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Confidence Crisis Rips Capital Markets

Discussion in 'The Economy' started by Tropo, 21st May, 2010.

  1. Tropo

    Tropo Well-Known Member

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    I have spent most of the day on the phone, watching screens and financial news and I am totally convinced that no one has a clue about what is happening to markets – FX, asset prices and commodities.

    This is one of those times when there may not be a good explanation and surely spending the bulk of your day trying to cobble together a narrative for what happened and not exiting risk would be problematic.
    You don’t need to be Nouriel Roubini – a man with an answer for everything and often a lot of nothing – to know what to do…exit for safety…run for the bunker…go to cash…check counterparties…the world of finance is not safe and certainly not sound.

    I think I have more wrinkles on my eyes today too after cringing so many times when experts asserted Washington’s fin reg progress (Senate) drove stocks down hundreds of points (fail to realize the DJIA was down few hundred points before the Senate voted for cloture).
    Or how worries about Greece’s general strike set into motion a massive decline in equities, massive rise in Tsy prices and gutting of commodities and commodity currencies especially against the EUR. EM was also eviscerated.

    This is a run from risk day if there ever was one and trying to pin it down to one or two sound bites is unproductive. How about we don’t know why with any certainty? All we do know is that the financial system remains highly compromised and vulnerable to enormous instability with equally enormous consequences.
    I feel like I did in the 1987 crash…like today at that time there were scores of efforts to explain why the market crashed. None were adequate and perhaps there was no “reason” other than it was an unpredictable and uncontrollable event that in hours changed entire concepts of risk – feedback loop driving confidence and prices ever lower.

    No I am not in denial nor an apologist for Congress and the White House. – fin reg is an enormous challenge in best of times…in the current political and economic environment it is assured that fin reg will get many things wrong and some things right.
    But these changes will look much different than the ones in the initial bills and following reconciliation in conference committees of the House and Senate bills in coming weeks, we will see very different law than the competing bills and amendments. And the law making process is evolutionary and changes will be made to whatever gets signed into law by the president in coming years.
    Don’t forget for a second that Wall Street still has an outsized influence on Congress.

    At the risk of sounding dumb, I don’t know why things are moving the way they are and if I don’t know it is likely that most officials don’t know either. And if officials don’t know what is happening and why, there is little basis for believing they can generate a policy response that successfully stabilizes financial markets – yet that seems to be the demand coming from the financial markets.
    This is what leads to flailing policy steps or missteps like those from Germany on Wednesday – again not a cause for today’s market gyrations nor for much of yesterday’s response.

    The crash of the economy and financial system in 2008 exposed a deeply flawed financial system (banking system).
    The fact that it took under 2 years to experience another crash is not so surprising when one considers the main policy response to the last crash…unlimited and minimally constrained (access to) central bank liquidity and massive government spending.
    I am not an Austrian schooled economist…these were the proper Keynesian responses. But they were done on top of a compromised banking system and capital market. Liquidity can raise the tide enough to again hide those swimming nude, but not indefinitely. The tide has gone out in the last few weeks and it is exposing ever more suitless bathers,

    A number of people have noted that credit markets are showing some signs of strain, but hardly to the degree of what was seen in 2007-2008.
    But that ignores the fact that central banks have put in place a perfect substitute to the interbank funding market for banks…central bank funding. Moreover switching between these two types of funding has proven to be relatively seamless and hence it is natural that credit markets are not the place to look this time for strains in the financial system.

    I think AUD/USD chart or bank stock prices are far better indicators of market stress now than credit spreads. And for those few who bothered to notice (there were some), May06 and this week shared some common features…big unwinding in long AUD, short EUR trades (same for CAD longs vs EUR). Something much more fundamental to the plumbing of the capital markets is happening and it has little to do with Greece debt (ring fenced for next few years), fat fingers or Washington botching fin reg.

    If this condition continues to snowball ahead I think the German actions of Wednesday will be added to and copied or not copied but done differently everywhere.
    Capital controls aimed at stopping speculation is how officials who don’t know what is happening will respond…they will shut down CDS, short selling, leverage, OTC derivatives, high frequency trading, algo trading, off exchange trading in stocks, ETFs…you name it.

    The system we have now has evolved far beyond any capacity to understand it and prevent black swan events. The future will be all about walking the financial system back to simpler times…and this won’t be good for world growth or income in the short run. But if it removes severe shocks to the financial system ahead, we won’t be facing potentially larger hits to growth and income from crashes like the one now and the one in 2008.

    Ideally – can’t and won’t be done – G20 needs to convene a 4-week convention with leading experts in capital markets, securities law and practitioners and hammer out a new robust financial architecture that must be adopted in every major financial center.

    Practically, expect more flailing and more of the same for financial assets, FX and commodities.
    This is not the time to be trading. This is the time to be battening down the hatches and preserving capital.
    Confidence has been shredded for individual and institutional investors.
    Cash has been recrowned.
    Think globally and act locally…personal bank (risk) holiday…then again the system is built around forcing people to take risk…not self-imposed bank holidays.

    David Gilmore
     
  2. Chris C

    Chris C Well-Known Member

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    Had to happen eventually... and it looks like bear market version 2.0 is coming to a stock market near you...

    http://finance.yahoo.com/echarts?s=^VIX+Interactive#chart2:symbol=^vix;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

    Policy response should be inventive this time around, and I will be interested to see how much lower nominal stock indexes can fall...
     
  3. Vagon

    Vagon Well-Known Member

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    XAO Open 4342.4 Close 4326.4

    Not exactly doomsday, it'll be interesting to see what the US does and how we start on Monday.
     
  4. Chris C

    Chris C Well-Known Member

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    It is if you consider that exchange rate fall...

    Nominal values don't mean a lot when the value of money is always changing.

    Plus this whole process will take a long time to fully play out, but the trend seems reasonably clear at this point.
     
  5. Johny_come_lately

    Johny_come_lately Well-Known Member

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    If the aussie dollar has dropped, does that mean the Chinese motorcycle that I have my eye on, will go up?





    J.
     
  6. Vagon

    Vagon Well-Known Member

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    The original post was going off nominal values so I was just highlighting that if the capital markets are your indicator of a "confidence crisis", I don't think we're there yet.

    Dollar going down generally makes export companies more favourable. Considering that's the major part of our listed economy...

    I don't have a crystal ball, but calling crisis seems a bit premature after the US index of leading indicators drops a little.

    No doubt, but if we're talking trends then this would have to be one of the weakest gains in history and an exception to the trend.

    All other things equal, yes. That said if you're buying it locally any currency risk has probably already been accounted for by the dealer, so no.
     
  7. Chris C

    Chris C Well-Known Member

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    This crisis is the same crisis as last time, it's just that the last crisis was brushed under the rug, but investors have kicked back out into the open again.

    For the last 5 years the problem has been unproductive debt. Today the problem is still unproductive debt, it's just that this time the debt is on the government balance sheets.

    The debt problem isn't going anywhere until the debt is paid down or inflated away. It's as simple as that. Law of finances. It's just a matter of how and when.

    That's why I say that nominal values don't mean much, because if the debt is paid down and their is deflation then who cares if the index falls as a result because currency will be worth more anyway.

    On the flip side if they inflate the debts away the stock market will almost certainly go up as well as a result of inflation but we won't be better off because inflation will have eroded our fiat currency's purchasing power.

    That's why I don't tend to worry too much about nominal numbers, and I actually believe there will be a lot of people in the coming years and decades whose stock portfolios will double, triple or more in nominal value but they will still become very poor as a result.
     
  8. Vagon

    Vagon Well-Known Member

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    Cool, I get your position and its by no means unfounded, but I wanted to point out to Tropo that a round of leading indicator data (leading to the 3% dip in the US exchange) isn't exactly a strong signal to "exit for safety…run for the bunker…go to cash…check counterparties…the world of finance is not safe and certainly not sound."

    Let me bring it back, you said:

    Which indicates you think they will fall (based off volatility) so my comment showed that initial gloom based purely off falls in nominal values was unwarranted.
     
  9. Tropo

    Tropo Well-Known Member

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    "..but I wanted to point out to Tropo that a round of leading indicator data (leading to the 3% dip in the US exchange) isn't exactly a strong signal to "exit for safety…run for the bunker…go to cash…check counterparties…the world of finance is not safe and certainly not sound"

    There is always a small dip (or small loss) at the beginning...With time this dip may grow.
    It does not mean that you should sell everything right now and buy a comfortable coffin with plasma, jump in and wait for another slump.
    3% is like a yellow light...:rolleyes:
     
  10. dudek

    dudek Well-Known Member

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    Last time people called it “dead cat bouncing” or “catching a falling knife” sounds familiar?
     
  11. Tropo

    Tropo Well-Known Member

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    Whatever...I call it a bull trap. ;)
     
  12. dudek

    dudek Well-Known Member

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    what about a bear hug... I like the bear hug analogy :D
     
  13. Tropo

    Tropo Well-Known Member

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    Very sexy...:p:D
     
  14. dudek

    dudek Well-Known Member

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    European markets down almost 3% yeah, very sexy!!!
    After GFC ver. 1, I was prepared to wait another 5 years for next buy opportunity. What do you know :D
    now I can't wait for RBA to rush to cut interest rates again :rolleyes:
     
  15. Tropo

    Tropo Well-Known Member

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    DOW (Futures) at the moment = -220...even more sexy ! :p
     
  16. fundies

    fundies Member

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    Just when things were starting to get very sexy, the market rallies once again.
    I'm getting sick of this, I'm not a very patient person.
    I'm cashed up, just waiting for the market to hit rock bottom, so hurry up will you...........:mad:
     
  17. dudek

    dudek Well-Known Member

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    Yes, you have to have a stomach to sustain the roller coaster ride.
    Chances of repeating ‘big dip” are very small, mainly because every one is anticipating it.
    If you are cashed up, put all on black …then again may be red…:D

    ps. who said is easy to make living from the the share market?
     
  18. Tropo

    Tropo Well-Known Member

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    "ps. who said it is easy to make living from the share market?"

    It was NOT me! :p:D;):eek:
     
  19. Chris C

    Chris C Well-Known Member

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    Nothing goes up or down in a straight line...