Bloodless Coup

Looks like it's off more than 5% for the day.

Aaaaand the bounce going into the close as shorts cover and close out before 4 pm. S&P down 3.85%.

At some point before I fall over and go boom tonight I will try to post a list of links to the financial/econ/market blogs I find most useful. There are several good ones that are worth checking in with during the day if you want a read on what's happening behind the headlines.

I don't have time to track it down, but Dr. B. had a nice post last week that consisted entirely of a lengthy online chat transcript between her and a present or former trader friend. Like many of us, she seemed lost on all but the basics, and their conversation tracked some of my own thoughts and questions and was easy to follow. I couldn't relate it all back, but it did help me understand some of the issues.

And as for This American Life, it's free to download through iTunes.

Barry
Dave (posts once a day M-Th, usually around 5-6 pm ET. Great quick look at charts from different corners of the global market.)
Yves
The FT Alphaville crew (semi-liveblogging, active from 6 am London time until NYSE close)
Henry et al
The Fool
Seeking Alpha (aggregates content from lots of financial writers/bloggers/self-interested twits; some is worthless, some is extremely valuable, widely read by traders, hedge fund types, etc.)
Krugman (worth a look once or twice a day)

These are my mainstays, aside from big media (Bloomberg, Y! Finance, Marketwatch, etc.) If you want more, poke through Barry's blogroll.

BTW, Europe is going to get it worse than the US.

Their banks are (way) more leveraged, the Euro is being sold down HARD vs the USD and Yen, and the ECB, such as it is, is spending too much of its time squabbling with the various national governments who are violating Brussels' decrees left and right in a mad effort to save their own national skins.

Milton Friedman predicted that the Euro would not survive the next serious recession. We are seeing why. Question is, if the Euro implodes and the ECB is rendered irrelevant, what becomes of the EU itself?

I've started reading about Europe, now that they are going into the tank. My uneducated guess is that Europe's problems may help us alleviate ours. As Europe looks worse, people will move money into the US (hence, the Euro/Dollar rate moving our way yesterday). We're bigger, we're more unified (Europe is clearly having coordination problems that the US doesn't have), and likely safer. That isn't necessarily bad for helping us get back on our feet.

The dollar (and the yen) have skyrocketed in value vs the Euro in recent days. This is why -- to oversimplify, investors holding Euros are getting out of them. Conveniently, this is more than soaking up all of the excess new dollars the Treasury and Fed have blasted into the banking system in recent weeks.

For all our troubles, the US is still the place with the deepest pockets, the biggest economic base, and the nimblest (and arguably smartest) central banking system. Most of the world's key financial actors do not think that is likely to change anytime soon.

But whether this will really help us is debatable. It may drag us down somewhat. It arguably already has -- the ECB's nitwittitude and general disorganization has made a coordinated global response very difficult, and their insane move of raising interest rates and generally denying reality the other day made EVERYTHING worse, everywhere.

Oh, and I suppose it's worth reading Roubini, too. He was derided as Chicken Little for ages, until it became clear that the sky was actually falling -- but I predict that his hysterics will continue past the point where things are actually starting to get better. Still, he's smart and sees the problems more clearly than most.

Nikkei (key Japanese market index) closed down 9.38% today. London's down 5% as I type this.

Jesus freaking Christ.

Hey Baltar, guess what the Russians will get for bailing out Iceland?

I just saw the NYT story about the coordintated rate cut by many central banks; market futures look headed up.

Of course, the WSJ story yesterday that indicated that 1 of 6 US households owed more on their mortgage than their houses were worth wasn't very good news (if you've bought a house in the last six years that figure is 1 in 3).

I think we're headed for a recession, and a steep one. I suspect the central bank activity will get credit moving (if slowly, at first), but nothing will stop a global recession in the near term.

What a mess. Whoever wins in November is going to be paralyzed: there isn't money to do anything at this point.

Holy fuck a duck. The Russians get Keflavik? If they want to re-start the Cold War, that both an incredibly provacative move, and a hell of a strategic coup.

Damn.

Of course, the Russians have had to close their stock market until Friday to staunch the bleeding there, so their threat to us is dropping day by day.

I think history will show that we've already been in a recession for several months.

I am also starting to think that the US market's bottom is not far off. There's a lot of money sitting on the sidelines, and while there's still some selling to be done, at some point everybody who is gonna sell will have sold, and the rate cut (with maybe more to come) means that the yields on that sidelined money aren't very attractive, and stocks aren't far from looking cheap... this is how bulls are born.

And yes, they have historically been born way before anyone expects them, and when things look really dire, more often than not.

I see that. My question is how much lower the recession is likely to go, and what that will do to the markets. I guess I'm saying that rate cuts/fed involvement/etc. has taken us to the bottom today (as you argue), but that if we hit a really bad recession, business will suffer (versus the markets), which will cause people to spend less (which causes more business to suffer). Hence, recession. And the worse that recession is, the worse the business perform, and the worse the market will be for their stocks.

Shorter version: won't a bad recession drag the markets down more than the financial crisis already has?

Remember that markets are forward-looking -- when you buy stock, you're buying an expectation of future performance, and that expectation is what drives prices. The old saw is that the markets run about 9 months ahead of reality. Studies have been done, and IIRC the data shows that during recessions, markets tend to bounce 5-10 months ahead of the economy itself.

Translation: I think we are in for a period of rough economic times, I don't know how long they'll last but I'd be surprised if they ended any earlier than next summer, much depends on how governments and other key actors respond in coming days and weeks, and I don't think any of that is inconsistent with the possibility of a nearish-term reversal in the markets.

Sorry to be vague but IMO anyone who isn't being vague right now is (on some level) just making stuff up.

OK, so the markets have already figured in the recession (however bad it is), and once they start going up the "sense of Wall Street" is that the end of the recession is 5 to 10 months away.

I can see that. In other words, the markets have already predicted how bad they think the recession is going to be by how far we've fallen (and how much further we fall in the next weeks/months).

Roughly and factoring in the usual (nontrivial, especially near inflection points) fear/greed error, yeah.

Another day, another descent into the crazies: Now we're going to nationalize banks.

And in further evidence of the crazies, I was talking to a Moderately Famous Libertarian Economist last night (I will supply his name privately if desired), and we agreed that this is, all things considered, a good move!

Twilight zone, man, twilight zone.

Overseas markets mostly up overnight in heavy trading. S&P futures trading up a little as I write this. We should open green, unless we don't.

Short-sale ban ends today. How that will play out in terms of broader market movements is anyone's guess.

Gas and crude inventories are significantly higher than was generally expected. Expect downward pressure on prices -- the futures market is already in what they call "backwardation", meaning the price for delivery in the future is lower than the "spot" price, or price for delivery today. Today should catch up to tomorrow in short order.

Paulson will almost surely start putting equity into banks -- having had a NYT front pager suggesting that he's about to, he can't really back off now. FWIW, what the British are doing is very good -- putting in equity without trashing shareholders, and thus making it possible for banks to ask for help without their stocks crashing -- and I expect Paulson et al to copy it.

Broader market is probably not done declining. Bank stocks may perk up a bit. Gold probably isn't done running but bounced off $920ish rather abruptly... it's possible a central bank is selling to try to hold the price down so as to mute the impression of market panic. They do things like that, I hear, though they don't talk about them.

Baltar, do I need to worry about Ukraine today?

I'm Jacques Flash and this has been your Bloodless Coup Morning Market ReportTM.

I don't think Ukraine will fall off the deep end, but I haven't been paying close attention. Georgia shook them up, plus they have lots of internal issues. I don't think Russia will accept us putting Ukraine into NATO (I wouldn't if I were them; would we want Canada in the Warsaw Pact?), so some other way of guaranteeing Ukrainian sovereignty without pissing off the Russians will have to be found. I have no idea what that is.

The markets look opaque; I'm guessing they are also confusing for people who know more than me, since we're in territory never seen before. To a large degree, the markets don't seem to be what to watch for: it's a credit crisis, not a stock market crisis (I know; everyone says this).

Is there a easily found metric (like the Dow, or S&P) that tracks loan activity that we can watch to see if lending starts to trend up? LIBOR? Just asking.

I saw something in passing suggesting that Ukraine's govt was about to fall (in the parliamentary sense, not the tanks-on-main-street sense). I wasn't sure if that was just politics or something more dire.

The most commonly used lending/credit market indicator is the TED spread, which is the difference between LIBOR (the interest rate at which (London) banks lend to one another) and the US Fed's short-term bank lending rate. Anything over 2 or so denotes Big Trouble -- banks hoarding capital, the "frozen credit markets" commentators have been discussing. It's at 4.13 as I write this, which is either an all-time high or damn near.

If you see it going below 3.25 or so you will know that things are looking up. That will happen very soon, I hope -- not today, in all likelihood, but perhaps by this time next week.

Wheeeee! Markets all down by 5% again today! TED spread at a record high! US government fiddling like the band on the Titanic!

Is it time for guns, firewood, and backwoods cabins?

I don't get it - transforming the bailout/rescue into something like the Elmendorf plan seems sensible. I know you were going for effect and fun, but I wouldn't call that "fiddling". Maybe inaction earlier in the year was "fiddling" - but is there a ton more the government can do before the details of the plan that was just passed are worked out?

Lehman's portfolio of toxic crap is being sold off/liquidated today and tomorrow, which is filling the market with all kinds of dread as actual prices are being put on these things (and may have also been part of why all these big banks have been hoarding cash -- they're the counterparties on a lot of these turds.)

Plus, the ban on shorting was lifted today, which clobbered bank stocks and some others like GM.

The government is actually not fiddling. Treas is scrambling to get the bare minimum of infrastructure necessary to start spending that $700B and the Fed is doing all it can to try to hold the fire-line in the meantime... and the rest of the govt is irrelevant at this point.

But just in case, I've got guns and firewood... and a position in a double-short ETF that's up 25% since Tuesday morning. That latter will be my bargain-hunting capital when we finally hit bottom.

Bloomberg says people have started bailing on mutual funds and that today's hit was driven by funds selling stocks across the board to meet redemptions. Certainly in looking at the sector charts (via David Fry) there were more sellers than buyers everywhere, even in stupid boring corners of the market, and that would tend to confirm that thesis.

I guess I was more referring to the two presidential campaigns, who both seem to want to sling mud (and when not slinging mud talk about the new money that won't exist in January that they will spend).

And, yes, Congress fiddled earlier when they could have done more to slow this train-wreck down.

At this point I'm sort-of inured to the markets and everything. I hope that we hit bottom soonish. I don't really care about bottom, other than knowing bottom isn't, say, when the Dow (or S&P) hit 0.0. I'm not, at this point, convinced that there isn't a very small (but countable) possibility that the bottom of this isn't somewhere in the "end of western civilization as we know it" ballpark. The chances of that are (I'm guessing) about 1%; but that 1% is much, much higher than the chances of the same event three or six months ago.

What the heck is a "double-short ETF"?

I'm with you on that 1%. It's not helping me sleep any.

Double short = short with 2x leverage. S&P 500 goes down 1%, fund ostensibly goes up 2% (and vice versa, obviously, which makes it something of a hairy thing to be holding). Ticker is SDS.

Ah. Am I correct to assume that the double-short is "hedging"? In other words, if it goes down you win and if it goes up (I'm assuming you have actual stock/funds somewhere, too) you win. Thus, hedging.

Interesting.

Baltar: Exactly, though I'd say "I lose less" rather than "I win".

The stocks are longer-term holdings. I expect them to do well 5ish years out. I've had a block of cash waiting for the bottom and bargain-hunting time; I put some of it in the ETF to grow it a bit on the way down.

I have no big commentary to offer yet this morning. All I've got to say is that this is scaring the shit out of me right now. Yves is NOT NOT NOT an alarmist or a hysteric.

No global shipping, no global economy.

You know better than I; the continued (daily) 10% drops in the foreign markets can't be sustained that long before absolute panic sets in. The link about shipping (possibly) stopping is very nerve wracking. I guess we should bump the "end of civilization" scenario probability to 2% now.

As I said, I want to hit bottom not because I want to start making money, but because I want to know there is a bottom to hit that isn't 0.0.

My dear friend, this is 'absolute panic', at least in terms of the global markets.

If and when it will spread to the average citizen, I don't know. Maybe it won't until the shelves at Wal-Mart and the supermarket start being empty, and hopefully we'll never get to that point.

Meanwhile, back in the markets, at some point everyone who is going to panic-and-sell-at-any-price will have sold. That's the bottom.

That won't be zero unless all actors lose complete faith in the system, and we are still a long way from that point. There's a LOT of money on the sidelines waiting for the right moment to jump back in.

On the other hand, there's lots to worry about this morning, including some very first small signs that sovereign wealth funds (read: the Chinese govt, etc) may be starting to bail out of US Treasuries. I probably don't have to tell you what that would mean.

I have to come up with 1600 words of good advice for my readers today. At present I don't know what that's going to be.

All that money on the sidelines isn't going to come back in at any point if the system can't sort itself out. Did you see the morning story about the World Economic Forum rating banking systems? Canada is #1. The US is something like 40th, behind Namibia.

I have no idea what you'll write either. Everyone should have charcoal and a couple weeks supply of food, just in case?

As of 10ishAM, DOW was below 8k for a while (came back up, but if good news is that things are only down 3%, we need to get better quality good news), and the TED spread is at a record high (again).

I was thinking that it was a good thing that I have a government job, but then realized that if no one has any money to pay taxes, I won't have a government job.

Semi-wild-ass guess as to what will happen:

Major market indexes go up strongly starting shortly, possibly Monday morning, sustain a rally for several days, and then come crashing back down hard -- probably before the end of the month. That'll (hopefully, maybe) be the bottom. From there... it probably depends on how many banks get financed/bought/seized/nationalized between now and then.

I'm seeing headlines galore that use the word "nationalized". Is that really appropriate?

No. :-)

I gather that the Dept of Treas will take an equity stake in key banks -- will buy preferred stock, most likely -- in return for sufficient funds to recapitalize those banks (by "recapitalize" I mean "give them enough money to get their debt-to-assets ratio back to the desired 12:1"). The govt will aim to sell off those stakes once the banks and market and whatnot are returned to health. It's unlikely that the government will actually seize control of any banks other than ones that are in truly dire straits.

It's crazy and expensive and philosophically awful but right now I mostly hope it happens very very soon -- tomorrow or Monday would be a good time to start, and MS would be a fine bank to start with -- and not "in a few weeks".

S&P 500 futures up 4% on Sunday night. Asian markets up sharply in early trading. Looks like the rally is here. I don't expect it to last long, but I'm going to trade the hell out of it and try to get some of my money back.

I'll be curious to see how high this bounce goes. I don't think you can assume the crisis is "over" until the various government rescue packages actually start working (or not working, as the case may be).

What do I know. I thought we were in a bubble, but never thought we'd sink this low.

Bubble-pops have historically tended to overshoot 'reasonable levels' by about 20% on the downside, or so Those Who Know tell me. Of course some of those folks thought "reasonable" was about where the market bottomed on Friday, so there may be worse to come.

Right now I'm sticking with what I said last week: Up hard for a bit, then right back down. But the situation, as they say, continues to evolve.

Well, that was a day.

If technical analysis is to be believed we are about halfway to the reversal -- the point at which this trend turns around and starts going back down, which looks to be somewhere between 1100 and 1150 on the S&P 500.

FWIW, my take on technical analysis is that it's useless for predicting anything longer-term, but that it is oddly helpful for guessing near-term moves. Things on charts frequently line up neatly in ways that they "shouldn't", if skeptics are to be believed. It's hardly foolproof, but as a tool to help a trader make a careful guess, it's pretty good.

I just couldn't watch. The craziness (now in both directions) just seems illogical. I'm having a hard time believing that underlying economic values changed substantially over the weekend to justify adding, what, a trillion dollars of wealth in a mere seven or eight hours? It's hard to believe we've hit bottom and won't go down anymore. And I expect to see it plummet in early trading tomorrow.

I don't see it going straight back down tomorrow -- in fact, that's pretty much the only thing that would really surprise me. Tomorrow is likely to be either a slightly muted replay of today or a lot of futzing around with no clear trend and prices relatively unchanged at the close. I'm betting (literally, in the sense of my portfolio's position at the moment) on the former.

Wednesday, on the other hand, could be trouble, for a variety of reasons I'll explain tomorrow if they look like real possibilities.

I am struggling to find words for this. What country is this again?

As a Bank of America shareholder I think... well, I think I'll be a former BAC shareholder as of about 10 am tomorrow, 'cuz I'm dumping this sucker, but we'll see.

Okay I don't understand that at all. Moving beyond jacflash's opening question, why force it on banks who don't want it?

I'm lost, too. I understand that recapitalization was a preferred strategy (the Bill from only 10 days ago is now seen as DOA), but why this particular recapitalization strategy? What controls does this give the gov't over the banks? How will the banks behave differently? Echoing armand, if they don't want it, why force it?

I'm pretty confused.

Someone I talked to late last night put it thusly:

"If you're going to buy stock in a bank, do you want to buy the one that needed the bailout or the one that didn't?"

By making them all take it (or agreeing to come out of the meeting saying that the Feds made them all take it), Treas and the banks conceal who's really in trouble and who isn't.

That's terrible, awful, and no good for transparency in a public market, but arguably good in terms of staving off more de facto bank runs. Not that the market doesn't have some clue about which banks are in which category (Morgan Stanley surely needed it; State Street probably didn't), but the Feds like to think that they've concealed the depth of the problems at Citi and JPM (rumors persist that events were contrived to drive Lehman under specifically to save JPM), so we shall humor them.

Hopefully the feds have no significant new "controls" over the banks as a result of this investment. There will be window dressing about compensation limits and a few other things, but the needed controls will -- I hope -- be done more broadly via regulation, and the government should be nothing more than a silent shareholder vis-a-vis these specific banks for the duration of their investment.

FTSE (main London stock index) is up 4.36% at this moment; I expect our day will look similar, as predicted, unless it doesn't. Onward.

A little more detail: Paulson was surely looking very hard at the British example on a lot of this. RBS and HBOS took the bailout and their stock prices plunged; Barclays refused it and their shares went up. Making everyone take it avoids that problem, which while philosophically bad, is convenient and helpful in the near term.

(HT Felix, in a useful first-impressions post from last night.)

I have no freaking idea what's going to happen today and I won't be watching it closely -- I'm spending the day elsewhere. Talk to y'all late tonight.

I found this off my RSS reader today:

If you're running an insolvent bank, and you get a slug of equity from Treasury, your shareholders will thank you if you use that equity to take some very large risks. If they pay off and you make lots of money, then their shares are really worth something; if they fail and you lose even more money, well, there was never really any money for them to begin with anyway.

If the government guarantees bank deposits, but at the same time hands out wads of free cash (with no strings attached), and tells everyone that they need to start lending, isn't this the definition of moral hazard? How is this different from the S&L crisis back in the 80s? The S&Ls made crazy bets to win back market share, knowing their accounts were covered.

I'm in favor of saving the system. I don't think this approach is the best idea.

DO any of your guys read Predictably Irrational? Behavioral Economics guy... interesting stuff. He posted this.

I read Ariely's book by the same name (and both of Taleb's... the most recent one is a tough slog.). I didn't realize he had a blog. Thanks for the pointer!

The thinking person's objection to quantitative finance comes down to this: I don't give a flying fuck where you got your math PhD, your elegant little mathematical map is still not a perfect substitute for the highly inelegant territory. Choosing to bet not just your business but the entire fucking world on the perfection of your map is not going to work out well for you in the long run.

The fund Taleb runs is really interesting... it's mostly just a pile of Treasuries, but every day they buy some options that are WAY out of the money, essentially low-cost high-odds bets on something going off the maps. Every now and then something happens and the fund cleans up. He's had a GREAT year.

I've been trying to stay out of this debate because I am not a micro person at all, but having taught political economy for awhile, and about the developing world, clearly I have some opinions about the way that elegant economic models conform (or not) to reality. And there I will stop, or this will turn into a dissertation on Pinochet. But, yes, I agree with you on the point about inelegance.

Acquaintances of mine -- one used to be CEO of the startup I worked at years ago -- started a fund-of-hedge-funds. In essence, they provide one stop shopping for wealthy investors who want to be in hedge funds by doing the investing on their behalf. I heard through the grapevine that all of their analysts (like their founder) had PhDs in quantish hard-science disciplines (astrophysics, geochemistry, like that) from Harvard or MIT. That's it, all 15ish of them came from four or five departments within two schools. No others needed apply; no other sets of credentials were being considered.

My first thought was that if I took over that firm, the very first thing I'd do is go hire some guy who flunked out of college and spent the next 30 years on a trading desk at Bear Stearns or something -- somebody who was smart and understood the markets but who would bring a VERY different perspective, in other words. Get some diversification going in that intellectual portfolio.

I haven't heard from that crew in several months. It wouldn't surprise me to hear that they were wiped out and closing up shop. Those black swans are a bitch.

Mr. Buffett has gone long.

This is called leadership, gang, and the reason you see guys like Buffett and Soros stepping up to try to provide it is because the dipshits running the major banks and the government aren't getting it done. Fuckers.