So, wheres the Crash?

[GRG55]

Re: The Savings Glut Myth

This savings glut myth is one of those vague and fuzzy concepts that begs to be deconstructed into concrete blocks. First, we need to consider whether exactly what we're talking about. Did the Chinese et al just pile money up in their mattresses? If it were simply "savings" at issue, wouldn't that be the case? And if it were, it couldn't very well be supporting US bond prices and holding down US interest rates, right?

No, the money was lent. So is there was any glut going on here, it was a "lending glut". Next, realize that the global economy is a closed system. No one here is conducting commerce with space aliens. If one party is lending, another party is borrowing. So if there is a lending glut somewhere, there must be a borrowing glut somewhere else. It was never possible for Asia to sua sponte engage in a lending spree on its own. One cannot simply decide one will be a creditor and carry it into effect without someone else willingly becoming a debtor.

And it is equally true that one cannot become a debtor without someone else willing to become a creditor.

And to become a creditor doew one not need savings from prior income surplus to one's own consumption?

[jk]

Re: So, wheres the Crash?

On the topic of "Where's the crash" asked on another thread, the credit markets have been crashing since July. The question is, when does the stock market follow? As I've said before, market participants remain confident that CB efforts to manage the credit crisis will effectively prevent bank failures, and that the Fed, Bank of England, and others will keep insolvent banks open and functioning just as the Bank of Japan did in Japan during their 1990s debt deflation. As long as the banks are lending, the financial system and economy will continue to function.

Central banks are substituting CB credit issuance for the credit issuance lost to the crash of the securitization market. Call this Plan A. Plan B is a far more comprehensive program of CB money printing and purchase of assets by CBs and arranged asset sales to foreign purchasers. The crash occurs when either 1) Plan A fails and before CBs move to Plan B, or 2) the inherently inflationary impact of Plan A begins to look both extended and volatile.

[emphasis added]

plan A keeps the banking system going, which is reassuring to all market participants. and so far the stock market hasn't followed the credit market. but doesn't the stock market drop when it becomes clear we are in a recession? i.e. economic activity slows markedly, profits plunge, unemployment trends up, etc

[bart]

Re: So, wheres the Crash?

...
Greenspan has recently attempted to defend this abysmal record by citing the global nature of the housing and credit bubble. Like the misbehaving sixth-grader, it was okay because "everybody was doing it". Not to mention that central banks all over the world were taking their cues from the US Fed, driven at least in part by the fear of damaging their export industries by having their currencies appreciate too fast in relation to the US dollar. The maestro can hardly escape responsibility for the sonic disaster he leads.

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."
-- John Maynard Keynes, "Consequences to the Banks of a Collapse in Money Values", 1931



And as far as the crash not having happened yet, these apply:

http://stockcharts.com/h-sc/ui?s=$IN...d=p20714381682
http://stockcharts.com/h-sc/ui?s=$us...d=p20714381682

[WDCRob]

Re: So, wheres the Crash?

Bart, am I reading $INDU:$GOLD correctly when I see something very similar to the cycle of hard assets chart you've produced before (love the lables on this one).

If history holds (obviously no guarantees), we would eventually expect that ratio to fall from 16.7 currently to something between ~.5 and ~2-3, yes?

Does stockcharts allow you to recreate the US Housing Market/Gold ratio as well?

[Andreuccio]

Re: The Savings Glut Myth

Incidentally, in our Gold Update (our first since 2001) we go into each previous period of inflation vol A1, B1, etc. to find parallels and predict the future of inflation vol.

Is this out yet? Can you please provide a link? Thanks.

[bart]

Re: So, wheres the Crash?

Bart, am I reading $INDU:$GOLD correctly when I see something very similar to the cycle of hard assets chart you've produced before (love the lables on this one).

If history holds (obviously no guarantees), we would eventually expect that ratio to fall from 16.7 currently to something between ~.5 and ~2-3, yes?

Does stockcharts allow you to recreate the US Housing Market/Gold ratio as well?

Very much so on Dow/Gold "probably" falling to the ~.5 to ~2-3 range.

To the best of my knowledge, housing prices are not available from stockcharts.
I actually requested that CPI-U from the BLS be added bt stockcharts some time ago, but so far no joy. It sure could produce some "interesting" charts.

[c1ue]

Re: So, wheres the Crash?

The second is an ancient cultural emphasis on saving and against debt, likely at least party a result of distrust of government.

My apologies to your sources, but this is BS of the first degree.

Ancient cultural emphases were systematically wiped out by the Communists although there is now a 'emphasis' on Confucianism as a nice sop to the angry rural masses.

The reason Chinese save is:

1) Why spend money on frivolous s**t when the money can grow quickly via investments in various forms (land, stocks, whatever)

2) Due to import taxes, many things cost much more in relation to income than in the US. Thus savings is necessary to buy anything large like a TV or refrigerator. This is magnified by Chinese level of education/stinginess - they know full well what happens when interest gets charged.

3) Education costs are very high - theoretically it is all free but in reality it takes cash to get into a good school - whether it is bribes, extra private education, whatever.

4) Money talks - bribes are still a reality of life. Last I checked no bureaucrat will accept American Express

The last 3 items are directly a consequence of government; it can be argued the first item is also a consequence of the government's mercantilist policies.

[EJ]

Re: So, wheres the Crash?

[emphasis added]

plan A keeps the banking system going, which is reassuring to all market participants. and so far the stock market hasn't followed the credit market. but doesn't the stock market drop when it becomes clear we are in a recession? i.e. economic activity slows markedly, profits plunge, unemployment trends up, etc

In our analysis of the inflationary recessions of the 1970s for our Recession 2007 update (see Larry Summers), the stock market did not decline during the recessions. In fact, it increased as inflation decreased. Stock investors cared more about falling inflation, which was high, than about economic contraction. The stock market declined before the recessions, but because of high inflation than in anticipation of recession.

[Andreuccio]

Re: So, wheres the Crash?

Does stockcharts allow you to recreate the US Housing Market/Gold ratio as well?

I don't know where he got the info from, but here's a chart of housing/gold from Charles Mckay:

http://www.itulip.com/forums/showthr...16792#poststop

[bart]

Re: So, wheres the Crash?

I don't know where he got the info from, but here's a chart of housing/gold from Charles Mckay:

http://www.itulip.com/forums/showthr...16792#poststop

He did good on that chart.

My best guess is that the data is from the Census Bureau, which is one of my primary sources.

[Finster]

Re: The Savings Glut Myth

And it is equally true that one cannot become a debtor without someone else willing to become a creditor.

And to become a creditor doew one not need savings from prior income surplus to one's own consumption?

The fact remains that they are not making us do it. US policymakers do not control the polices of other countries, they control the policies of the US. And if the Chinese, acting in their own self interest, are becoming relatively more wealthy while the US becomes relatively less so, then who is acting in the interest of the US?

One can easily picture BRIC and OPEC sitting over there getting rich, laughing at the "stupid Americans". "We send them things they wear out and burn up. They send us dollars. We send the dollars back and they send us their corporations."

http://www.bloomberg.com/apps/news?p...d=aX3IcNd1YrVM

Merrill Gains on WSJ Report of Temasek Investment

(Update1)

By Kelly Riddell and Jean Chua

Dec. 21 (Bloomberg) -- Merrill Lynch & Co. rose in New York trading after the Wall Street Journal reported that the world's biggest brokerage firm may receive a cash infusion of as much as $5 billion from Singapore's state-owned Temasek Holdings Pte....

Citigroup, the biggest U.S. bank by assets, said Nov. 27 that Abu Dhabi would invest $7.5 billion in the New York-based company. State-controlled China Investment Corp. is buying an almost 10 percent stake in New York-based Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss of $9.4 billion from mortgage-related holdings on Dec. 19...

http://www.bloomberg.com/apps/news?p...d=aGhGwGK1wTpk

Wall Street Gets $25 Billion in Chinese, Mideast Cash

(Update1)

By Matthew Leising and Zachary Mider

Dec. 19 (Bloomberg) -- Wall Street is turning to Asian and Middle Eastern governments for $25 billion to prop up balance sheets battered by writedowns from the collapse of the U.S. subprime market.

State-controlled China Investment Corp. is buying an almost 10 percent stake in Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss today of $9.4 billion from mortgage-related holdings. Citigroup Inc., Zurich- based UBS AG and Bear Stearns Cos. also received sovereign money after bad investments depressed profits...

http://www.bloomberg.com/apps/news?p...d=al3KoVYVhdkI

China's $200 Billion Fund Feels Pressure to Meet Return Goals

... The sovereign wealth fund ... in May invested $3 billion for a 9.4 percent stake in New York-based Blackstone Group LP, manager of the world's biggest buyout fund ... China set up Asia's biggest state-owned investment company after surging trade surpluses helped push the nation's currency reserves to a record $1.46 trillion...

http://www.bloomberg.com/apps/news?p...d=aUJXYsY4gpKQ

U.S. Home Foreclosures Rise 68 Percent in November

(Update2)

By Dan Levy

Dec. 19 (Bloomberg) -- U.S. home foreclosures rose 68 percent in November from a year earlier and may surge in 2008 as adjustable-rate mortgages leave subprime borrowers unable to meet higher payments, according to data compiled by RealtyTrac Inc...



http://abcnews.go.com/Business/story?id=1946250

Cleveland





Shanghai





Dubai

...

[Tulpen]

Re: So, wheres the Crash?

A crash will only happen if there are conditions that lead to a cash.

Currently I can think of only three conditions that would lead to a stock market crash.

1. If retail investment in stocks and mutual funds severely deteriorates.
2. If investments in stocks by foreign institutions severely deteriorates.
3. If domestic financial institutions holding stocks are forced to sell due to insolvency.

Right now I do not see any of those conditions in force.

Things like negative sentiment, disasters, wars etc can lead to market corrections but after some time the market simply returns where it was before and actually rises due to inflation.

[grapejelly]

Re: So, wheres the Crash?

Crashes are very rare. And this bad news is discounted all over the place, for now. In fact there could be a sharp rally led by the financials at this point.

[jk]

Re: So, wheres the Crash?

In our analysis of the inflationary recessions of the 1970s for our Recession 2007 update (see Larry Summers), the stock market did not decline during the recessions. In fact, it increased as inflation decreased. Stock investors cared more about falling inflation, which was high, than about economic contraction. The stock market declined before the recessions, but because of high inflation than in anticipation of recession.

ej,

i wonder if this parallel will hold. in the 70's inflation was out of the closet and widely identified as a problem. when the fed tightened and we entered recession, there was some hope that the underlying problem was being addressed or even cured, so equities rose.

now, on the other hand, inflation is not acknowledged and it is believed that the fed is already keeping us safe and sound.

if there are failures of major financial institutions, that would tank equities. if inflation becomes an obvious problem, that might tank equities.

but i think a recession might play differently than in the 70's. it means that the cat's out of the bag- there are problems that are not, indeed, under control.

just as the credit market collapsed when it learned that the credit problems were not contained to subprime, the equity markets could tank when it learns the real-economy problems are not contained to housing.

[GRG55]

Re: The Savings Glut Myth

If the question had nothing to do with US policy, we could make such an observation and just leave it at that. But Greenspan has been trying to use that as a diversion from the fallout from his record at the Fed.

It remains that Chinese savings (lending) activity cannot exist in a vacuum. There must be a borrower somewhere. And why would Americans spontaneously - all together, now - get so enthusiastic about going deep into debt?

Something in the water?

Or ... just maybe ... ultra low interest rates?

Just as a little "thought experiment", let's ask what the rational response of people ought to be. Just suppose there exists a security X that depreciates at 6% a year. At the very least, you wouldn't want to hold much of it. That is, you wouldn't want to "save". Not only would want to get rid of all you had, but what if it could be borrowed at 3% a year? Looks like a pretty obvious short, huh? What if it's the US dollar?...

Finster: You and I don't differ in our views of the "Great Greenspan" and the Fed's track record over his tenure. However, I remain unconvinced that the remarkable difference in consumption vs savings behaviour of the "Anglo-Saxon" countries (USA, UK, Australia, etc.) compared with the rest of the world is due simply to "low interest rates", or a remarkable insight on the part of American consumers that the US dollar was "a pretty obvious short".

As noted, interest rates were low in other jurisdicitons, but failed to prompt the same excess consumption behaviour. And if shorting the US $ was so obvious, it seems to me the rest of the world would have figured that out at least as fast as the average American (large numbers of whom are allegedly unable to read and comprehend the very mortgage documents they signed).

I prefer elegantly simple explanations wherever possible, but this mess we are in now seems the result of a complex interplay of many factors; and its pretty clear I am having trouble understanding some of them.

inter alia[/I], residential real estate. It was only natural (and as we have seen, consciously anticipated by Mr. Greenspan) that they would make their way into the pockets of millions of Americans and ultimately be spent. Meanwhile, there was no new production in the United States commensurate with the new money. If, say, Americans have 20% more money to spend, but only produce 5% more, the difference has to be made up from somewhere else. That means loads of the new dollars go overseas. Once there, they begin to compete with the dollars remaining at home for resources (oil, copper, wheat, you-name-it), driving up prices.

This prompts the Bernanke Fed to tap on the monetary brakes, slowing the flow of new dollars into the US economy, at the same time the outflow amounts to hundreds of billions a year. Result: Americans wind up short of dollars while the rest of the world is swimming in them.

America, meanwhile, is still consuming more than it produces, so there isn't much for foreigners to buy from America with all these dollars.

Except perhaps for its IOUs ...

And it's troubled banks (Citi), brokers (Bear and Morgan Stanley), chip makers (AMD), and so forth.

I see this as the "third phase" of globalization - a process that really got underway with the money printing wave during Burns' tenure at the Fed.

How long will it be that these purchases are limited to only distressed companies? Will the SWF's become more assertive in time, and reject the limitations currently being imposed (capital infusions without Board seats, etc)? Is a real transfer of wealth from west to east underway, and are these bank capital infusions a harbinger of a remarkable shift in control of the global financial system away from Americans on Wall St?

The fact remains that they are not making us do it. US policymakers do not control the polices of other countries, they control the policies of the US. And if the Chinese, acting in their own self interest, are becoming relatively more wealthy while the US becomes relatively less so, then who is acting in the interest of the US?

One can easily picture BRIC and OPEC sitting over there getting rich, laughing at the "stupid Americans". "We send them things they wear out and burn up. They send us dollars. We send the dollars back and they send us their corporations.".

I don't know about BRIC, but the few Arab bankers and financiers that I know aren't laughing. If anything they are increasingly appalled at the behaviour of the US Government, Treasury and the Fed. In the summer of 2002 I had a long discussion with a semi-retired Arab banker (who has subsequently become a business associate). He was remarkably frank about his disgust with Greenspan and Fed policy, and the inevitable consequences of unbridled US consumption supported by ever more creative debt instruments. He warned me that Enron (which was then on page one in the news) was merely foreshadowing a far more insidious and widespread level of corruption and deceipt in the financial system centered on Wall St.

In my recent conversations with him and a few others there's a marked tone of resignation. They tell me that the GCC SWF injections of capital into the banks is at least partly motivated by the realization that even OPEC can't afford a US centred banking or currency crisis.

Wall Street Gets $25 Billion in Chinese, Mideast Cash

By Matthew Leising and Zachary Mider

Dec. 19 (Bloomberg) -- Wall Street is turning to Asian and Middle Eastern governments for $25 billion to prop up balance sheets battered by writedowns from the collapse of the U.S. subprime market.

State-controlled China Investment Corp. is buying an almost 10 percent stake in Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss today of $9.4 billion from mortgage-related holdings. Citigroup Inc., Zurich- based UBS AG and Bear Stearns Cos. also received sovereign money after bad investments depressed profits...
...

Cleveland

Shanghai

Dubai

...

I live within "spitting distance" of Dubai. What's going on in Dubai and a few other Gulf locations including Abu Dhabi, Doha and Manama is a bubble of such magnificent proportions that even Alan Greenspan would be hard pressed to deny it. I can't see a California/Florida/Spain type real estate melt-down because that level of mortgage credit leverage is not available in this region.

However, there are a few problems that are being overlooked. There is no liquid secondary re-sale market for residential real estate in any of these locales (why buy a used flat on Sheikh Zayed Road when you can buy a new one, finished to your specifications, in the building under construction next door). Life-time residency permission (with its income tax advantages) is a big draw for expatriate buyers. Despite years of selling product with this assurance, not one GCC country has yet enshrined this benefit in law.

No doubt Arabs "fleeing dollars" (your apt description) are fundamental to the overbuilding now underway. Expanding local construction companies, pooled real estate investment funds (many meeting Islamic criteria), and a steady appetite for commercial office ownership continue to fuel the boom. But the end game will eventually come, and although there may not be a decline in price, I am quite certain that a lot of local and expat "investors" are going to discover they hold highly illiquid, immovable assets in an unstable part of the world.