Friday, March 06, 2009

Gloom in the markets

The extraordinary massacre on US equity markets continued Thursday with a 4% decline to levels not seen for 11 years. The Aussi market (above) declined 1.4% today. It is still inaccurate to call the current dip in the US the worst recession since the Great Depression - 1982 was worse - but the adjusted unemployment rate suggests things are getting close to that.  The actual unemploment rate in the US is 8.1% with 651,000 Americans loosing their jobs in February.

Your faithful scribe got hammered (ignoring his own advice to others) over the last week or so with some premature stock market punts - his foolish bet that things could not get worse has gone south. The market is close to the levels of a decade ago and has halved since its peak in late 2007. There is no question it can go lower. Note the relatively gradual rise and the subsequent - near vertical-fall.

I must - cut back on the Bollinger. Bin 65 Chardonnay is underrated!

11 comments:

conrad said...

Too bad (I must admit to having similar greedy bottom picking thoughts -- although I thought I'd resist until we find out that Europe doesn't implode). I'm not sure how much you lost, but try not to look at your superannuation. Some people where I work have decided that they will now have to work at least until they are 70 because of all this, including one that was already semi-retired. C'est la vie I guess.

hc said...

I didn't lose my shirt but a family holiday in North Queensland would have disappeared along with half a dozen Grange.

Of course you are right - looking at superannuation is the real shocker. Several year's gross income down the plughole.

The market will recover but the pain of not having the resources to reinvest at current prices is difficult to bear.

Anonymous said...

You'll obviously have join us lesser mortals and downgrade the champagne you drink from AAA to BBB or less.

P/E ratios are still around 14 compared with 5-7 in previous stock market troughs, so there could still be some way to go.

Mark U

Sir Henry Casingbroke said...

It is fascinating to read this blog of Aug-Dec 2008. So many predictions. And the winner is? Steve Keen, see http://www.abc.net.au/worldtoday/content/2008/s2370790.htm

Personally I have gone on a bit about the exposure of the banks to margin selling of shares, the elephant in the room that nobody is talking about.

Maybe that has something to do with the Rudd gumment desperately trying to prop up the real estate market (not without some success thus far). To elucidate: margin call loans for share purchases were issued by banks often using real estate as collateral as last resort insurance if the shares fell precipitously below the margin, which is now happening. Real estate asset values are now the only thing between the banks and a long way down - as in the coyote and the roadrunner.

The Thatcherite propaganda for punters in the UK to buy shares (for ideological reasons) has now meant that Lloyds had to be nationalised last week.

How long before the NAB becomes true to ITS name? I say May 1. Banks of the World, Unite. You have nothing to lose but your chains of debt.

jc said...

The Thatcherite propaganda for punters in the UK to buy shares (for ideological reasons) has now meant that Lloyds had to be nationalised last week.

Henry, are you too embarrassed to post under your real name because of the stupid comments you make?

Anonymous said...

So, who are you jc?

Sir Henry Casingbroke said...

Doesn't follow, JC. If I was embarrassed then I would be AWARE that the comments were (allegedly) stupid.

If we follow your reasoning we have the shaky proposition that I am making allegedly stupid comments knowing them to be stupid.

(Just to drive this one home for you JC, if I didn't know the comments were allegedly stupid then I'd have nothing to be embarrassed about, the notion wouldn't even enter my head...)

So, you see JC, you have revealed the full extent of your reasoning ability to everyone on this blog.

And we'll no doubt take that into consideration next time you leave a comment.

jc said...

I should have realized you aren't self away Sir H.

So tell us, who made the made the propaganda announcements to buy shares in Lloyd's?

hc said...

'self away'?

OK I give points for elegant logic here to Sir Henry (remember this the next time you prepare your recommendations to the queen for Birthday Honours Awards).

And the Homer Paxton award for poor spelling goes to jc....

jc said...

Ummm

Gram check needs gram check.

I meant to say...

I should have realized you weren't self-aware.

Sir Henry Casingbroke said...

Okay, just for you JC, because I have a soft spot for you, as I have for all God’s innocent creatures.

My bon mot about Lloyds did not stand alone but related to the rest of my commentary above it about banks being exposed to an avalanche of defaulting loans that were made to punters who borrowed to buy shares even though they couldn’t afford them on their income, which they need to live on. The debt was funded by the expectation of an ever-increasing value of their share assets and was thus assumed to be self funding. It would have been truly marvellous if it were true.

But as shares started to tank in quick order, banks like Lloyds who lent to margin call borrowers became precipitously exposed because in margin calls the shares themselves act as scrip or security on investment. Eventually, as shares plummet, the banks end up holding a whole lot of nothing. In other words, if they call in the security (the shares), in order to liquidate the assets they put the shares on the market in a fire sale and thus make matters worse. If they call in the realo they may hold as collateral then that too would have to be sold and thus devalue the market price of real estate holdings as other banks do the same.

This is why Lloyds’ own shares plummeted 20 per cent in one afternoon’s trading.

Margaret Thatcher, for purely ideological reasons, urged everyone to become share owners (and property owners) and to borrow to the hilt to buy shares via the margin call system.

Traditionally, shares were owned by people with money, or at least, by people with spare capital. But Thatcherism was a kind of messianic cult, which, like all such cults, relied on belief rather than logic or commonsense.

Hence, the British economy floated on funny money, entirely supported by debt securitised by more debt. That is why now Britain went from hero to zero so rapidly. Haven’t you yourself wondered, JC, why Britain's economy became trashed so quickly?