invest it. If they invest it, it will simply lose value. They will save it and remove the currency from the economy, furthering the decline.
On the other hand, the government sure as hell cannot spend its way out of this mess either. Again, what got us in trouble in the first place? Excessive spending by individuals, corporations, and government. What we need is a much better balance. Cut spending and increase taxes. To paraphrase Tom Friedman, it sure isn't patriotic to pay less taxes. Especially considering the cost of defense, education, and health. It is patriotic to pay taxes and help move the country forward. This isn't calling for radical increases, but slight increases in some areas. It also means that if you can't afford something, don't spend your damn money on it! Again, the Republicans and Democrats (from now on both parties combined shall be called the Kleptocrats) are both to blame.
Anyway, really this is about me ranting. I think it is a pretty good rant at that. It has length, details, ideas, and a general plan about finding a solution. Sorry for taking up so much time and space, but hope you enjoyed the read.
And the DJIA should theoretically settle in the 9,200-9,500 point range eventually.
One last interesting point. Even though the DJIA and S&P 500 are tanking, people are still investing in American currency. The dollar is still seen as the pillar of stability and has been steadily gaining ground against the Euro and most other key currencies other than the Yen. I find that interesting, anyway.
"I have always imagined that Paradise will be a kind of library."
PSA727 From United States of America, joined Feb 2006, 974 posts, RR: 0
Reply 2, posted (6 years 7 months 2 weeks 4 days 19 hours ago) and read 2180 times:
Quoting Texan (Thread starter): One last interesting point. Even though the DJIA and S&P 500 are tanking, people are still investing in American currency. The dollar is still seen as the pillar of stability and has been steadily gaining ground against the Euro and most other key currencies other than the Yen. I find that interesting, anyway.
Probably because the European, Japanese, and other foreign markets are in just as bad of
position as the United States. However, in some people's view, it is the United States that
is better positioned for a recovery sooner than these other economies.
The stock market of today is diferrent than the stock market 20 years ago. When did the
term day traders become normal speak. More Americans have money tied into the stock
market, but that doesn't mean that they are better investors. They kind of act like the stock
market is a casino, just as was done with the housing market. The over-valuation of stock,
just as the over-valuation of the housing market, is greatly responsible for this mess.
Remember the high tech stock rise and crash? People want to make money fast, and that's
not the purpose of the markets. The quicker the rise, the harder the fall. Just as the housing market is correcting itself to be closer to actual home value, the stock market is doing the same, although fear is probably making stock value decline a little further than
it should be.
MIAMIx707 From , joined Dec 1969, posts, RR:
Reply 3, posted (6 years 7 months 2 weeks 4 days 18 hours ago) and read 2159 times:
Quoting Texan (Thread starter):
However, just since May 19, 2008, the DJIA has dropped from 13170.97 to its present position
The indexes were artificially high, and they took too long to reflect the serious economic problems that were coming. With the impending world recession you'll see them continue to drop even more.
First the housing meltdown, which was driven by greed in all its components from lenders to builders. They made outrageous profits for a while, now they're in trouble. Same thing with those who artificially pushed the price of oil to 140. Now the world economy is in a recession. You reap what you sow.
Aither From South Korea, joined Oct 2004, 927 posts, RR: 0
Reply 8, posted (6 years 7 months 2 weeks 3 days 21 hours ago) and read 1960 times:
If the treasury is planning to take stakes in banks today's drop may actually be something not so bad for the US taxpayers. Eventually, but doubtful, in a few years the treasury could sell their stakes with a profit.
StasisLAX From United States of America, joined Jul 2007, 3293 posts, RR: 7
Reply 9, posted (6 years 7 months 2 weeks 3 days 19 hours ago) and read 1871 times:
Quoting Texan (Thread starter): However, even government intervention may not be enough to stave off a panic when the perfect storm hits. That is what we have occurring right now
Spot on comment and excellent narrative, Texan. What the credit are now facing is a perfect storm of confidence - banks do not even trust other banks to pay back loans because there is no transparency in their books. In other words, so many financial institutions have outright lied through their teeth about their overall financial health, painting a rosy picture to investors and other banks when in fact their business is about to fail. The freeze in the credit markets is happenning because banks are hoarding as much cash as possible, trying to make sure that they can cover their own obligations. The federal bail-out monies will still take another 5 or 6 weeks to begin to flow into the credit market, and by then severe damage will be done to the economy.
For instance, credit dependent businesses such as General Motors will probably be forced into bankruptcy by that point. GM has the lowest overall value it has had since March 1929! Their stock is currently valued at $6 USD a share. Car dealerships are closing by the dozens everyday. In small town America, the biggest small business present in the town is often the local Chevrolet dealer. The trickle-down effect of this situation will be huge. And Ford Motor Company is right on GM's path to bankruptcy.
Congress has wasted the taxpayers money on attempting to bail out the financial industry. The situation was worse than the banks would admit even to the federal government and now their greed is taking the U.S. economy down with them. There will be dozens of bank mergers as banks try to consolidate whatever remaining assets they have and try to survive. Smart investors should be looking to move their assets from banks into safe havens such as treasury bills/notes, gold, silver, and platinum. I honestly feel like the Great Depression 2 is just crashing ashore. The financial industry simply cannot be trusted to tell us the truth as this point.
"Those who would give up essential liberty to purchase temporary safety deserve neither liberty nor safety!" B.Franklin
Texan From New Zealand, joined Dec 2003, 4303 posts, RR: 52
Reply 10, posted (6 years 7 months 2 weeks 3 days 18 hours ago) and read 1835 times:
Quoting Aither (Reply 8): If the treasury is planning to take stakes in banks today's drop may actually be something not so bad for the US taxpayers. Eventually, but doubtful, in a few years the treasury could sell their stakes with a profit.
Well, that is certainly the plan. The government's securing the subprime mortgages also could pay off in a few years. Theoretically, only 30% of the subprimes should default, meaning 70% will be paid in full (this from a Tuck Business School Dean I discussed the issue with today). If that occurs, then the government will receive a windfall in payments and will make out like bandits. We shall see, though.
Other issues arise, however, with the Bailout Bill.
The cry went up from the Democrats on the Hill. Without executive compensation caps, the bailout bill could not pass. So §111(a) of The Emergency Economic Stabilization Act of 2008 includes such a hard handed limit: “Any financial institution that sells troubled assets to the Secretary under this Act shall be subject to the executive compensation requirements of subsections (b) and (c) and the provisions under the Internal Revenue Code of 1986, as provided under the amendment by §302, as applicable.” (emphasis added). Washington, we have a problem.
The executive compensation restrictions only apply when the company receiving funds actively sells “troubled assets” to the Secretary. So if the government simply loans the money without acquiring any “troubled assets” in return, the executive compensation limits do not apply. Of course, these terms do not apply to the Bear Stearns or AIG individualized bailouts (and remember: the government granted AIG an extra $26 billion loan just yesterday, October 8, on top of the $86 billion already loaned to AIG. The reason? AIG already spent over $60 billion of the loan in less than 3 weeks). And Lehman Brothers and Merrill Lynch no longer exist as independent corporations. That leaves only Morgan Stanley and Goldman Sachs as the remaining large corporations who could potentially utilize the bailout in the next few weeks. We have already let four of the worst offenders off the hook. Moreover, if there are anymore bailouts, the smart money is on the money being loaned for either a) strong assets; or b) little asset protection.
Moreover, the limits on executive compensation apply only to the top 5 executives. If there are more than 5 executives, then the limits apparently no longer apply. Nothing prohibits a company from funneling money to a non-top 5 executive and then into another’s bank account or to adjust executives’ titles or enhance or decrease an executive’s duties in order to avoid this rule. Furthermore, if payments to the executives occur before the bailout, there is no provision requiring the return of the funds to the company if the bailout is approved.
Another question, though, is what is a troubled asset? According to the bill, troubled assets include any:
“residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.”
So the only “troubled assets” that are definitely involved are residential and commercial mortgages, plus their related instruments. Of course, these terms are not defined at all and may be interpreted narrowly or broadly by the Secretary of the Treasury (Paulson would like to interpret them narrowly if history is any indication of his leanings). Nobody truly knows what other financial instruments entail, nor do we really know what might be connected with the troubled residential and commercial mortgages. While common sense would suggest that it involves merely those securities used to back the loans, without further definition it is impossible to say how the Secretary or any court would interpret this language.
The loopholes left in this bill are wide enough for wily corporations seeking bailouts to negotiate terms that allow them to completely sidestep the executive compensation limitation provisions in §111. By offering either non-troubled assets or accepting only government backing of their troubled assets or securities without actually selling the assets or securities to the government, the corporation will not be subject to the executive compensation limitations. When combined with the predilections of Secretary Paulson and the Administration to keep executive compensation high and Secretary Paulson’s close relationship to the individuals running the corporations who may need government assistance, there is a high likelihood that the executive compensation provisions will be completely bypassed by employing terms that avoid the requirements for limited compensation. The Democratic leaders knew this and yet championed and passed this bailout bill. This bill, while supposedly well intentioned, provides no mechanisms to force corporations accepting money to abide by the executive compensation provisions so exalted by Democratic leaders. Once again, Congress decided to put form over substance and sold out United States citizens.
Another issue to examine is §119 of the Bill regarding judicial review. I haven't figured out everything it means yet, but it appears there will be some sort of limited judicial oversight, unlike the original three page Bill proposed by Paulson. If anyone else has any ideas about §111 or §119, feel free to chime in on those as well!
"I have always imagined that Paradise will be a kind of library."
MD-90 From United States of America, joined Jan 2000, 8511 posts, RR: 11
Reply 11, posted (6 years 7 months 2 weeks 3 days 17 hours ago) and read 1804 times:
Quoting Texan (Thread starter): Well, folks, we did it. On October 9, 2007, the Dow Jones Industrial Average hit 14,198 points. Today, on October 8, 2008, 365 days later, the DJIA hit 9,194 points. 5,000 points, or a 35.2% loss, over 365 days. On average, it only lost 13.6986 points per day for 365 days.
Can anybody spell B-U-B-B-L-E? How 'bout O-V-E-R-P-R-I-C-E-D?
Aaron747 From Japan, joined Aug 2003, 8533 posts, RR: 26
Reply 12, posted (6 years 7 months 2 weeks 3 days 6 hours ago) and read 1701 times:
Other markets are doing even worse. The Nikkei 225 has lost 51% of its value over the year, and the Hang Seng has lost 48% as of the staggering losses posted yet again today. The Nikkei alone has lost 24% of its value just this week - and it's the world's second largest index. Scary stuff.
If you need someone to blame / throw a rock in the air / you'll hit someone guilty
Dougloid From , joined Dec 1969, posts, RR:
Reply 15, posted (6 years 7 months 2 weeks 3 days 3 hours ago) and read 1646 times:
Quoting Texan (Reply 14): Quoting Dougloid (Reply 13):
Hey, what ever happened to this guy? I heard one of them on the radio a few years ago.
One of the authors, Mr. Hasset, serves as John McCain's senior economic advisor. Hmmm...
Yeah, fuck 'em all, the long, the short and the tall. We're all a nation of whiners.
That's what Phil Gramm said back in July.
In an interview with the Washington Times, Phil Gramm tells America to suck it up and stop complaining about the economy:
"You've heard of mental depression; this is a mental recession," he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. "We may have a recession; we haven't had one yet."
"We have sort of become a nation of whiners," he said. "You just hear this constant whining, complaining about a loss of competitiveness, America in decline" despite a major export boom that is the primary reason that growth continues in the economy, he said.
Nice opening blast Texan! One of the better rants ever I think and indeed plenty to rant about.
All you can do is laugh at the intricacies of the shuffling. Other than that it is off to slit the wrists, and it messes up the keyboard typing with slit wrists - I expect.
I wonder if Bird and Fortune will do a repeat, but a little more seriously, will the G8 and then the G20 agree to do something (usually that lot don't meet unless action is pre-agreed) and then if they DO do something, will it work?
Apparently one problem for the US is that although the 700 billion has been wheeled out, little of it has actually been brought into action as it were.
It seems that the "grey" Mr Brown has been about the most active, especially the neat employment of the anti-terrorist laws! I will bet the city never thought of that sort of use when making approving noises for strict Laura Norder moves back a few years ago.
It does look as if collective action will be about the only thing likely to break whatever downward spiral we are in. With globalization, it does seem axiomatic that collective action would be needed.
Next installment awaited with bated breath - hope it is not baited breath.
MIAMIx707 From , joined Dec 1969, posts, RR:
Reply 18, posted (6 years 7 months 1 week 6 days 12 hours ago) and read 1500 times:
Quoting StasisLAX (Reply 9): I honestly feel like the Great Depression 2 is just crashing ashore
and this time it could be worse, at that time the dollar's value was pegged to gold. We could see the collapse of the dollar.
Quoting Texan (Reply 14): One of the authors, Mr. Hasset, serves as John McCain's senior economic advisor. Hmmm...
Ironic that Obama hasn't used that in his campaign. If he mentions this, McCain's campaign can officially declare it's game over.
The direct origins of the mortgage meltdown can be traced to 1999 under Bill Clinton. Then Bush came in and was quite happy to let things be with Fannie, Freddie and the loose lending and continue with the slogan that the American dream is to own a home.
After all, it seemed like more Americans than ever were achieving the dream under his presidency. Housing was what made the economy look good and like nothing was wrong from 2003 through 2006.