Period of extreme market stress

[Rapier2]

We are obviously in a period of extreme market stress. By market I don't mean just the stock market but all financial markets. Crashes are extremely rare events and not predictable and I am not predicting some sort of crash or major dislocation. What I am saying is that the conditions as I sense them now suggest that the chances of one of those rare events are higher than normal.

The practical usefullness of this information is intended to be zero.

If such a thing were to occur Bush would I think lose it. I don't think he could handle it. Of course any president in the same boat would be crucifed but Bush is I think uniquely unqualified to handle the pressure.

I am not hopeing for a crash. I think there will be trouble enough going forward in the economy and then by extension in the political world and of course in many peoples personal worlds.

The hallmark of any serious bearish economic trend going forward will be s sudden shift in the 'reality'. In a sort of Emperors Clothes sort of way. What was accepted yesterday as the conventional wisdom would suddenly tomorrow be understood to be illuison, or a lie.

[Nite Owl]

1. Conditions are present for this to happen.

I hope it doesn't cause the big boys always get out it's the small investors that get screwed. A shift in reality could be foreign investors bailing out, something to do with currency changes. Talk of that already too. I want to be wrong.

[babylonsister]

2. My dad, 78-79 year old liberal, NYer, and

skeptic, thinks with the rise of the interest rates, a "major" depression could follow.

[T Roosevelt]

3. I think he's eminently qualified to handle it

He doesn't really give a shit about anybody but himself, and he's financially secure. So he can blindly move on without a second thought.

[CAG]

4. If there is a major correction

Bush will just say "9/11 did this" like he did throughout the initial market decline and recession.
And amazingly, freepers will continue to believe him, and his corporate buddies will continue to support him.

[blogbear]

5. Welcome to DU..I Hope the Economy Doesn't Slump to That..

Point but if it should people will want to survive and pull through. Hopefully this situation wouldn't be entirely devestating and people would not only learn from it but over time would come out stronger..

[lagged_variable]

6. General question

This is an honest question. Why is everybody so freaked out about the interest rate hike? There have been floods of pseudo-panic threads in the last two days, and I don't quite get it.

Interest rates are still ridiculously low, and have been for years. When the Fed raises interest rates, that implies that they believe the economy is improving.

So, what fact am I missing? Why is everybody else worried, and I'm not at all?

[oecher3]

7. every thing comes at a cost

Well, the Fed did seem to know what they are doing, but they don't have all the wisdom, the great depression was severely worsened by Fed behavior because they didn't understand fully what was going on. Greenspan has been more political than economical in recent month.

But then there are disadvantages that come with every descision, Yes, interest hikes will bring in more foreign investment and could cool down the stock market, deter people from borrowing too much money. But they can also overcool the economy, cause inflation. And then there is the whole dollar exchange rate issue! Raising the interest rates puts downward pressure on the Euro and strengthens the dollar, but it will make exports more expensive. I may have left out some more obvious ones, but you might get the picture.

The Fed is supposed to be independent minded and not political. But these days the fed has an agenda helping boost the president's talking points. So don't compare the Fed of Clinton era with todays Fed, they are two different agencies.

[lagged_variable]

9. Fair enough

I can't really disagree with any of that. I just wanted to thank-you for your response. Economics is already so full of hidden assumptions, and so many people who have no clue what they're talking about in this area. I just like for people to put their cards on the table instead of shrilly shrieking about how terrible everything is.

You and ribofunk and a (very select) few others have been willing to actually discuss the issues, and I wanted to say thanks.

[oecher3]

10. discussion is good and

sometimes you have to look at it from every angle and play devil's advocate. Only so you will find something good for everyone, as much as that is possible. It doesn't help to be blindly biased. Keep up the work, your discussion has been fun so far. Just don't find yourself disagree for disagreeing's sake. There is not only one possible solution to every problem and by jupiler there is no such thing an objective human being, but it can't hurt trying.
I was a very big fan of Greenspan during my graduate school years, heck, I wanted to have his job, but found myself waking up how blatant biased he has become, no longer objective and sober as you'd like it for an economist.

IN that sense, you're welcome and hope to read more from you soon!

[On the Road]

18. You are Correct, LV,

that interest rate hikes are often a good thing. If the Fed Chairman is taking the punch bowl away, it implies the party's getting good.

However, in this case, the increases seem forced by commodity inflation rather than an economy nearing capacity, like you had in the 60s. If China and India keep booming, commodoties are likely to keep going up. That means stagflation rather than the normal result of a booming economy.

The economy may be much more sensitive to interest rates than in the past. Home equity loans are the source of a lot of the buying power in the last four years that's kept the recovery going. A lot of folks have houses they can't afford -- mortgages are eating up almost half the average paycheck (the historical range is a fourth to a half). A lot of those same people are on ARMs, will not be able to deal with interest rate increases, foreclosures will go up. A housing crash could in turn trigger a recession.

Personally, I don't think it has to be any more severe than when the stock market crashed in 2000. But it will add to the economic strain of the bottom half -- high rents, no health coverage, low-paying jobs, etc. And the federal deficit will shoot even higher.

Forecasts usually don't pan out the way you think. But just like there were many warning signs before the NASDAQ crash of 2000, there are signs of an upcoming real estate bubble popping.

[phantom power]

8. In some circumstances, it wouldn't be so bad. But the current

economy is being "over-driven" by cheap credit. Increase the prime rate enough, and it could pop this enormous credit-bubble. In a sense, the "real" disaster has already happened: the growth of the bubble itself. The best scenario is that we find some way to slowly deflate it, instead of popping it.

Either way, it's probably going to hurt.

[fedsron2us]

11. You are correct that interest rates are still low

However, if you have borrowed heavily then even small shifts in the cost of borrowing can create problems. There are a lot of highly geared positions out in the market. If one of those goes down it could cause a cascade of debt default. I would suggest keeping an eye on those hedge funds because many are gambling with borrowed money.

http://www.forbes.com/columnists/free_forbes/2005/0328/210.html

edit for link

[screembloodymurder]

12. Yes, highly leveraged like GM

GM is doomed, so far behind the curve they still think performance (power)is their salvation. When GM goes, and they will, watch out. The higher rates can't help but make it sooner rather than later.

[fedsron2us]

13. Agreed. GM has £301 billion dollars in consolidated debt

This is almost as much debt as a country like Canada yet without the assets.
If it goes down then the bond and stock markets go with it

http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20050323/RGMBONDS23/TPBusiness/MoneyMarkets

[raccoon]

21. Would the federal government bail out GM,

As they did Chrysler in the '70's?

[sendero]

14. Simply this...

... our economy has been on life support since 2000. No matter what measure you wish to take, our economy is not doing well.

And this is in the presence of Fed Funds rates at a 40 year low, for an extended period of time.

The Fed has pumped liquidity into the economy and it is still listless. That liquidity will invariably lead to inflation, and the Fed will have to tighten. Rising interest rates have choked many healthy economies, what will they do to a moribund one?

There are many who would describe our situation this way:

1) consumers are overextended, and many are living on refinancing and home equity loans.

2) this will stop dead in its tracks when rates go up a mere 2 points or so, which they will.

3) housing prices are also very vulnerable to rising rates

4) rising rates impact almost every area of the economy, they are like energy costs, they are a factor in almost everything you buy

5) oh yeah, don't forget no matter what the BLS says, unemployment is in the 10% area, at least


Yes, I'm worried about interest rates rising. Coupled with crazy increases in oil, the danger is real and present.

[edhopper]

15. A rate hike

will make housing at the current ridiculous prices unaffordable. The monthly payment on a $400,000 or $500,000 will be beyond the means of most buyers. The housing bubble will burst and take the economy with it.

[oecher3]

16. and now put in the new bankruptcy law

this looks great, doesn't. Well orchestrated! Almost picture book perfect of what you could do wrong!

[ozymandius]

17. Either a crash or a significant correction

The Bush Social Security piratization plan would be finished. Though it looks as though this project is already smoking, spouting flames in its descent. That would be one net positive result of a "crash".

You are correct to say that Bush would be completely incapable of "handling" a crash. He has neither the mindset nor the people in place that could think their way through such a crisis. 9/11 is too distant to make a worthy excuse. If this were to happen 1/3 of the way through his second term, there would be no end to the political fray that would ensue. In short: the party in power would be blamed.

Honestly, I am going to hold ono something sturdy that day after Alan Greenspan retires. His looming absence seems akin to the planned removal of an architectural keystone. I venture that if market stresses need just a nudge toward collapse, then Greenspan's absence will give it what it needs.

EDIT: usual reasons

[Rapier2]

19. notes

Stocks are still looking sick. Conventional analysis is focusing on oil and oil may be used as the cause, or excuse, if the markets have a serious short term decline or accident. Something I said in the threads head seems, on the basis of many disparate opinion sources I follow, is possible but certainly not probable over the comming few weeks.

IF there is a problem oil will not be the 'cause'. All market panics are caused by one thing. That being a liquidity problem, wherein there is not enough money or bids in a market to support prices and everyone heads for the exit at the same time. Without doubt there are liquidity issues in the system. The leading cause is FannieMae which is being forced to sell off their holdings. While banks and S&L's and even foreign central banks have picked up the slack the total pool of liqidity to keep the credit bubble growing is failing. GM must be included as well as they are going to have a hard time finding anyone willing to cover their short term financing needs, which are gigantic, at anything but unacceptable rates.

The point of this little crystal ball gazing exercise on my part is I must admit partly ego in that if something happens I can say I saw it comming. and handily I have hedged mightily saying it probably won't. However the main idea is to give a heads up to those inclined to attempting to understand the most important issue of our age, money and its creation and manipulation, and by extension all of economics. Sometime in the future this age might be called the age of economics and this age will pass. When it starts too, as it already has I think, the repurcussions will be enormous and they won't be pretty. We are on the cusp of the cursed interesting times wherein all the little things we obsess over politically and culturally and socially will seem insignificant.

[ozymandius]

20. Are you suggesting that credit systems will crash?

And with the demise of credit systems, do you believe that the vehicles that allow for enormous manipulation of, say, S&P 500 futures will also evaporate?

Does this have any connection to the Iranian oil bourse, denominated in euros, set to open in the next year?

[Rapier2]

22. bump

Bad but not panic, yet. It is silly to expect panic. Better to just be aware that it can happen. It always will to some degree. Every decade perhaps a sigma 3 or 5, or an 8 or 10 every fifty or hundred years, meaning a move above the standard deviation to that degree.

Stocks can fall a lot futher, let's say another 10% or more, and it won't be a huge deal. It hurts the system because so much 'wealth' and 'savings' are measured in the 'value' of stocks but that wouldn't be fatal.

There is only one thing that would be fatal. That would be a crisis in the credit market. One is brewing with GM. Their ability to raise short term money is now getting dicey. An inability to obtain short term credit DEFINES corporate bankruptsy. Still, a GM failure would not necessarily mean a system wide credit seize up. It only MIGHT mean that.

The entire structre of our economy is now founded on an ever increasing amount of credit. There is no way off this path. Credit must continue to grow or it will contract, sharply. (This is an opinon of course)

[Rapier2]

23. Credit is everything

http://www.b4-thebell.com/index.php?act=Attach&type=post&id=4342