February 17, 2009
(Slightly Later): Dr. Krugman has published three additional news briefs
tonight. In the first, Permanent Link to Apocalypse now,
he draws attention to the "fiscal catastrophe
now unfolding in California. Years of neglect, followed by economic
disaster--and with all the reasonable responses blocked by a fanatical
minority. This could be America next."
In the second, Permanent Link to What I learned listening to Larry Kudlow,
he observes that Lawrence Kudlow "has adopted the full Treasury View--the
view that government spending can't raise demand because every dollar the
government spends comes at the expense of private spending." He
continues, "So the Conintern — the vast right-wing conspiracy —
has settled on a misunderstanding of the meaning of accounting identities
as the basis for its opposition to, you know, actually doing anything to
prevent Great Depression 2.0."
In the third, Permanent Link to The Geithner delay,
he notes that the vagueness of Tim Geithner's announcement last week
stemmed from the fact that he realized that the Obama team's approaches to
financial rescue were unworkable. Dr. Krugman asks why it took so long,
given all the public discussions that had been hashed out last fall.
The bottom line for us, or at least for myself as an
investor, is that it looks more and more to me as though we might
facing a protracted downturn, not because our experts don't know better,
but because economics is sufficiently politicized that they're blocked
from doing their job. Even at best, avoiding a long, painful economic
contraction is something that wasn't successfully accomplished either in
the US in 1929 or in Japan in 1989.
But it's still early.
Here's Kevin Depew's Five
Things: Markets Lose Faith. Minyanville's Bennett Sedacca has
published what at least to me is an excellent article: Assets in Free Fall.
One point he makes is that this is the first month in which
adjustable-rate mortgages are resetting. last December, 28% of all
adjustable-rate mortgages defaulted. Given "the brutal one-two punch
of job losses and rate resets", the author is looking for a default
rate in excess of 50%. With respect to commercial-property loans, "Moody's
stated that 'property values declined sharply in 2008, and we anticipate
further declines over the next 12 to 24 months. ...delinquencies on
Commercial Mortgage-Backed Security loans are also on the rise, and we
expect the pace to accelerate as macroeconomic pressures take a toll on
property cash flows.'" Bennett Sedacca continues,
"It's worth noting that the cuts and downgrades
are in a broad arena - hotels, vacation properties, shopping malls, etc.
It shows just how deep this deleveraging is, and why it will take more
than a quickly cobbled together bailout plan and what's left of TARP (the
Troubled Assets Relief Program) to cure it."
Mr. Sedacca also mentions the possibility of further
problems with money market funds, and mentions that he has his money in
This article underscores for me the precariousness of
our economic situation, and of money market funds. I had transferred my
cash into a Treasury-backed fund, but when I found I couldn't trade out of
it, I transferred my money back to the cash reserves. But maybe it's time
to return to the Treasury-backed fund.
Here's another article from Minyanville, this time
dealing with the technical picture after today's action: MV Weather
Report: Tornado in Global Equity Markets.
Stock futures tonight are somewhat positive.
The markets closed sharply lower today, retesting their November lows. The
was off 63.7
to close at 1,471,.
(0.29 points above its November 20th low),
and the S&P
to end at 789.
a barrel to $34.93
a barrel, and gold added $25.30
to end at 48.66.
How meaningful these moves were will depend upon what
happens over a longer time frame. The S&P closed at 752 on November
20, 2008, and dipped to 740 before closing up at 800 on November 21, 2008.
In the meantime, Michael Ashbaugh issued his public
analysis: U.S. markets venture into sky-is-falling territory.
It looks to me as though the stock market is, maybe, retesting its
November lows this morning. The S&P 500 is (so far) holding at its 804
resistance level. If it successfully retests these lows, then it should
clear the way for an "upside breakout". (Bear in mind that it
closed on November 20, 2008, at 752.44, and then closed the next day at
800.03.) Today is the day when Michael Ashbaugh releases his public
technical analysis, so that should appear later today. In the meantime,
here is a link to his The Technical
Indicator: S&P 500 ventures into sky-is-falling territory. In it,
he concludes that "the current technical story is incredibly
straightforward. Namely, the S&P 500 faces important support at the
January low of 804, and on a close under that level, further
downside, on the order of 10%, looks likely." A 10% drop from where
the S&P is now would put it in the 720 range. Bear in mind that on
November 21, 2008, its intra-day low was 740, so a 10% decline from here
wouldn't be totally catastrophic. The real danger is going to come when
the market rallies, and we have to decide whether the rally represents the
beginning of a new bull market or another trap within an ongoing bear
Other information regarding the breadth of this decline
will be important. For example, is this pullback being led by bank stocks
or is it broader-based?
And of course, the market may turn around and charge
back up today or tomorrow.
The VIX has jumped six points to 49.
Stocks put lows to a re-test.