Tough Love – Moon of Alabama

April 16, 2005

Tough Love

I am worried that this weeks downleg in the financial markets will go on longer and deeper
than most people expect. The dark clouds have been hanging around for
month, last week saw some rain and higher winds. The financial storm is
rising.

From Doug Nolands weekly Credit Bubble Bulletin:

The developing financial crisis took a major leap forward this week, with equity and risk markets in sharp retreat across the globe. Here at home, the Dow was hit for 3.5% and the S&P500 for 3%. Economically sensitive issues were in liquidation. The Transports were clobbered for 6% and the Morgan Stanley Cyclical index for 7%. Even the Utilities were down 1%, about the same as the Morgan Stanley Consumer index. The broader market was under heavy selling pressure. The small cap Russell 2000 dropped 5%, and the S&P400 Mid-cap index was down 4%. The NASDAQ100 sank 4% and the Morgan Stanley High Tech index fell 6%. The Semiconductors were hit for 8%. The Street.com Internet index fell 5%, and the NASDAQ Telecommunications index declined 4%. Led higher by Genentech, the Biotechs gained 1%. The Broker/Dealers dropped 4%, and the Banks declined 2%. While bullion declined only $2.20, the HUI gold index sank 9%.

Sounds quite bad, but well – the week was profitable for me. I am short the NASDAQ100 index and some semiconductor stocks for some time now and the week gave me a chance to add some cheap silver options.

The U.S. consumption binge is coming to an end and the hangover will be, like usual, of a proportional size to the binge. In this case this means, it will be gigantic. But it is healthy this way. It will keep at least some folks from drinking too much the next time cheap liquid(ity) is offered.

As Stephen Roach sums up in his Friday piece:

For a US economy that is living dangerously beyond its means, the tough love of fiscal and monetary discipline is the only way America will ever make lasting progress on the road to rebalancing.

Posted by b on April 16, 2005 at 16:41 UTC | Permalink

Comments

I watch a particular segment of the big-money stocks to get a read on how overvalued things are. It makes for an interesting snapshot.
Screen out for only dividend-paying stocks with a mkt cap over 10B. Then look for which of those stocks are 35% or more under their 250week ma. Under normal mkt conditions, even in a solidly rising market, you’ll find 5-10 such stocks. But in the period between late 2003 and late 2004 there were zero. Not only that, but of all the stocks that HAD been >35% under, every one had come back to cross the ma to the upside. I’d never seen such a thing, even in 1999-2000.
Recently a few stocks have come back down into the >35% under ma range: GM, DRL, MMC (F is close, MRK was there and bounced). In the 2002 trough, there were probably ~50 such stocks. We have a long way to go.

Posted by: mats | Apr 16 2005 17:18 utc | 1

Back in 2002 the Fed cloaked its reflationary policies in clever Friedmanite “determined to thwart deflation” talk. Dr. Bernanke proclaimed, “We’ll never let ‘it’ (deflation) happen again.” I have always believed that top Fed officials were keenly cognizant that they were in reality fighting systemic debt market dislocation – a problem with key differences to outright deflation. If the Credit system was incapable of generating sufficient finance and liquidity to avoid a general debt collapse and downward price (including assets) spiral – in a general environment of extreme risk aversion – then the Fed’s effort to “reflate” would at least have not been reckless. But the circumstances were diametrically different, and the Fed succeeded only in inflating Bubbles.

What a merrygoround, eh?
What is reflation?

Posted by: slothrop | Apr 16 2005 18:58 utc | 2

@slothrop – thanks for the link – good. Those Austrians are hellish good on diagnosting but I do not trust their medication prescriptions. Their framework of analyse is great. The consequences of their libertarian wonderworld implemented in real societies would be catastrophic.

Posted by: b | Apr 16 2005 19:07 utc | 3

One macro-economy reification is the so-called “business cycle.” So natural the waves of expansion/contraction, and so obvious are the periodic “adjustments” requiring everyone to bear the pain of “recovery.”
Really, complete horseshit, of course.

Posted by: slothrop | Apr 16 2005 20:06 utc | 4

@slothrop – cycles are a natural phenomenon that also does occur in economical frameworks.
If the benefits of the upturn of a cycle would go to the same people as the pain of a downturn that would not be a problem.
But usually the upturn gets “individualized” while the downturn gets “socialized”. The profits in an upturn go to capital owners, the debt taken on during the upturn goes to the general taxpayer (see the US airlines socializing their debts to their pension fonds through Chapter 11 defaults).
There are cycles and I see no way to avoid them but there is also robbing going on. The question is in my view how to avoid the robbing.

Posted by: b | Apr 16 2005 20:41 utc | 5

But usually the upturn gets “individualized” while the downturn gets “socialized”.
just another way to differentiate anarchic or planned production.
socialism can avert the crisis of the “cycle.” but, unfortunately, doing so cannot be accomplished unless there is a globally planned economy oriented to the precise management of production.
I know some will say: but that’s just command-economy fantasy proven to be unworkable; as opposed to this great workable system of capital accumulation benefitting a tiny minority of humans who, with such brave dispassion, murder who cannot be shamed to bear the “individual responsibility” of “prosperity.”

Posted by: slothrop | Apr 16 2005 21:02 utc | 6

Interesting question about managed economics. I imagine it to be impossible even under one world government, because there would be no guardians over the guardians. How could it possibly last?

Posted by: citizen | Apr 17 2005 2:53 utc | 7

Rocketman:
The utility of perpetual motion machines cannot be demonstrated from the undesirable properties of internal combustion engines.
In any event, it’s simply not correct that the system is totally rigged or that the world consists of only hapless victims and masterful vampires. The rather pleasant standard of living enjoyed by most europeans and many americans results from the efforts of all those generations of socialists, communists, reformers, and other utopian dreamers who imagined a world in which most people in their countries would have basic necessities. Things did not turn out as they hoped or expected, but …

Posted by: citizen k | Apr 17 2005 17:35 utc | 8

. The rather pleasant standard of living enjoyed by most europeans and many americans results from the efforts of all those generations of socialists, communists, reformers, and other utopian dreamers who imagined a world in which most people in their countries would have basic necessities. Things did not turn out as they hoped or expected, but …
I would rather think this is an uncompleted task and we all should take the responsibility to continue the project.

Posted by: b | Apr 17 2005 17:40 utc | 9

“I would rather think this is an uncompleted task and we all should take the responsibility to continue the project.”
b
me too

Posted by: remembereringgiap | Apr 17 2005 18:15 utc | 10

The utility of perpetual motion machines cannot be demonstrated from the undesirable properties of internal combustion engines.
That’s a good one. Are you alabama, or just his cynical specter?

Posted by: slothrop | Apr 17 2005 18:38 utc | 11

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