Your turn now: correction or doom?

I will be out for the first part of this morning.

However, it now looks as my view on the effects of downgrade were fairly close to reality , in fact I was underestimating the short term negative impact. That ‘s why what I said in the post “Romania needs to act fast” is imperative.

In the following days the key is with the money markets, for USD and EUR.Ā  I think we will see again pressure on short term rates to go higher.

But as I am not here to comment this morning, why don’t you?

Please let me know what you think of the current situation and how you see it solved.


8 thoughts on “Your turn now: correction or doom?

  1. Given stock exchanges evolution yesterday and FX situation this morning, I am afraid fear is spreading in the markets twice faster than few years ago during the recession. It’s probably because 2008 is still fresh in the memory, and few investors believe now that current levels are an opportunity for buying, and they would rather get rid of risky assets.

    On the other hand, looking close at all the hustle (politicians statements, central banks statements/actions), one cannot but be amazed at how slowly they react. I watched Obama last night and he seemed to talk to regular people, when instead I believe markets should have actually been addressed. They wanted to hear some concrete actions, but i believe what the heard was “political disagreement” and the Dow plunged as he spoke.

    If ECB and the FED are to go radical and shoot all the weapons they hold, fiscal measures are a must, as well, otherwise it will be in vain. Markets will not be calmed down by political statements such as “we will always be a triple A rating country”. That may hold for the regular John Doe and inflate their ego and patriotic feelings. But if EU countries and the US don’t reduce deficits and do not start to truly and orderly restructure debt, it will be worse than in 2008, because now we are talking sovereign default.

    I really admire Roubini, but I also hope that he doesn’t get it right this time.

  2. Correction is what Friday felt like.Today the feeling is far from that.
    However doom does not come easy. I am sure that the Fed and ECB will do what they can (start printing) to stop chaos.
    What happens after that I don’t know…

  3. @Florin

    This QE-thing is an epiphenomenon, we confuse the cause with the effect. And, beside, is one of the biggest jokes of the century. You can take the statistics and make a simple calculation, and you’ll see something freak.

    The FED didn’t make this QEs because they wanted the stock market to increase, but because they estimated good results for the companies in q3 2010, which was actually the best quarter for some of them by now, and which was about to create a rally in the markets, which actually happened. If you have a rally on the NYSE and the other developed markets, you lose demand for the gov securities, people sell them in order to come back to stocks. This increases the yields, if there’s no new demand in the market. So they enter the market when they expect sell-offs from the safe heaven, and stay mostly out of the market during the turbulences, because then you have enough demand for the bonds. It’s all about the rates, and nothing about stocks or commodities.

    Now they didn’t announce any qe, because the yields are already very low, and they may see an increase in the market, but not big enough to pull off many investors from fixed income, so they don’t perceive a real risk for the rates to increase, and a need for them to make a big demand in the market. šŸ™‚ The cause is they estimate a rally, and the effect is the QE, not the reverse.

    And the only difference in this QE1 and QE2, that we talk about today, and the QEs they made all the time during the 2002-2003, after the end of that recession and the start of the bull market for stocks, until 2007-2008, when the market got to an end and more and more money went into fixed income, from shares, is that now they said it loud and clear, and the other time they just did it. I’m too young to know, but all the planet seams to be surprised by this QEs, so I supposed they never said it loud and clear before.

    FED keeps a stock of gov secs of around 16% of the total debt of the US held in public hands since many years, excluding the turbulent times starting in 2007, until the spring of 2009, when the fixed income market didn’t need them, there was enough demand from anybody else around, and anyway the debt increased a lot, declining their proportion. When they made the QE1 the proportion was to historical lows, and only until 2011 it got to somewhere around 16%, where it was before the crisis.

    The question is: why did they keep it a “secret” in 2002-2007, and now they screamed it out loud, making us believe this is new policy tool for helping the economy? I suppose that everybody waited something from them, and they can’t do much, because the real problem in the us is the lack of production, and now a traumatized consumer, which leaves a central bank without any means of helping. They need government policy to make it, at this point the central bank is useless. Actually, they are down since 1999, the last decade was like a sort of joke for the real economy. And they can’t come out to say the truth. As long as everybody buys your lies … and nobody asks further questions … šŸ™‚

    There is not much demand in the market for the quantity of the US debt, which leaves the FED a necessary player in the market. Plus, they really care about the interest rates, because all the loans depend on the gov yields, and an increase during such a period is a huge risk for the US economy. The consumer has around 107% of GDP debt today, more than the US gov :). They need turbulences + FED at least until 2014, when a lot of the current debt will got to maturity, plus somebody to finance the refinances. They have enough space to issue new debt, but they need maturities over 10 years to get a comfort, and who’s to buy them at these yields?! The cash the banks now own, the FED, some of the foreigners … šŸ™‚ I don’t know.

    It has nothing to do with the stock market. But considering we will hear them again saying loud and clear: we will make a QE3, probably this will happen somewhere around an earnings season, and will signal that they estimate good results for the companies and a more serious flight from safety to risky assets.

    This is my opinion. Sorry for being that long šŸ™‚

  4. And they never justified it as a support for the market, they always said they make it for the low yields. I’d add: and because the US debt can’t get enough customers during times when people don’t need a safe heaven :). I don’t know who spread this rumor, because it was not what I read and what I understood. This is a rumor that got into the collective minds somehow :).

    1. This is the easiest one to answer. Bernanke did specifically mention “asset stock prices” in a piece in Washington Post on November 4th 2010.
      “Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. ”
      I will get to the other points later as they are quite a few. Thanks for reading.

  5. Ok, then. So there are only 2 possible ways. The guy can’t actually do nothing more and is trying to manipulate by stories, like our Isa, with the difference that one can’t do something, and the other is stupid. Or may be he said like this because it was already in november, and the stocks were already increasing, as far as I can remember. Of course lower rates should result in higher stock prices and commodities, plus some inflation, as a consequence of spurring a little growth around. And you can’t say the stocks increased for nothing, because the market looks more or less after the fundamentals. And the money are on the banks BSs. So is not like they financed this markets, as the conventional wisdom says these days. Personally I can’t agree in this one. At least this is my opinion, from what I know.

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