The financial market panic may not be over, but the Fed sent a strong message on Friday that the necessary course of action will be taken to ensure the functioning of markets.

Importantly, with inflationary pressures receding, the Fed can be expected to ease aggressively if the economy appears headed towards recession. The fed funds target rate is roughly around neutral, providing the credit markets return to normal functioning in the very near run. Corporate sector trends suggest no worse than a soft landing. Expansion plans (hiring and investment) should only modestly slow because balance sheets are still fundamentally sound and profit margins are near multi-decade highs. Moreover, global growth is much more balanced than at any other time in the past two decades. Thus, while the economy will be weak through yearend, it should not spiral into recession as long as the credit channels reopen.

http://www.bcaresearch.com/public/story.asp?pre=PRE-20070821.GIF

http://mauberly.blogspot.com/

this worked well until the fed intervention:

"I'm calling it lower near term"

I still hold that it will go lower by the fall season.

http://mauberly.blogspot.com/

Aug. 22 (Bloomberg) -- David Tice, who runs the $720 million Prudent Bear Fund, said losses in fixed-income securities are getting worse and ``much tougher times'' for banks and brokerages will lead the U.S. stock market lower.

``We see a long-term, secular bear market with very few places to hide,'' Tice said in an interview from Dallas. ``We don't think we've fixed these liquidity problems.''

Financial, computer and consumer shares will fall the most as credit losses spread, he said. Tice's fund is also betting against homebuilders.

U.S. stocks rebounded for a fifth day today, pushing the Standard & Poor's 500 Index up 4.1 percent since surging credit costs erased more than $4 trillion in global market value. The Federal Reserve's decision to reduce by 0.5 percentage point the rate it charges banks on loans has helped spur the rebound.

``Taking rates down 50 basis points is not going to save this,'' said Tice, who expects the Fed to cut its benchmark lending rate by the same amount by the next meeting of policy makers on Sept. 18. ``It shows what kind of crisis you have.''

Financial shares in the S&P 500 are down 4.5 percent since the index rose to a record on July 19 and fell to a 13-month low Aug. 15. Consumer discretionary stocks are down 8.7 percent, while computer shares have retreated 6.5 percent, the third- and fourth-most of 10 industries in the measure.

Losses in financial derivatives such as collateralized loan obligations and other forms of structured finance will keep banks from lending more in 2008 than they did in 2007, Tice said.

Credit Growth

``Corporate profits are dependent on the overall economy and the overall economy is dependent on credit growth,'' he said. ``People are not going to be able to take out big mortgages, cash out and refinance. Corporate profits will be dramatically lower.''

Analysts surveyed by Bloomberg expect profit among S&P 500 companies to rise an average 9.1 percent this year and 11.3 percent next year.

Tice said in an interview on July 26 that the sell-off in equities ``could be a really big one'' as ``risk is being re- priced.'' In March, he said the U.S. stock market may decline as much as 50 percent. The S&P 500 is up 4.4 percent since then.

Tice's fund is always positioned for a falling market. In part, he does this by shorting shares, which involves borrowing stock from a shareholder on the expectation of profiting by buying the securities later at a lower price and returning them to the holder. The fund is 75 percent short, he said today.

Created more than a decade ago to allow investors to bet against the market, the Prudent Bear Fund has succeeded during prior declines. The S&P 500 lost 22 percent in 2002, helping Tice generate a 63 percent return, including the reinvestment of dividends, according to Bloomberg data.

Still, the fund has lost 21 percent, including dividends, since stocks began rallying in October 2002. The S&P 500 has more than doubled investors' money during the same period.

http://www.bloomberg.com/apps/news?pid=20601084&sid=aLfpFjUXANDA&refer=stocks

(You have to take Tice with a grain of salt. He has, however, put together a bear fund that did not get killed in this huge upmarket and which, for hedging purposes, might have worked for someone.)

http://mauberly.blogspot.com/

with Standard and Poors forecasts:

"Analysts surveyed by Bloomberg expect profit among S&P 500 companies to rise an average 9.1 percent this year and 11.3 percent next year."

S&P is not forecasting anything close to negative. What has to happen for Tice to be right is a kind of "structural" change in lending that impedes the leveraged consumer. If this occurs, its effects will likely occur slowly as older and sounder credit expansion returns.

How would you model this? I have no idea how to quantify the inputs. I don't know who is not going to lend, who is, and who is going to somewhat lend the way he used to. I submit no one else does, either.

http://mauberly.blogspot.com/

REVENUE OUTLOOK
The long-predicted slowdown in macroeconomic growth arrived in 2006 and apparently has bottomed out. Gross Domestic Product (GDP) growth in the previous quarter, Quarter II, was revised from 1.3% down to 0.7% but the revision was concentrated in inventories, leaving sales and inventories in better balance—and paving the way for faster economic growth in the third quarter. According to Global Insight, real GDP growth in FY 2007 remains at 2.3%, based on a stronger second half of the calendar year.

Growth in economic activity as measured by real GDP in 2006 averaged 3.3%. Growth slowed to 2.5% in Quarter I and 0.7% Quarter II. Preliminary numbers indicate that real GDP growth was 3.4% in Quarter III and according to Global Insight growth is expected to be 2.5% in Quarter IV, for annual growth of 2.3%. Real GDP growth in 2008 is expected to increase at a rate of 2.6%, however our performance will be tempered by the dampening effect of our May 2007 rate increase. Although real GDP is the bellwether macroeconomic measure, three other economic variables tend to influence demand for our services more directly: private sector non-farm employment, real retail sales and real gross domestic investment spending. Of these measures, employment has most closely tracked mail volume growth over time. The outlook for employment growth has changed little.

If the economy rebounds strongly from the effects of the slump in the residential housing market and if energy prices stay under control, the economy may out perform expectations. The 7.6% rate increase in May 2007 should continue to act to depress our mail volume growth for the last three months of the fiscal year. However, since the demand for most of our services tends to be relatively inelastic with respect to price, our revenue should increase.

The May 2007 rate increase, while increasing revenue, will result in much slower volume growth in our lower margin products.

Trends in the macro economy continue to be dominated by two major factors in 2007. Volatility in energy prices has made forecasting economic growth and inflation challenging. The continued slow down in the housing market will linger well into 2008. These two events may both reflect and affect the actions of the Federal Reserve with regard to interest rates. Thus far the Federal Reserve has deferred any action on short term interest rates and has stated "readings on core inflation have improved modestly in recent months."

Long-term, we are no longer holding funds in escrow; consequently we no longer have the interest earnings on the escrow account. The reduction of interest income will be over $100 million per year.

http://www.usps.com/financials/_doc/10Q_for_3rd_Qtr._FY2007_FINAL.doc

have any idea what that last line is about? last year's report predicted a big slowdown in 3Q 2007, but I got distracted by this while looking for it.

According to our Global Investment Strategy service, the recent shakeout in risky assets should be regarded as part of the maturing process of the equity bull market.

This episode is very similar to the recession fears of 1998, which prompted Fed easing. The subsequent rally in stocks was powerful but led to increased volatility and ultimately ended in a crash two years later. We suspect that a similar pattern could play out this time around. Equities still offer reasonable value and should receive significant upside as investment capital gets funneled into fewer assets. Narrowing breadth of asset price inflation is a typical characteristic of a maturing market. In this cycle, commodities, government bonds, real estate and credit products have already largely been inflated but stocks still have room for further multiple expansion once the current turmoil in the credit market subsides. However, investors should be prepared for permanently higher volatility, which tends to accompany richer valuations. Bottom line: The bull market in equities, while in a maturing phase, should offer investors significant upside over the next two years.

http://www.bcaresearch.com/public/story.asp?pre=PRE-20070828.GIF

http://mauberly.blogspot.com/

Still No Progress On Banking Sector Labor Shedding

11:48:00, September 10, 2007

Despite the rapid decline in bank relative performance in recent months, it is too soon to call a bottom. True, the Fed’s commitment to support credit markets and the strong likelihood of interest rate cuts should lead to a steepening of the yield curve. However, Friday’s soft employment report for August did not include much action from the banking sector. Staffing levels actually rose in August, despite a surge in layoff announcements and the seizure in credit markets. The banking industry has undergone an entire cycle of a flat yield curve without paring back employment costs, an extremely rare occurrence. We are staying patient with our underweight position in banks, as the lack of any reduction in hefty cost structures means that a significant steepening in the yield curve will be required to help profits.
http://www.bcaresearch.com/public/index.asp

http://mauberly.blogspot.com/

Excess REIT Capacity Will Sustain The Bear Phase

13:56:00, September 11, 2007

REIT stocks are becoming positively correlated with interest rate expectations, underscoring that the industry is operating in an increasingly deflationary environment. Construction data show that the major REIT categories have experienced a boom in capacity over the past several years, as developers capitalized on easy financing and soaring property values. Now, financing conditions have tightened, creating the conditions for a self-reinforcing slide in property prices if rising vacancy rates introduce forced selling into the equation. Our vacancy rate composite (shown inverted and advanced), which is comprised of our demand and supply composites for the major real estate sectors, is warning that upward momentum in vacancy rates will build this year. The implication is that REIT profits and cash flows are likely to stagnate, sustaining the valuation squeeze in share prices. Stay clear.
http://www.bcaresearch.com/public/index.asp

http://mauberly.blogspot.com/

The main risk facing U.S. equities is still whether a profit recession will be avoided.

Our profit Model is forecasting a further deceleration in growth this autumn, but no contraction. Balance sheets are healthy, businesses have sizable cash reserves and high profit margins, implying that the corporate sector is in decent shape to absorb the slowdown in demand growth. Earnings from overseas continue to provide substantial offset to the deceleration in domestic profit growth. Profits earned abroad, which currently account for roughly a third of total profits of U.S. companies, are outpacing domestic profit growth by a wide margin and this trend should persists due to the weak dollar and diverging economic prospects. In sum, the overall market will remain on edge as profits will be weak this autumn, but a profit crunch seems unlikely, and domestically-levered shares should continue to underperform globally-exposed stocks.

http://www.bcaresearch.com/public/story.asp?pre=PRE-20070918.GIF

http://mauberly.blogspot.com/

S&P on 9/11 was forecasting 95.40 for the S&P 500 2008 earnings. On 9/19, the forecast was lowered to 90.30.

http://mauberly.blogspot.com/

Another flight to quality increases the odds of a Fed rate cut later this month.

The subprime debacle is rearing its ugly head yet again, sending investors scurrying for safe havens. The 2-year U.S. Treasury yield and the 3-month Treasury bill rate are falling, while indexes of subprime mortgage security prices have plunged anew. Many had hoped that the worst of the fallout from the subprime mess was over. However, fresh ratings downgrades of mortgage-related debt, more bad housing news, and earning disappointments from some major banks, reminded investors that the risks remain elevated. Investors are also skeptical that Wall Street’s $100 billion "superfund", designed to avoid forced asset sales by Special Investment Vehicles, will help the situation much. Until housing bottoms, there is no respite for subprime-related debt. Bottom Line: Credit markets are not yet out of the woods, which will keep the Fed biased toward easing.

http://www.bcaresearch.com/public/story.asp?pre=PRE-20071022.GIF

http://mauberly.blogspot.com/

you'd expect this from the lunatic fringe:

http://www.prisonplanet.com/articles/october2006/301006globalcrash.htm

but this is Joseph Stiglitz.

http://mauberly.blogspot.com/

a triple top in copper on a one year basis and other base metals are already in decline. Plus LME inventories are rising.

Mining stocks have backed off and dryshipping stocks are also backing off. We are in danger of a large collapse in commodities, even as Chinese securities decline.

If it happens, the Dow industrials should go quite a bit lower, and drag much with them. The Dow is oversold on a short term basis so it may get talked up a little here. But there is much to be concerned about with respect to these other fundamentals.

http://mauberly.blogspot.com/

Our U.S. Equity Strategy service advocates staying cyclically bullish on equities despite the probability of more near-term volatility.

The mountain of sidelined cash has grown markedly in recent months. The upshot is that there is pent-up demand being created for risky assets. Moreover, the incentive to hold cash is running thin owing to declining interest rates: Interest earned on the cash mountain has declined even as cash levels have climbed. Nonetheless, it will likely take more time and further rate cuts before economic confidence is restored sufficiently for investors to re-deploy cash into stocks. Efforts to provide additional liquidity to the banking sector and help bring an end to the credit crunch are encouraging, but investors are likely to remain hesitant until the major global central banks act aggressively to preserve growth. Bottom line: Equities will likely churn in the near run but the cyclical trend remains up.

http://www.bcaresearch.com/public/story.asp?pre=PRE-20071218.GIF

http://mauberly.blogspot.com/

Jan. 2 (Bloomberg) -- Byron Wien, the strategist whose New Year's predictions have influenced investors for a quarter century, said the U.S. economy will fall into a recession and stocks will tumble 10 percent this year.

The Standard & Poor's 500 Index will rally in 2008's second half after a decline that meets the common definition of a market ``correction,'' Wien, chief investment strategist of Westport, Connecticut-based hedge fund Pequot Capital Management Inc., wrote in his 23rd annual list of 10 ``surprises.'' Democrat Barack Obama will beat Republican Mitt Romney in a ``landslide'' to win the U.S. presidency, he added.

http://www.bloomberg.com/apps/news?pid=20601087&sid=auGjVHMlH09Y&refer=home

http://mauberly.blogspot.com/

NEW YORK (Reuters) - Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter.

In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent.

The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.

The weakening economy will force the Fed to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent. Starting in September, the Fed cut rates at the last three meetings of the Federal Open Market Committee, reducing the target rate on loans between banks by 1 percentage point from 5.25 percent.

Goldman strongly advises fund managers to overweight health care, consumer staples, energy and utilities. They are significantly underweight consumer discretionary, financials, industrials, materials and information technology.

The three most significant changes to their sector recommendations are the reduction in the financial sector weighting by 300 basis points to 14 percent, the information technology weighting by 400 basis points to 15 percent, and the increase in their health care weighting by 300 basis points to 17 percent, the firm said.

Their reduced allocation to financials reflects weak fundamentals and their declining weight in the S&P 500. The reduction in information technology reflects that the group has been the second-worst performing sector in both the six months leading up to a recession and during the first phase of a recession, Goldman said.

The health care weighting change reflects strong performance of the group during the six months leading up to and during the first phase of a recession in addition to an attractive valuation, Goldman said.

http://biz.yahoo.com/rb/080109/usa_economy_goldman.html

http://mauberly.blogspot.com/

By George Soros

Published: January 22 2008 19:57 | Last updated: January 22 2008 19:57

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

http://www.ft.com/cms/s/0/24f73610-c91e-11dc-9807-000077b07658.html

When Soros speaks, it's a good idea to listen up.

However, I think his confidence in the Asian economies will turn out, near term, to be excessive.

http://mauberly.blogspot.com/

to the current wheel that is falling off the credit markets is the rating of MBIA; the rating agencies will be under tremendous pressure to preserve MBIA's AAA rating, for that rating underpins the value of so many securities held by banks across the country.

The crookery will shift to much jawboning as to the efficacy of the capital plan of MBIA;

http://www.bloomberg.com/apps/news?pid=20601103&sid=aZIUBUvA_i4s&refer=news

If the market can be convinced(and it loves to be), there could be a substantial rally in the offing.

http://mauberly.blogspot.com/

Feb. 11 (Bloomberg) -- Before you can say ``Barack Obama is president of the United States,'' the economy will be growing faster again.

That forecast is based on the rise in the five-year Treasury yield from its lowest level relative to two- and 10- year notes since 2001. The last two times that happened was during the recessions of 1990 and 2001, and the economy began to expand within nine months.

``We're actually starting to see tell-tale signs by the market that it expects the economy to be in recovery in six to nine months,'' said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley. The five-year note ``tends to be the most forward-looking point on the curve,'' said Caron, whose firm is one of the 20 primary dealers of U.S. government securities that trade with the Federal Reserve.

If past is prologue, then the five-year note's yield indicates the economy will be on the mend by the Nov. 4 general election. Whoever wins the White House may have Fed Chairman Ben S. Bernanke to thank for cutting interest rates at the fastest pace in almost two decades and President George W. Bush and Congress for a proposed $168 billion stimulus package.

Obama, the junior senator from Illinois, and New York Senator Hillary Clinton each control about half the delegates needed for the Democratic Party's nomination. Arizona Senator John McCain is the front-runner among Republicans.
http://www.bloomberg.com/apps/news?pid=20601087&refer=worldwide&sid=a8qLR4f6OieU

http://mauberly.blogspot.com/

Job Worries Sink Consumer Confidence- AP S&P: US Home Prices Down Sharply- AP IBM Increases Outlook and Buyback Plans- AP Wholesale Prices Jump in January- AP Sales Slowdown Drags on Target 4Q Profit- AP US Home Foreclosures Soar in January- AP Google Shocker: Paid Click Hits Wall- Tech Ticker

http://finance.yahoo.com/

One is purported to drive the market:

Top Stories As of 1 hour, 23 minutes ago
Wall Street Lifts on IBM Stock Buyback- AP
Wall Street reversed earlier losses and moved higher Tuesday after IBM approved a $15 billion stock buyback, suggesting to investors that there are still some companies out there with financial muscle.

Draw your own conclusions.

http://mauberly.blogspot.com/

on why commodities are not a bubble:

The analysis gets much more challenging in the commodities markets. The simple view holds that commodities are just another Bubble waiting their turn to burst. This thinking gained greater acceptance last week, with the sharp reversal of prices and unwind of speculative positions. And it goes without saying that major speculative excess has developed throughout the commodities complex ("par for the course"). I am as well sympathetic to the view that liquidations by the leveraged speculating community could lead to some major price instability. Yet it’s my sense that there really is much more to the commodities story – and inflation, more generally – that is not widely appreciated.

The bursting of the Wall Street finance and U.S. Credit Bubbles marks an End of an Era. But the start of a deflationary spiral? Importantly, these bursting Bubbles are in the process of consummating the demise of the dollar as the world’s functioning “reserve currency” and monetary standard. Examining global markets, I note the ongoing strength of currencies in China, Russia, Brazil, and India, for example. Considering mounting financial and economic imbalances in all these economies – not too mention histories of less than exemplary monetary management – I can state categorically that these are fundamentally very weak currencies. Today, however, it’s all relative to the sickly dollar. In the face of rampant domestic Credit growth, these currencies nonetheless attract endless global finance and appreciate.

When it comes to Ending of Eras, I am increasingly fearful that we are falling deeper into a precarious period devoid of a functioning global currency regime necessary to discipline Credit excess and restrain mounting inflationary pressures. And as long as dollar liquidity inundates the world economy, domestic Credit systems across the globe enjoy the extraordinary capacity to inflate domestic Credit and use this new purchasing power for the benefit of their citizens and economies. And, in particular because of their enormous populations, as long as the Chinese and Indian Credit system enjoy the freedom to inflate at will there will remain significant upside pricing pressure for energy, food, and various goods and commodities in limited supply – hedge fund speculative excess and/or bust notwithstanding.

I throw this analysis out as food for thought. I am increasingly of the mind that commodities should be differentiated from U.S. financial assets when it comes to the consequences from the bursting of the Wall Street finance and leveraged speculating community Bubbles. Prices will likely remain hyper-volatile but (unBubble-like) well-supported by underlying fundamental factors. Similarly, I believe general inflationary pressures may likely prove more significantly influenced by runaway global Credit excesses than by the Wall Street and U.S. asset price busts. If this proves to be the case, perhaps the greater risk is a bursting of the Treasury Market Bubble. It may take some time, but an enormous supply of government debt is in the offing and – let’s face it – these instruments will become only less appealing over time. It also begs the question as to the advisability of aggressive Fed rate cuts. They are having little influence on the bursting Wall Street Bubbles but possibly huge effects on global inflationary forces. Little wonder the ECB is so hesitant to lower rates.
http://www.prudentbear.com/index.php/CreditBubbleBulletinHome

Looks as if he is counting on the debasing of all currencies relative to commodities. He could be right.

But I still think that you will have a considerable set back in commodity prices due to a pause in the dollar when US rates quit falling.

http://mauberly.blogspot.com/

April 10 – Bloomberg (Patricia Kuo and Bei Hu): “Billionaire George Soros said the seizure in global credit markets caused by the subprime collapse will get worse before it gets better. Lack of oversight is partly responsible for problems in the financial markets, Soros told reporters… He said regulators and the U.S. administration ‘failed to perform their job’ in a crisis that began in the U.S. housing market… ‘This is a man-made crisis and it’s made by this false belief that markets correct their own excesses,’ Soros, 77, said. ‘It will take much longer for the full effect of the decline in the housing market to be felt.’”

http://www.prudentbear.com/index.php/CreditBubbleBulletinHome

http://mauberly.blogspot.com/

May 16 (Bloomberg) -- Myron Scholes, chairman of Platinum Grove Asset Management LP and 1997 winner of the Nobel Prize in economics, said the worst of the crisis in credit markets may not be over.

``From my perspective, I think that we don't know if the storm has passed or if we are still in the eye of the storm,'' Scholes said in an interview with Bloomberg Radio yesterday. ``Are there other shoes to drop and new events or new shocks that will come to the fore?''

Scholes's warning reflects financial markets that Federal Reserve Chairman Ben S. Bernanke this week said remain ``far from normal.'' Financial institutions have been reluctant to lend to each other, driving up bank borrowing costs, since a flight from risk in August sparked by defaults on subprime mortgages.

``In my view, this is probably as bad or worse than the 1989-1990 crisis and may even rival the worst crisis we've seen since the end of the Second World War,'' Scholes said. Former Fed Chairman Alan Greenspan has also said the turmoil is the most ``wrenching'' since the war.
http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive&sid=a8AZRX5LUMYE

http://mauberly.blogspot.com/

July 7 (Bloomberg) -- Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor's 500 Index will gain the most in 26 years during this year's second half. That isn't going to happen, if history is any guide.

The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTjWQbjpkpxk&refer=home

http://mauberly.blogspot.com/

are better than ours, and no one looks as though he's missed any lunches.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHX5trIc_s6k

http://mauberly.blogspot.com/

It will take a much deeper correction in oil prices, some light at the end of the housing tunnel, and a stabilization of employment trends to reverse the U.S. consumer retrenchment.

Retail sales growth slowed in July, led by dismal sales at auto dealers. The ongoing squeeze on discretionary spending continues, thanks to elevated essential spending costs like food, energy, interest payments and medical bills. The recent decline in oil prices is helpful, but will need to persist for much longer before consumers perceive energy as 'affordable'. The main factor that will determine consumer spending behaviour will be employment growth and we expect hiring trends to continue to deteriorate until at least the end of the year. In addition, the other major headwinds (housing and the banking system) are still in place. Bottom line: Economic risks are high and we doubt there will be much improvement in the next few quarters.

http://www.bcaresearch.com/public/index.asp

http://mauberly.blogspot.com/

SINGAPORE (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.

http://biz.yahoo.com/rb/080819/usa_banks_crisis.html

http://mauberly.blogspot.com/

Massive policy easing and fiscal stimulus have not been sufficient to offset the drags from a housing bust and squeeze on consumption.

The Conference Board's U.S. leading economic indicator (LEI) fell again in July, providing a fresh reminder that the slowdown is far from over. A domestic recession is underway and policy efforts to stimulate growth have been short-circuited by a collapse of risk-taking in the financial markets. Mortgage rates rose as policy rates declined, underscoring that the housing slump will persist. Rumors that the Treasury Department may have to absorb the two large GSEs are proliferating, underscoring the seriousness of the banking and financial crisis (please see the next Insight). Bottom line: The economy will remain weak for the foreseeable future, implying persistently low Treasury yields and further struggles for the equity market.

http://www.bcaresearch.com/public/index.asp

http://mauberly.blogspot.com/

The just-announced federal takeover of Fannie Mae and Freddie Mac, the giant mortgage lenders, was certainly the right thing to do — and it was done fairly well, too. The plan will sustain institutions that play a crucial role in the economy, while holding down taxpayer costs by more or less cleaning out the stockholders.

But Sunday’s action needs to be seen in a larger context — that of the attempt by the Federal Reserve and the Treasury Department to contain the fallout from the ongoing financial crisis. And that’s a fight the feds seem to be losing.

We’ve come a long way from the days when Alan Greenspan declared a national housing bubble “most unlikely.” There was indeed a bubble, and since it popped two years ago home prices have fallen faster than they did during the Great Depression.

Falling home prices, in turn, have led to the much-feared phenomenon of “debt deflation.” Yes, deflation: prices are going up at the checkout counter, but the prices of assets, which are what matter for balance sheets, are dropping fast...

The current U.S. financial crisis bears a strong resemblance to the crisis that hit Japan at the end of the 1980s, and led to a decade-long slump that worried many American economists, including both Mr. Bernanke and yours truly. We wondered whether the same thing could take place here — and economists at the Fed devised strategies that were supposed to prevent that from happening. Above all, the response to a Japan-type financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus, designed to prevent the crisis from spilling over into a major slump in the real economy.

When the current crisis hit, Mr. Bernanke was indeed very aggressive about cutting interest rates and pushing funds into the private sector. But despite his cuts, credit became tighter, not easier. And the fiscal stimulus was both too small and poorly targeted, largely because the Bush administration refused to consider any measure that couldn’t be labeled a tax cut.

As a result, as I suggested, the effort to contain the financial crisis seems to be failing. Asset prices are still falling, losses are still mounting, and the unemployment rate has just hit a five-year high. With each passing month, America is looking more and more Japanese.

So yes, the Fannie-Freddie rescue was a good thing. But it takes place in the context of a broader economic struggle — a struggle we seem to be losing.
http://www.nytimes.com/2008/09/08/opinion/08krugman.html?_r=1&ref=opinion&oref=slogin

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By MICHAEL GRAY
September 21, 2008

The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.

Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value.

The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.

While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.

Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.

Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund - which touted itself as super safe - fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default - which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.

By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.

Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.

And for good reason. By the close of business on Wednesday, $144.5 billion - a record - had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.

By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.

The banks knew something drastic had to be done. So did Paulson.

The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.

Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.

Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.

By that time, Paulson had announced the plan. It included insurance on money market accounts, a move that started in quiet Thursday morning, when the former Goldman Sachs executive saved the country from a paralyzing meltdown.

http://www.nypost.com/seven/09212008/business/almost_armageddon_130110.htm

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http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0

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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, driving the stock market lower after it rallied the most in seven decades yesterday.

``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, pushing unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

``This will be the first round of recapitalization of the banks,'' Roubini said. ``The government has to decide to intervene much more directly in the provision of credit and the management of these companies.''

The Standard & Poor's 500 Index rallied the most since 1933 yesterday, rising 12 percent, on the government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars. The S&P 500, which has fallen 36 percent since its October 2007 record, dropped 0.5 percent today.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asxXHEAn1glc

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