johnnymk

I really like this comment: "This situation has reminded us of something else we pointed out in Empire of Debt: "the force of the correction is always equal and opposite to the deception that preceded it." "


http://www.bitsofnews.com/content/view/5987/

Violent mood swings took control of the markets this week, as they reacted to the volatility in the credit and mortgage markets, which has been exacerbated by the housing bubble burst. All in all, it's been an interesting August; a month that is usually pretty tame as far as the markets are concerned.

After the injection of billions of dollars in the markets didn't seem to have any effect, the Fed tried another medication on our bipolar markets, in the form of an emergency rate cut. FOMC announced that they would be cutting the discount rate by 0.05 percentage points on Friday morning - the markets breathed an audible sigh of relief…and subsequently rallied on this decision.

Although the stocks regained some of their losses from earlier in the week after the rate cut, most experts believe that this volatility will be around for months - or possibly until the end of the year.

"The bottom line is the credit situation, the subprime situation, and the confluence of these items runs a lot deeper through the Street than a Fed move or even a Fed rate cut can fix," said Chris Johnson, chief investment officer at Johnson Research Group.

Many analysts commenting on the situation used the term "wake up call" - particularly when they were talking about the central banks.

"The lack of monetary discipline has become a hallmark of unfettered globalization," said Morgan Stanley's Stephen Roach. "Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy."

"The current post-bubble shakeout is hardly an isolated development. Basking in the warm glow of a successful battle against inflation, central banks decided that easy money was the world's just reward. That set in motion a chain of events that has allowed one bubble to beget another-from equities to housing to credit."

We can't jump from bubble to bubble forever…after all, as we noted in our last book, Empire of Debt, eventually, everything regresses to the mean. Interestingly, a Baltimore talk radio host, Ron Smith, thinks that is what is happening now - a reversion to the mean. He talked about this on his show yesterday…and gave Empire of Debt a little shout out:

"Market commentators are forced to utter ever more unprovable assertions about what the future looks like for stocks, bonds, and all the myriad financial derivatives traded electronically across the globe," Mr. Smith wrote in an article on his WBAL website.

VTGreg

It's a correction. There has been unbelievable gains in the market the past few years and a correction was long overdue. I don't think anyone will be surprised if it gives back another 10 or 20%.

With the big drops over the past few weeks the market is still up about 5% YTD.

__________________
It only ends once... Anything that happens before that is just progress.

Courage is not the absence of fear but rather the judgment that something else is more important than fear.

Prngr44

Bingo.

Remember that article we posted a while back commenting on most American's negative saving practice? I like to think this more than anything is what's driving the correction. All the unrealized equity that was supposed to rescue poor spenders is dwindling and banks aren't willing to just throw loans at anyone with built up equity that's seemingly eroding.

I'm just bummed that I doubt I'll be getting a rate closer to 6% and more like 7 as a result of this.

johnnymk

In am not sure if the savings rate of Americans has much to do with this correction. If we had to depend on money from the average American, there would be nothing available to lend, except for pension funds and other institutions. There is still a lot of liquidity from foreign countries, especially China which has been pouring into our country.

Everyone is saying that the Fed is going to drop the interest rates in the near future. But they are still caught between a rock and a hard place,

It will be very interesting to see which direction mortgage rates will be in the next month.

zippyjuan

Two figures for you. One. The economy is only growing at about four percent a year. Two. In the last twelve months, even with the latest drop in share prices, the Dow Jones Industrials are up 27%. A correction would seem to be in order. This divergence cannot be maintained over the long haul. Adding more liquidity will only add to inflationary pressures which the Fed has vowed to try to keep under control. I think that is why they opted for one-time stimulus, to calm some fears, and not a longer term rate reduction.

__________________
I add new pictures to my photo gallery pretty regularly. You can see them here if you are interested: http://www.pbase.com/jeffryz

Prngr44

I was thinking more in terms of investor and consumer confidence. You can't really predict those and I was thinking that the credit pinch (negative savings) along with the housing bubble (perceived equity going away) causes consumers to hang on to their money, not buy things, not invest, etc.

The feds reduction of the discount rate between banks shouldn't have too much effect on mortgage rates in the near term.

zippyjuan

There isn't much if any correlation between the Fed rates and mortgage interest rates. I do agree that consumer spending is slowing.