V N1. Of the 100 biggest markets around the world, almost all are down 40- 60% in dollar terms with the exceptions' being Tunisia and Botswana. The impact of the decline this week, unless rapidly reversed, is going to be very severe on purchases. The previous 20% caused great angst; imagine what this decline will do to those who rely on retirements. The positive feedback of the decline in a negative direction also impacts the election results with every market decline making it more likely the Republicans will be blamed for the situation.

2. The worst aspect of the decline this week from a health point of view was that fixed income around the world cratered, thereby reducing world wealth by a good 15% as opposed to the normal situation where the equities go down 10% and the fixed incomes go up 8% leaving total wealth down only a little. And the people that talked about how bearish it was for stocks because commodities were up would never say that it's bullish now because commodities are down 40% over the past four months.

3. A new word should enter the market vocabulary, a waterboarding decline, being a decline that seems to have a breath of life at the open before going into a death spiral.

4. Because of the decline in all sectors, the wealth/price ratio has stayed relatively constant with corn, copper, soybeans, wheat and oil down 40- 50% since June 30, thereby keeping the number of bushels and barrels we can buy with one DJIA relatively constant, making the number of ounces of gold you can buy with the Dow less than 10 for the first time in a googol, and looking like a bargain for the Dow.

Paolo Pezzutti writes:

In other crises you could see the flow of money from bear markets to more promising assets. From equities to bonds, from equities to housing, from technology to defensive, and so forth. You could see investors moving away from the "bad" returns toward the "new" vein of expected future returns. This time it is a simultaneous meltdown and loss of money everywhere. Only cash has been a safe haven in each country. At least until some of the currencies initiate a fast devaluation path on lack of trust not only of the banking system but also of a country's ability to navigate these stormy waters. Only a few months ago I was confident to see the financial system, at least in the US, finding a good base and start recovering. After all the financial system of the US could not simply collapse! I was not expecting this could go so far. There were many predicting a financial armageddon but I did not pay too much attention. Catastrophists have always been around. The fact that money is simply being burned actually makes it quite difficult to have a complete recovery. I am afraid it will take many years. Because in this case, simply, the flow of investments cannot return to equities. This time there is not enough money to move away from some other asset. What I am really afraid of, and I go back to a previous post I wrote about the end of the US dominance era, is the following: this crisis signals the transition to a new balance of power in the world. I learned at my expense that systems and large organizations continue to act ignoring that they are moving at the edge of an abyss. Factors for a change of balance accumulate but they are ignored. Suddenly they ignite rapid and impressive changes with an avalanche effect (black swans?). It seems that these transitions cannot occur smoothly or gradually. Awareness does not grow gradually. People live in a dream until they are brought abruptly to reality. The reality is that the US and Europe have lived a number of years spending and consuming more than they could afford. Continuously growing current account deficit and immense flows of money out of our countries did not ring the bell. Now, whatever the specific cause that started the crisis we are brought to reality. More regulations vs less regulations, more government vs less government are the discussions we hear in order to try and find a solution. The problem lies in the fact that our societies consume and spend more than they earn accumulating debts that eventually nobody will be able to pay. This has to be changed somehow. And hopefully not through increased presence of the governments in the economy or, even worse, through protectionism. Of course emerging markets are suffering a lot in this crisis. We are the main source of income for them and we finance their surpluses. Moreover, we will not be able to go back soon to previous levels of demand. However, the relative weight of some of these countries will increase as their internal demand will pick up to fuel their growth while we lick our wounds. And demography explains the dynamics of aging western societies. We need to be aware that this historical shift is developing and accelerating. I do not think we will be able to go back to "business as usual". This will have effects in the long term, in my opinion, also in the strategic posture of the US and Europe and in their role in the world governance. There are already signs of increased weakness from the military and political perspective. More in general, we need to understand the possible answers to this crisis. And the implications. This phase, however, if my analysis is correct, could be an opportunity to invest in those emerging markets that will grow faster than we will be able to do (provided that one still has the liquidity to do it).

Steve Leslie remarks:

If it were not enough for ACORN to help destroy the housing market in Florida by being the pointpersons for loans to unqualified buyers, now it seems they wish to start another stain on the Sunshine State with voter fraud. It seems that Mickey Mouse tried to register to vote in the state of Florida at the behest of the political action group. They are currently under investingation in 13 states for voter fraud. My one question would be how in the world did Mickey fill out the application and sign it with those huge hands? And if Mickey Mouse is registered will the other Disney characters soon follow?





Speak your mind

20 Comments so far

  1. Sam Kumar on October 11, 2008 11:57 pm

    "With every market decline making it more likely the Republicans will be blamed for the situation"…  Yes — it's called homeostasis — the earth cannot sustain Republicanism for a while (1980-2008 is a long time ) — the American electorate will ride them out of town on a rail come this November reacting from a deep visceral place.Capitalism red in tooth and nail won't be talking so loud for some time — the only immediate hope is a massive Keynesian expansion of Government spending (for %&*%&%*'s sake not on weapons) to stimulate demand from a terrified population.

  2. ghost of posts past on October 12, 2008 3:02 am

    Only 10% of sub-prime mortgages are apparently in arrears right now, with only 5% total under threat of foreclosure. On the other hand, how many low income families have been able to improve their status in last five years because of what this product offers? Enough to bring the home ownership rate to 70% of all families (2004), and presumably this is even higher now.


  3. lon evans on October 12, 2008 5:38 am

    Victor, As my previous comment was accepted, I assume I'm considered a bit less toxic. I'd be pleased for the opportunity to post rather than simply comment, but I'm ignorant as to the protocol. If kindness dictates, would you be gracious enough to allow me the stating of my case. As previously suggested, there just might be something worthwhile in the methodology of the despised Lon. It's easy to best competition when one can arbitrarily ban it. Ask Satchel Paige, but then your own experience more than amply suffices. Or not? "Don't look back. The Devil might be gaining on you." Am I the Devil? lon

    [Contributions for the website can be sent to: web =at= dailyspeculations =dot= com — Ed.]

  4. douglas roberts dimick on October 12, 2008 8:46 am

    I heard that support level is 7500. Yes?

    Or does this quantification occur in a void, whereby fixed income cratering causes related metrics to become unassumed?

    If derivatives are systemic, then how can one say bargains now avail? Isn’t that what contra-types always proclaim “on the way” down (or up)?

    The Dow swung over 1000 points between its low and high Friday - the first time ever in its 112-year history.

  5. dunnage on October 12, 2008 2:25 pm

    Please, always, note whether earnings (10) are forward or backward looking. The backward PE is or was the norm — now we get sold down the river by folks using so-called forward looking earnings.

  6. Anonymous on October 12, 2008 2:45 pm

    Sam Kumar writes 1980-2008. I do not get the numbersof numbers. Democratic congress in the 1980’s Republican Administration. Democrat Administration in the 1990’s Republican Congress with Gingrich Contract with America. Republican President 2000-2008. Democratic Congress elected in 2006.

    You can not have it all ways. What specifically do you mean. I can just as easily point out Fannie Mae and Freddie Mac execs Raines, Gorelick, Johnson. Barney Frank committee to oversee Fannie and Freddie. Speaker Pelosi, Senate Majority leader Reid

    Perhaps Republican administration is to be painted fairly or unfairly as to the cause of the failure of the system, but hardly can one pin it on a minority Senate and minority House currently seated.

  7. Daniel on October 12, 2008 4:24 pm

    Vic and Laurel — why don't you just call it what it is, deflation. It's OK to admit this now my friend. Since I posted doom and gloom before, I figure it is appropriate to post that I am long Nasdaq100 and short gold. The local bottom call is of course predicated on the markets' opening and 840 holding tomorrow. I also would like to put the idea out there that we are not witnessing the collapse of capitalism, but of socialism. Think about it…

  8. Sam Kumar on October 12, 2008 9:35 pm

    Anonymous: We entered a "dark ages" period in 1980 when Ronald Reagan, Helmut Kohl and Maggie Thatcher took power and held it for a long time. Reagan terrified the Democrats with his demagogic, racist appeal to the worst instincts of the people which forced the (apart from a brave rearguard action by Tip O'Neill for a few years) Democrats to steadily transform themselves into Republican-Lites. The world has to purge the excesses of that age — shredding of the social fabric, virulent militarization, steady financial deregulation, the enshrining of greed, etc. The dark age will end only when "liberal" stops being a dirty word.

  9. Leonardo on October 13, 2008 7:04 am

    As Dr Bartlett once said “the greatest shortcoming of the human race is our inability to understand the exponential function” At some stage any complex systems that display an exponential distribution (or power law accelerations) are destined to finish in an equally inverse (declining) exponential distribution. Is it coincidental that markets took off in ernest, deviating from its long term average, with the expansion of debt (at all levels) during the time of Reagan? The only question one needs to ask is “will this attempt to reflate western economies work or will the ever growing mountain of debt burden the country into a deflationary spiral?.

  10. Anton on October 13, 2008 7:06 am

    I don’t see what the problem is; isn’t everyone pleased at the 15-50% increase in the purchasing power of your potential investment $, of course assuming the foresight to keep ample cash reserves for use during a fire sale.

  11. Anonymous on October 13, 2008 8:17 am

    So what's this all about anyway.. Hubris of the grande everywhere, today i see fut up 300 points smells like a set-up to me.Waldo street cries to main street no answer hey let's put on the pain meter. somebody answers.. and says hey your good to go at the (fed) atm machine ok you good still get back in there we need you. but wait there's more Waldo street maseradi's cry where my share i'd did not buy enough puts was a ltttle asleeep a switch. whew ok you good to go too.. what an easy button bunch of strange bedfellows. so far we have gotten a rotten dose of [horsefeathers] I'm waiting for the real [bullmanure] then let the blame game begin. Diversify um a word i've never used.. but here it goes yea diversify cash all of it. with hey wait a minute couldn't gold a silver coins once be used to buy food and camels..and heaven forbid leaving it in a institution… some in the mattress some in the yard a little euro here a lot of yen there some USD over there hey how bout sum cdn's gone cheap under the hay.. best I can come up with as far as asset preservation mode argh.. good luck…g

  12. steve on October 13, 2008 8:23 am

    Sam Kumar writes “The only hope is a return to Keynesian expansion of Government spending to stimulate demand..”

    This column allows too brief a commentary to dismiss his comments as pure sophistry.

    Cute phraseology however completely flawed. What demand are we talking about. Goods and services? are you suggesting nobody is buying things because nobody has jobs. Do you want to go back to a “New Deal” with a massive infrastructure rebuilding with new building of roads,bridges,dams,water systems etc. All paid for with massive printing of new money? Too sow the seeds of a gigantic inflationary trend? Or are you suggesting an enormous government socialization process where govt becomes the solution to all the problems and institutes more program like social security, medicare and other entitlements?

    Then he writes “we entered a “dark ages” period in 1980 when Ronald Reagan, Helmut Kohl and Maggie Thatcher took power and held it for a long time. Were the Carter years “bright”? Then you are suggesting Reagan was a racist? That is absurd on any level. And lest I remind you that The Reagan Administration led to the breakup of the Soviet Union the immediate benefit was to decrease of the size of the U.S. military in future years.

    Finally we get to the core of the matter. Mr. Kumar hates any form of conservative thought and wants to instill his own liberal agenda Larger Government is the solution. More legislation, higher taxes, Sorry, I am not buying it! I personally liked the economic expansion I enjoyed from 1982-2000.

    My one fear is that if the proposed Obama Administration becomes a reality this is exactly what we shall see. Then we very well may see true “dark ages”.

  13. Greg Vinately on October 13, 2008 8:54 am

    It truly amazes me the shift in sentiment of investors. It is not only like clockwork, but it also tends to work like a pendulum shifting from one extreme to another. One has to look no further at previous posts on this blog itself. As a long time reader of this blog just go back and read the ill-founded and distressing bullish arguments near the top of this bull run. Back then folks were happily buying Countrywide at mid $20s and other now defunct bank stocks, Google was a bargain and viewed as the symbol of the new economy as it crossed $700 and etc, etc, etc.

    Now we are here talking about depression, “Oh, I think that it will tak many years to get out of this hole”, “I quit trading”, and vega buying when volatility is up a gazillion. Or that commodities will go back up when the Chinese factories are turned back on after the Olympics!

    Interesting enough this negativity permeates in a community that judges itself on “DEDICATED TO VALUE CREATION, BALLYHOO DEFLATION AND APPLYING THE SCIENTIFIC METHOD ”

    And yet, I have to see a single post that applies the scientific method. The ill-founded argument that I commonly see here is that after a big decline a similar or higher upside reversal often takes place. Therefore, it is always a good reason to buy after big declines. It is true that there exists a mean reversal component in prices as rightly pointed out by several readers of this site (backed up by numbers). But there is also those events called “big fat tails” such as the one the market finds itself in. Buying simply for the sake that “it’s a big decline and a big bounce” should follow will simply lead (eventually) to disaster. Perhaps, this is the position that most buyers may find themselves in and their stake in now depleted. But can one simply address this situation with THE SCIENTIFIC METHOD in order to contain “fat tail” risk by means of position sizing and “stop loss” parameters? A question that I pose to readers in perhaps an attempt to get away from this mundane and boring “gloom and doom” talk.

  14. Anton on October 13, 2008 11:40 am

    Steve, I concur, however when contemplating a response of my own, I remembered McCain’s position concerning a meeting with Ahmadinejad.

  15. I. Laroui on October 13, 2008 12:54 pm

    Ghost, some of your statistics are wrong, out of date and misleading.
    This from the US Census bureau: http://www.census.gov/hhes/www/housing/hvs/qtr208/q208tab5.html
    Homeownership rates:
    2001: 67.5
    2002: 67.8
    2003: 68
    2004: 68.6
    2005: 69.1
    2006: 68.5
    2007: 68.4
    2008: 67.8
    We’re basically back to where we were before the subprime phenomenon took off and do you notice the trend? We’re going much lower. So, even though I will stop short of concluding that subprime mortgages will have in the long run actually decreased the homeownership rate (see Shiller’s latest opus to get just that conclusion), I will strongly dispute the notion that it has durably increased it. Since that notion is actually one of the conservative talking points and therefore based on faith and not facts and reason, I sadly suspect this comment will not change your mind.

  16. steve leslie on October 13, 2008 2:17 pm

    McCain and Ahmaninajab is another issue altogether. I agree that Politicians are a necessary evil. This is why I am a staunch believer of gridlock. Actually the 90s were so good because Clinton had a strong Administration and had to negotiate with Gingrich in the House and Daschle in the Senate. George W. Bush had to deal with Daschle in the Senate and then Reid. And Hastert and Pelosi in the House.

    In my opinion he got sidetracked with Hastert and the Senate in 2004.

  17. Matt Johnson on October 13, 2008 4:54 pm

    Neat, you’re a tape reader.

  18. Heit Yoas on October 16, 2008 1:25 am

    Victor and Laurel,

    I believe that the current crisis has largely discredited your kind. I have your "Practical Speculation" book and it is largely based on the idea that we should look for correlations, most of the examples being using 20 or so years of data.
    As the current events indicate, the fat tails/rare events is what does you in. I wonder if this market will have to drive the "markets go up X% a year in the long run" crowd to insolvency before the rout is over.


  19. vniederhoffer on October 16, 2008 5:21 pm

    Mr Yoas makes a thoughtful critique—one that I used to say to one of the best men I ever knew , the magisterial and marvelous James Lorie , may he rest in peace, I loved him so. vic

  20. douglas roberts dimick on October 11, 2009 7:53 am

    Revisiting http://www.dailyspeculations.com/wordpress/?p=3218#comments

    I request that this article be republished today (being tomorrow, October 12, 2009) for the purpose of reflection and updated commentary…

    Victor’s October 3, About Last Week, appears as such so offered with many of his and others, positing and reflecting on a given market. Yet his close invites pause… addressing those who may “fare better in another world where we will not meet them.”

    There is the inclination to scan his articles of this year past. Then there appears the article of a year ago… being so implied with “another world.”

    Perhaps due to having just been introduced to 2012 and the end — or, alternatively, restarting — of the Mayan calendar?


    That site references the award for best scientific paper in the CASYS’09 (Computing Anticipatory Systems) conference: New Trends in Computing Anticipatory Systems: Emergence of Artificial Conscious Intelligence with Machine Learning Natural.


    This paper gravitates to a related work: An Interactive Proof Development Environment + Anticipation = A Mathematical Assistant?


    Consider the excerpt…

    “1. Reasoning about the relative merits of physical actions is characterized by comparing additional selection efforts with later gain through more economic goal satisfaction. For example, buying a simple object such as a pen is usually done very quickly, while buying larger and more expensive objects such as a car makes detailed comparisons for price as well as for technical details well worth the additional effort.

    In MEGA, the proof planner constructs a proof plan for the goal node from a set of supporting nodes (the proof assumptions) using a set of proof planning operators, called methods, whose contextual usefulness is judged by so-called control rules (Melis, 1990). The control rules associated with a method anticipate the suitability of this method for the problem at hand. Here, method application corresponds of a physical action, since it changes the current proof state.”

    In that context, how Victor’s “hope” may be realized…

    Could we utilize his “100 biggest markets” observation to generate a benchmark for a proof plan that represents a mass (or space or indexing) calculation? Would the “waterboarding” characterization provide a time reference for methods or control rules, which in turn permit quantification to discriminate market segments/issuances or participants/holdings as aligned with proof states as described by Dubois?

    Perhaps thee question is whether his “hope” of yesteryear would be his same today?



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