Share market gloom continues

Despite an emerging sentiment that the brunt of the damage in the local and global share markets was now behind us, it appears markets are determined to push the boundaries to new lows.

In a report published in The Australian, US stocks dropped overnight to new lows not seen in more than a decade as complete risk aversion and the weight of a global recession led investors to either get out or bet against equities once again.
For banks, and all of the companies that rely on the credit markets to sustain growth, a continued fear about what still remains on corporate balance sheets reigns.

“Where there has been smoke so far, there has eventually been fire every time,” said David Klaskin, chief investment officer for Oak Ridge Investments in Chicago.

Overall, the Dow closed down 250.89 points, or 3.41 per cent, to 7114.78, marking its lowest closing point since May 7, 1997. In 10 sessions, the Dow has lost more than 14 per cent and is down 19 per cent for the year.

The broad stock declines have fed into the same level of concern from investors in late 2008, when money managers said many of their clients were increasingly asking for the safest route possible.

“People are totally risk averse to anything right now. They’re backing off any asset allocation and just getting out as it’s going to take a while before any stimulus money moves in,” said Thomas Nyheim, a portfolio manager with Christiana Bank & Trust.

Gordon Charlop, managing director at Rosenblatt Securities, said: “So many people had thought you were at the spot where it didn’t make sense to sell anymore, and that doesn’t seem to be the case. It seems to be the opposite, that there is no attractive level to jump in.”

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17 Responses

  1. Investor’s business Daily: Today, as the market continues to sell off and we plumb 12-year lows, we wish we had a different explanation. But it still looks, as we said four months ago, “like the U.S., which built the mightiest, most prosperous economy the world has ever known, is about to turn its back on the free-enterprise system that made it all possible.”

    How else would you explain all that’s happened in a few short weeks? How else would you expect the stock market, where millions cast daily votes and which is still the best indicator of what the future holds, to act

  2. How would I explain what has happened in a few short weeks.

    Profit downgrades of over 50% for most companies.

    Ponzi schemes being located left right and centre.

    Management retiring enmasse with massive payouts.

  3. shaneinqld, on February 24th, 2009 at 12:22 pm Said:

    How would I explain what has happened in a few short weeks.

    Profit downgrades of over 50% for most companies.

    Ponzi schemes being located left right and centre.

    Management retiring enmasse with massive payouts.”

    It defies belief Shane. Ponzi schemes being located left right and centre” is about as accurate as it gets,

    The model in plain English has been ‘plain wrong’, there’s no doubt about it.

    Hyman Minsky wrote way back in 1986:

    “Over a a protracted period of good times capitalist economies tend to move from a structure dominated by hedge finance units to a structure in which there is a large weight to units engaged in speculative and Ponzi financing”

    Minsky would not attribute the crisis to ‘irrational exuberance’ or manias or bubbles. Those who were caught up in the boom behaved rationally, at least according to the model of the model they had developed to guide their behavior. That model included the prospective course of asset prices, future income, behavior of policymakers, and ability to hedge risks or shift them onto others. It is only in retrospect that we can see the boom for what it was: mass delusion propagated in part by policymakers and those with vested interests.

    However, a large part of the blame must be laid on the relative stability experienced over the past couple of decades “the tranquility that made the boom possible also created fragility because,according to Minsky, stability is destabilizing.

    The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

    It think it is far too simple to attribute the current crisis to a speculative boom in real estate, to excessive monetaryease, or even to lax supervision. The causes are complex and have developed over a very long period.As such, solutions will also be multifaceted, tentative,and contingent upon continued evolution of the financial system, with an eye to longer-term trends that have made the system much more prone to crisis, in my opinion..

    People had come to believe that a ‘new age of permanent prosperity” had arrived that that fundamental economic, finance and business principles no longer applied.

  4. Your friend Minky makes some interesting observations there John.

  5. Reb

    I read his book ‘Stabilising and an Unstable Economy, form 1986 and his model came alive to me which is a rare occurrence for me. It all made perfect sense.

    Here’s quite a good short essay that explores his ‘Financial Instability Hypothesis’
    http://cas.umkc.edu/econ/Oeconomicus/VolumeIV/Winter2001/Tse.pdf

    Ouch! That reminds me – business investments seems to have crashed.

    Recession risk as capex set to topple
    http://www.theaustralian.news.com.au/business/story/0,28124,25099944-643,00.html
    “AUSTRALIAN private investment spending is expected to topple into a deep ditch in 2009/10, sharply increasing the risks of recession in an economy that was riding a commodity boom less than a year ago.

    New private capital expenditure data for the fourth quarter of 2008, which will be released by the Australian Bureau of Statistics Thursday on Thursday, is expected to confirm fears that planned business investment has been massively scaled back”

  6. John McPhilbin, on February 24th, 2009 at 12:54 pm Said:

    “People had come to believe that a ‘new age of permanent prosperity” had arrived that that fundamental economic, finance and business principles no longer applied.”

    That’s the sort of thing a lot of us codgers have been saying for ages and have been howled down, but you don’t live half a century or more with parents who lived through the depression and not notice that there’s no such animal as permanent prosperity.

    That’s what makes me so angry with Ratty, he’s been around long enough to know that in boom times you sock away the dough ready for lean times. There should have been a lot more readies put away.

    Hyman Minsky must be regarded as somewhat of a prophet, imo.

  7. Reb, just in case you go in search of it, it’s”Stabilising an Unstable Economy” not ‘Stabilising and an Unstable Economy” The second book title is something JWH and Pete have probably read (lol).

  8. Jane

    “That’s the sort of thing a lot of us codgers have been saying for ages and have been howled down, but you don’t live half a century or more with parents who lived through the depression and not notice that there’s no such animal as permanent prosperity.”

    So true. I spoke with an 85 year old man just recently and we discussed the Great Depression and his memory was still vivid. He told me he’d been warning his kids about the impending danger and they laughed him off, he told me. Not laughing anymore though.

    TB’s also mentioned advising and warning his children for some time. Though I doubt he grew up around that period – he’s no doubt well aware of the dangers though.

    John Kenneth Galbraith who wrote ‘The Great Crash:1929 (in 1956) said in one of his last lectures, back in 1998 at Harvard University:

    “There’s one thing that should warn everybody. If you forget everything else tonight, remember this, that when you hear someone say, “We have entered a new era of permanent prosperity,” then you should immediately take cover, because that shows that financial idiocy has really taken hold and that history, all history, is being rejected.”

    As for Minsky being a prophet? Great little tribute to the man

    The Minsky Moment
    by John Cassidy
    http://www.newyorker.com/talk/comment/2008/02/04/080204taco_talk_cassidy/
    Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

  9. “as complete risk aversion and the weight of a global recession led investors to either get out or bet against equities once again

    Complete risk aversion? Investors get out or bet against equities? Right!

    So they gave their shares away? They cancelled them? They disappeared them? They turned them into cabbages? The shares in question are now orphans; wandering the bourse begging for adoption?

    Or did they sell them? And if they did the latter, there must have been buyers! Indeed for every share sold there had to be a buyer. You know buyers or investors who were not risk averse.

    The musings of ‘experts’ are always amusing. Sellers without buyers. What next? Lol.

  10. Jane, on February 24th, 2009 at 2:56 pm

    I see it a bit differently. Ratty (and overseas market fundamentalist debt-binge friends) should have slowed the pace of illusory monetary growth and the consequential asset price inflation bubble formation, which would have slowed the inflow of readies too, but still socked some away, perhaps less than he did manage to sock away, on the premise that not so many readies would be required in an environment where there was less of a fall from a great height. All very Daedalus and Icarus, when the wax wings melt.

  11. John

    I truly believe everything comes down to two things. I know they are simple answers.

    1) Lack of regulation and control by governments at the demand of big business insisting they be less regulated and pay less taxes. Year after year we hear the same old diatribe. It will be better for all of us if business pays less tax and is left alone.

    2) A human element of which we do not share with the rest of the planets creatures. Greed.

  12. Shane

    Deregulation (along financial innovation which enabled the lending madness to continue) and greed?

    Your answer was simple Shane but it does cover a whole multitude of failures.

    Broadly speaking I think you’re spot on Shane.

  13. Legion, I haven’t thought of things that way, but imo it sort of jibes with Minsky’s ideas. Yeah, there wouldn’t be the frenzy of the last few years, but like you say you don’t have so far to fall.

  14. Jane and Legion

    Minsky’s financial hypothesis is bang on – the global financial system has moved fairly rapidly into Ponzi financing after years of increasing speculative activities.

    Sadly, given the much wider scope and reach of banking and finance than in periods of the past has lead to a scenario where periodic crises in various sectors of the economy were ignored, simply because they could be contained, and not viewed as symptoms of the flaws in the wider system.

    We’ve now reached the point where toxic assets have proliferated throughout the entire system. Take the Bank of Scotland as a prime example of what I mean – it ventured into all kinds of speculative schemes. And our own banks have yet to have many of their bad debts realised.

    * Has already had a massive bailout
    * Government will insure “toxic assets”
    * CEO blames “unprecedented turbulence”

    Bank of Scotland reports $53bn loss
    http://www.theaustralian.news.com.au/story/0,25197,25111710-12377,00.html

    THE Royal Bank of Scotland today reported a net loss of £24.1 billion ($53 billion) in 2008, the largest annual shortfall ever recorded by a British company.

    RBS, which is nearly 70-percent owned by the British state after a massive bailout, said it would sell off a large part of its assets, withdraw or reduce operations in 36 countries and re-focus its activities on the domestic market.

    The beleaguered bank said the state had agreed to insure RBS “toxic” assets worth £325 billion ($713 billion) and would cover 90 percent of losses stemming from such holdings.

    It suffered the losses after a catastrophic year when the financial crisis sparked by the failure of US bank Lehman Brothers brought it to the brink of collapse.

  15. shaneinqld too true.

    And a media that acts like a propaganda machine for big business & the rich who despise taxation. Has something to do w/ easing regulation/controls…but even our tax-payer funded media gets infiltrated…serves as a mouthpiece for the pro-business, anti-union lobby.

    The bias demonstrated by QLD ABC news this week has been outrageous.

    Reporter Matt Wordsworth on the news & his blog focuses on the “Bad Report” (think of the connotations) story that heads the days news about the tragic rape of a nurse. Sad…but the government didn’t rape the woman…even if someone in their department was negligent.

    But the fact the Bligh government is building thousands of affordable, low cost housing comes 20 minutes or so into the news. It’s biased BS.

    I prefer to read this:

    http://blogs.crikey.com.au/electioncentral/

    N’

  16. And why wasn’t this a bigger issue?:

    How big a gaffe did the Borg make on the economy?

    February 25, 2009 – 12:23 am, by Mark Bahnisch
    In my wrap up of day two’s campaigning, I observed the Borg’s mangled syntax – and also, on reflection, his weird idea of political messaging – got him a terrible grab on the nightly news which will stick in voters’ minds:

    It wasn’t a good news day for the Borg. In his ire about Anna Bligh’s focus on the global financial crisis, he declared it an “issue peripheral to Queensland”.

    http://blogs.crikey.com.au/electioncentral/2009/02/25/how-big-a-gaffe-did-the-borg-make-on-the-economy/

    How about some BALANCE QLD ABC news?

    N’

  17. John McPhilbin, on February 26th, 2009 at 10:08 pm

    I sometimes wonder that you are always so agreeable, John. How can Minsky’s financial hupothesis be spot on, and Shane also spot on, when Minsky posits that the fragility is a function of appetite for increasingly under-priced risk, just as the most appetitive are not greedy, but rational from within a model which values appetitive-ness as a competitive feature?

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