Five Things You Don't Want To Know
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
WARNING: THE FOLLOWING MAY BE REALLY, REALLY, REALLY SCARY. ALSO, POSSIBLY WRONG, BUT STILL, REALLY SCARY.
1. Why 1% is Scary?
2. Scared Consumers Without a Cushion
3. S&P 500 Price Structure: More Scarily Bearish Than Previously Expected
4. Revisiting Scary 2002
5. The New, Scarier 2009
Why 1% is Scary?
On Wednesday, October 29, the Federal Reserve aggressively cut their target for the Federal Funds rate, the rate banks charge one another for overnight lending, to 1%, the lowest since 2003.
Why is that so scary? Well, let's consider a few things that were happening in 2003, the last time the Federal Reserve cut rates to such an aggressively low level.
By June 25, 2003, the Federal Reserve had cut interest 13 times, from 6.5% in as of January 2001 to 1%. Today, the Fed has cut rates nine times, from 5.25% in September 2007 to 1%.
But there are a number of key differences. For one thing, the deflationary forces that are in effect are far more severe right now than they were in 2003.
Commodities: From the first interest rate cut in January 2001 to June 2003, the CRB Index was up 3.4%.
From the first interest rate cut in September 2007 to present, the CRB Index is down 11%. Year-to-date, it is down 23%.
Credit: By virtually any measure, the Fed's interest rate policy was successfully resulting in real economic credit expansion throughout 2003.
According to the Fed's Senior Loan Officer Survey in April, 2003, "Only 6 percent of domestic banks reported that they had tightened standards on residential mortgage loans in the April survey, down from about 10 percent in both the January and the October surveys."
Meanwhile, as we are all painfully aware, the most recent Senior Loan Officer Survey from July 2008, "Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 75 percent of domestic respondents—up from about 60 percent in the previous survey—indicated that they had tightened their lending standards on prime mortgages.2 Of the 32 respondents that originated nontraditional residential mortgage loans, about 85 percent—up from about 75 percent in the April survey—reported having tightened their lending standards on such loans.3 Finally, 6 of the 7 respondents that originated subprime mortgage loans—a somewhat higher proportion than in the April survey—indicated that they had tightened their lending standards on those loans over the past three months."
The charts from the most recent survey illustrate the difference in credit expansion from both the supply side (credit availability) and the demand side (credit appetite) at present, compared to 2003.
Percent tightening standards for C&I loans was dropping dramatically by the time the Fed reached 1% on the Fed Funds rate...
Meanwhile, demand for C&I loans had bottomed out in 2001 and by June 2003 was showing robust demand...
Commercial Real Estate lending standards had loosened considerably by 2003, while today it is not yet clear tighter standards have even peaked...
And note the tighter standards for consumer loans. Those standards throughout 2001-2003 were coming down even after having been well within range of historic norms, while present shows how tight credit availability is in the real economy...
Finally, most damning of all might be the reported credit demand. Remember, the Fed can lead them to water, but it can't make them drink...
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deleveraging from a all time high national personal and corporate debt levels
CDS losses making all losses exponentially higher.
Unemployment acclerating and hitting personal consumption visciously.
Corporations at emerging markets are having worse credit problems and unable to continue business even at a nominal pace. They cannot even get letters of credit for daily purchases.
Huge losses at pension funds causing further losses to states.
Tax losses to states causing further layoffs in all US states.
Unfortunately we will hit S&P in my opinion below 500 as people realized the earnings could drop below 40 dollars and there is a real possibility that the recovery could be over 5 yrs ahead.
I am shorting the ralley today and will keep half my powder dry to short again every two weeks if the rally continues.
I have been off of gold since I expect deleveraging to continue. Thank you for your input on that trade few weeks ago.
Like Kevin I too think this latest bear-market rally is a bad bad sign for the long run. The low volume makes it easier for the evil Fed to manipulate the market higher for a while right before the election in a desperate attempt to keep the people's choice from winning. I suspect that the next leg down will commence after Obama wins---he's a perfect scapegoat after all.
I agree with your thinking. If the consumer (70%) of the economy doesn't spend, then corporate earnings must fall. If corporate earnings fall, then more layoffs, and less spending. The market has to come down.
But that money needs to be redeemed to buy up our debt, as other countries will have a harder time doing so, and it could be $750B to $1T. And rates on Treasuries will have to be set to a level where enough will be purchased. The sudden interest rate hikes by some other counties (like Iceland, Hungary) to save their currencies is truly scary.
Boo.
I hope this doesn't happen here, and we skate by.
I'm now preparing for the DJI at 12,000 in mid November (assuming daily 200+ point spikes daily). Why it's going to that level I'll never know, but some sort of euphoria has settled in and the herd is stampeding to the equities well.
The really scary thought is: What if Paulsen and Bernanke are correct?
http://www.247wallst.com/2008/10/as-word-markets.html
The rally is all the rage. I don't understand, I don't see why or where it is coming from, but it is here.
Kevin, hate to agree with you but I do.
Wednesday through Friday the data was down but the market was up; that can't be a good sign. Irrational Exuberance no doubt.
It's the day traders and retirees playing on the craps table along with some intervention by the Fed.
Look for profit taking Monday by the pros, followed by panic sell off by day traders Tuesday-Wednesday, followed by another fake rally, etc.
The gyrations will happen in waves, until the real data and realities come home to roost and we get down to DOW 3,500 - 4,000.
...Very Scary...let's hope and pray it is cushioned by something before the riots commence...
Plant a garden or get a subscription to a farm. (Community Supported Agriculture (gasp! socialism!))
The problem with the modern food system is in its bottlenecks (pun intended). When a contaminated pig was butchered in a small butchershop, perhaps a dozen or so people could get sick before something was done about it. Now, each occurance results in recalls of millions of pounds of food or hundreds of people getting sick.
It isn't the food that's the problem, it's how we get it and what we pay the farmer for it. Cheap food isn't doing anyone any good in the long run, and people think that cheap things are unimportant.
Today's rate cuts are only part of a much more comprehensive action (Bank recapitalization, huge liquidity provision) designed to address a much tougher situation. Those seemingly identical charts are therefore, in my humble view, worthless and using them to gauge where the market is headed is a futile exercise as are all similar attempts at defining a future that would replicate some past.
Mr. Market does not take its cue from what it did last week, last month or last year. It processes today's information and reacts accordingly. None of what we know today was known in '03, therefore forecasting '09 on the basis of '04 is like making a left on the road because the stretch we just drove on reminds us of a similar one we drove on 5 minutes ago that was followed by a left turn.
Do you ever do that?
