On November 6th 2001, Alan Greenspan lowered interest rates to 2%. A year later, the stock market bottomed.
On April 30th, 2008, Ben Bernanke lowered interest rates to 2%, but will the bear market end a year later in the summer of 2009? Maybe not.
A huge difference between 2008 and 2001 is that 2001 enjoyed a strong real estate market. That real estate market is now a smoking crater, and it has taken the banking system down with it.
As you know, the Fed’s stimulus works via the banking system. Lower interest rates mean that banks can make more loans and make more profit on those loans. However, the fact that banks are tightening credit shows that this time around, the stimulus will take longer to work.
As house prices continue to fall, banks are making fewer loans because the borrower quickly plunges into negative equity. And that’s only the consumer side. The hard truth is that banks don’t even want to lend to each other.
The all-important Libor rate is literally just a guess right now because banks don’t trust each other and refuse to make inter-bank loans for anything but very short time periods. Since Libor is based on what banks charge each other for 30-day loans, and no such loans are being made, Libor is now set by what banks guess that they would charge each other.
Why are banks reluctant to loan to each other? Because every bank knows that all other banks are a bunch of lying shitheads. We civilians might be outraged over how long it is taking for banks to write-down their losses, but the banks themselves are outraged at how badly their fellow banks have behaved. So, when Shitty Bank calls up Crappy Bank and says “How about a 30-day loan to tide me over?” Crappy Bank says: “Beat it deadbeat.”
A trillion-dollar-a-year Ponzi Scheme of bogus mortgages has collapsed and only two banks have gone under? (Countrywide and Bear Stearns). Are you kidding me? Bernanke’s stimulus will have little affect until the banking industry is worked-out and consolidated, and the sellers capitulate in the housing market.
Note: I have chosen January 2010 because 2010 sounds like such a long time away. The date could just as easily be December 2008, but way too many people are way too hopeful that this recession is already over, and I want to dis-abuse people of that notion because it will cost you money. Here is an example of way too much hope: Jim Cramer wrote this (subscription required) about a sucker’s rally in the homebuilder stocks in December 2006:
“What I don’t understand is how the “rigorous” anti-homebuilding stock folks can justify what has happened with the stocks. What is their thesis? I have a bunch of reasons the stocks are going up. But I never hear from the bears why the stocks went up. They usually give some version of how the market is stupid and overly optimistic.”
Homebuilder stocks have been chopped in half since then. And until there is some consolidation in the industry, the stocks are likely to keep falling. At the time of this writing, Cramer was once again calling for another bottom in the homebuilders – even after he had Bob Toll on his show saying that the light at the end of the tunnel was an oncoming train. Hope springs eternal, but don’t be sucked into it.
The Wall Street Journal has been doing absolutely incredible work on Libor. Go there and search on “Libor” and you will get the real story.
If the Libor stories are in the WSJ’s subscription area and you can’t get to them, go to Bloomberg and do a search there.
To read about how bankers refer to defaulting borrowers as “shitheads”, go to Tom Wolfe’s brilliant “A Man in Full” at Amazon.com, search on “shithead” and start reading at page 33. You will be reading an account of a bank “workout” on a real-estate developer (Charlie Croker). Of course, the irony today is that the bankers themselves are the shitheads. In this story, you can see that Citibank is clearly the shithead. Yet another reason why banks won’t loan to each other: they are busy suing each other!
Jim Cramer, Doug Kass, and Rev Shark over at RealMoney.com are calling a bottom in financial stocks. Long financials? Starting to be a crowded trade…and a bad one at that. No workout, no bottom in financials. Sorry guys.
The same people calling for a tech bottom all the way down in 2001 & 2002. But I guess this time may be different as the banks have their buddy Hank Paulson of Goldman Sach in the White House buddying up with Fed Benanke to suck up all those toxic loans and hide them under the carpet at tax payer’s expense. This way, these loans will never have a day in the sun to be “marked to market”. Back in 2001, tech poor baby didn’t have buddies in the White House to bail them out at the time. So the ponzy scheme continues. It’s just now the Fed is part of it. The Fed is now the 4th branch of our government and it’s the most powerful branch as there is no check & balance at work here folks!!!
Ken, the Fed is dealing with the liquidity crisis. There is no evidence that it is trying to fix the solvency issue. M1 is flat last 12 months. The run on the banks will continue and this time I believe Bernanke will let them fall.
Hi Larry,
Yes, he just might let a few more fail. I think he may have given the green light to the take-down trade when he said “no more rate cuts” in the Fed minutes.
And from everything I’ve read, the Fed is only loaning treasuries to deadbeat banks to give them time to get their acts together. The banks will have to return those treasuries, and it just might be politically impossible for the Fed to extend the loans by then.
Matt
You are in good company.
“By a nice coincidence, those averages suggest the market will decline to 1100 in 2010, which is exactly the number we get to from a completely different technique — building it from the grass roots through fundamental value. We do that by taking average corporate-profit margins, actually a generous average, assigning a normal market price/earnings ratio, and that gives you 1100 in 2010. This year, next year and the year after will all be uncomfortable years. One of them might be up, but my guess is it won’t be up by much.”
Jeremy Grantham , FEBRUARY 11, 2008
Hi Brian,
Thanks, I hadn’t seen that before.
Matt
[...] days ago, I wrote this in the comments section of this page: “I think he [Bernanke] may have given the green light to the take-down trade when he said [...]
[...] bottom after Greenspan goosed money-supply growth into the high teens. So, my prediction for this bear market to run until January 2010 is still intact, because it looks like Bernanke’s rate cuts are doing [...]