Tuesday, October 16, 2007

Three Gloom & Doom Opinions About the Stock Market

Below are excerpts from three gloom & doom opinions about the stock market. The thing that is interesting about all three is that they are not from some wild-eyed internet blogger, but from three relatively reputable sources: Bill Moyer’s Journal on PBS, the UK Telegraph, and a man that called the 1987 crash.

Once again, I believe firmly that it is good to have a number of opinions from different sources. No one knows what the future holds. The real issue is you need to determine what are the likely scenarios and what level of risk you are willing to live with.

The first one is from the Bill Moyer’s show. The site is worth a visit because it has a clip from the PBS show.

Two prominent economic experts have warned that "insiders with conflicts of interest" allied to the Fed's policy of tanking the dollar to bail out Wall Street could lead to a repeat of the economic crash of 1929, during a segment on Bill Moyers' PBS show.

"I think there are three big parallels between what happened in the 20's and what has been happening in Wall Street lately," Robert Kuttner told Moyers.

Kuttner is a veteran economic journalist and a former legislative assistant in congress.

"One is insiders with conflicts of interest that are not fully disclosed to the public generally, secondly - there's much too much borrowed money....particularly in the financially engineered parts of the economy....and third is the lack of transparency - regulators and the public don't get any kind of disclosure," added the former BusinessWeek writer.

Kuttner called for more transparency and slammed the Fed for recycling a vicious circle of cheapening the dollar to bail out Wall Street, inviting another round of speculative excess.

"The risk is that every time we repeat this cycle, we get bigger and riskier bubbles. And with the dollar being in the tank-- it's not a costless kind of bailout," said Kuttner. "One would have thought that if the dollar were down to 140 Euros there'd be a run on the dollar. We're gonna see inflationary pressures as a result of the cheap dollar. So it's not as if the Fed can simply print more money to bail out these excesses, and there be no cost to everybody else."

William Donaldson, the former chairman of the Securities and Exchange Commission, also warned that the dollar was "disappearing" through the floor as a result of the Fed's policy of bailing out "devious" investors.

So I think that the central banks have a greater technique and ability to meet this problem," said Donaldson. "But insofar as they do-- we run into a moral hazard, i.e. we bail out the people who made bad or devious, or whatever you wanna call 'em, investment decisions. So you sort of are saying, "Go ahead and do whatever you want, and you can count on the good old Fed to bail you out."

The second article is about Paul Jones, who called Black Monday (Oct. 19) 1987. Also included in the article are comments of Robert Prechter, the follower of the Elliott Wave. From the NY Times:

Paul Tudor Jones II . . . .“There will be some type of a decline, without a question, in the next 10, 20 months,” he says in his rich Memphis drawl. “And it will be earth-shaking; it will be saber-rattling.” . . . . .

. . . . . Now, 20 years after the 508-point decline, several strategists are anticipating that the earth will shake again. Valuations are stretched beyond historical comparisons. The market, ever more volatile, is reaching new highs, ignoring a buildup of bad news. Most crucially, the strategists say, the sentiment that the market’s rise is infinite seems to have taken permanent hold.

“The overvaluation of stocks is more extreme than the 1929 high,” said Robert R. Prechter Jr., an independent market forecaster in Gainesville, Ga., and a well-known follower of Elliott Wave theory, which examines the extent to which investor psychology creates stock market patterns. “Which tells me the next bear market will be the biggest in many years, probably since 1929-32.”
Now, Mr. Prechter is suggesting that the country is facing not just a market crash, but also a depression. On every measure, he says, the market is more overvalued than it was in 1987 before the reversal. The price-to-book ratio of the S.&. P 500-stock index today is 4.04, compared with 1.73 in 1987. And measures of the bullishness of Wall Street traders confirm Mr. Prechter’s assessment of the overvaluation.

On Wall Street, the roles are reversed. Mr. Prechter foresees a return to the Depression; Mr. Jones, who himself said a depression would follow the 1987 crash, may well be fully invested.

The third article is from the UK Telegraph. Also look at the graphs below, they are a little to similar. (Also I realize that this is not an exhaustive search for graphs with similar relationships):

Exactly 20 years after "Black Monday" – which saw Wall Street plunge 22.6pc – economists have warned of eerie parallels with the tensions visible on global markets today.

Simon Derrick, chief currency strategist at the Bank of New York Mellon, says the collapse of the US dollar in the mid-1980s lay behind the ructions that led to Black Monday – modern times' most dramatic one-day crash. The dollar had been sliding relentlessly for two years and was at risk of breaking down in a disorderly rout, much like today.

"The dollar was under severe pressure in October 1987. Interest rates were on the rise globally, the US trade deficit remained high and energy prices had been increasing on the back of tension in the Gulf," he said. These conditions are more or less in place once again. . . .

. . . . Jim Baker, the former US Treasury Secretary, said Black Monday's trigger was an interest rate rise by Germany's Bundesbank, forcing the whole European system to raise in lockstep.
The move sparked fears that the US Federal Reserve would have to match with tightening of its own, or risk a further dollar slide and the start of an inflationary spiral. The Fed found itself hemmed in by world forces.

Economists' concern this time is that Asian and Middle East central banks and investment funds are losing their taste for US investments. This could knock away a key prop for the dollar. There is already evidence that Korea, Singapore, Taiwan, Vietnam and Qatar are drawing back. Europe is less likely to prove a trigger today. Even so, European Central Bank governors recently warned that inflation risks are rising, hinting at another rate rise.

John Lonski, Moody's chief economist, said the G7 club of major powers will take pre-emptive action. "I don't think that other central banks would allow the US dollar to collapse. It's not in the interest of the world economy to allow the US dollar to enter a downward spiral," he said.

One missing ingredient this time is that 10-year US Treasury bonds – the world's benchmark price of credit – remain stable. Yields have risen 30 basis points to 4.69pc since the Fed cut the Discount Rate in August. In 1987 they jumped 300 basis points from the start of the year to a pre-crash peak of 10.23pc on October 16, as investors feared a return of 1970s-style inflation. Nor are stocks as richly valued today. The price-to-earnings ratio of Wall Street stocks was 22 in 1987. It is nearer 17 now.

Double click on the image to enlarge.

No comments:

Post a Comment