[Dogpile]

Merrill Lynch economist equates the recent credit massacre to the market effectively tightening on its own what is the equivalent of 5 Fed Rate hikes.... yes, 5. Keep in mind, we have not had a consumer-led recession in the last 16 years. 2001 was a business-investment bust that remained mild because the consumer (70% of GDP) kept spending.

This interest rate ramp-up is very scary prospect as this tightening has lagged effects that will play out in economic activity in a few months time -- not now. This future news could erode confidence and spiral into something more serious. I am not saying a recession is inevitible -- only that the Fed better get its act together soon and act very aggressively when it does. Risking a recession when inflation is really not that high relative to previous economic expansions would be a serious mistake.

Here are a couple of links:

http://bp1.blogger.com/_5h-SWVGx6Ms/...sion+Risks.png

http://bp3.blogger.com/_5h-SWVGx6Ms/...this+point.png

http://bp2.blogger.com/_5h-SWVGx6Ms/...ity+vs+GDP.png

[walterw]

Originally Posted by Dogpile »

Merrill Lynch economist equates the recent credit massacre to the market effectively tightening on its own what is the equivalent of 5 Fed Rate hikes.... yes, 5. Keep in mind, we have not had a consumer-led recession in the last 16 years. 2001 was a business-investment bust that remained mild because the consumer (70% of GDP) kept spending.

This interest rate ramp-up is very scary prospect as this tightening has lagged effects that will play out in economic activity in a few months time -- not now. This future news could erode confidence and spiral into something more serious. I am not saying a recession is inevitible -- only that the Fed better get its act together soon and act very aggressively when it does. Risking a recession when inflation is really not that high relative to previous economic expansions would be a serious mistake.

Here are a couple of links:

http://bp1.blogger.com/_5h-SWVGx6Ms/...sion+Risks.png

http://bp3.blogger.com/_5h-SWVGx6Ms/...this+point.png

http://bp2.blogger.com/_5h-SWVGx6Ms/...ity+vs+GDP.png

Hi Dog, thanks for posting this interesting information... I dont understand too much of economy (fundamentals) but I understand some basics of what you are showing here...and is clear that US economy is in some crucial cycle turning point... I have a question maybe not easy to respond about market volatilty in relation to this economy stage... can we still expect high volatilty ? in this type of tense decisions as too where the US economy is lead, can we still have this high range on the markets ?....(from a fundamental point of view)... thanks Walter.

[TinGull]

If the economy keeps at the rate it's headed, I would think this volatility should be around for a nice time to come. In terms of market cycles, in a topping cycle things are normally very volatile. We've been in a topping cycle on the technical side of things for around 2 months now. Topping can be quick, but often it can be a drawn out thing when the bulls aren't willing to give up on their position. When the bear market comes along, it's typically volatile as well as fear runs on high. When you hear about people saying the housing market isn't to bottom until 2009 ish...that's when I would think volatility might start to decrease a little while the market seeks out a bottom along with that market.

Until the economy goes through this stuff its going through, it'll be nice and day trader friendly. And if it's anything like the rest of the US Gub'ment, it'll take a while.

[Dogpile]

good question walter... there is a good argument that when there is so much capital out there, 'the system' quickly arbitrages anything that gets out of line and so price never gets that far before it comes back into line -- causing a loss of volatility. the same though could be said in 1998 when all of Wall Street was basically implementing the same 'relative value' strategies that LTCM was doing.

I think you need an 'event' once in a while to keep the volatility going. ie, 1997 had Thai devaluation causing ripple effects. 1998 saw the LTCM event that caused the financial sector (banks -- a major sector in the S&P500) to get really volatile. 1999 had a 'high-beta' sector (tech/media/telecom-TMT) enter a boom. 2000 saw that major TMT sector bust. 2001 was a recession year with 9/11 thrown in. 2002 saw the Worldcom fraud. After that, no major event really hit. You just kind of worked off the hangover of the bubble with real estate stocks steadily climbing (REIT's and financial stocks are generally low-beta and homebuilders are insignificant part of the index).

So you had a 4-year bear market in volatility. Now here we are with bank-related stocks (XLF) getting volatile again - just like 1998. A recession would certainly cause more extreme volatility. Alternatively, a boom from a high-beta sector might keep things volatile (emerging markets). Until recently, emerging markets have been noticeably non-volatile. But that could change. Emerging markets are growing 10-15% per year -- you would think that there would have to be some up or down volatility associated with that kind of growth. Inflation and/or recesssion (bust) would seem to be likely at some point. Scandal could also hit.

Net net, that is a great unknown. I have loved this volatility. That said, Thursday and Friday were a little too volatile for my taste. Its hard for me to think about 'trade location' relative to previous day when you are having such massive gaps every day.

[Nick1984]

In terms of global stability the growth in the BRIC nations (Brazil, Russia, India, China) which has been pushing double digits if not close to it for a long time now should act as a counter to any US troubles. To me it seems simply since a lot of Western nations have been suffering from the effects of debt driven growth unchecked, the world is not shifting its resources to these new areas.

Like Dogpile just said, should a high beta sector have a sudden boom due to a technological advancement or some other factor then that could stall any downtrend in the US markets. With horrible lending practices to the public sector in the residential mortgage market many consumers should be feeling the squeeze on the hip pocket as mortgage repayments become to burdensome. This in turn will effect spending power to pump more money into the consumer goods and services sectors which in turn hurts those company's bottom lines.

Until the market shakes out all the bad debt in the US I think that in the medium turn the US will have more volatility but I won't speculate on the direction of that volatility. Money will continue to shift to those other markets and a housing price downturn in the short to medium turn in many Western countries (you can see that about to start happening here in Australia already) will have increased volatily even should markets turn around and start heading back up. The swings will be more frequent and more wild.

[darthtrader]

[Reaver]

Originally Posted by darthtrader »

heh heh I work at a mortgage company and I think that is pretty frigging funny. LOL

The way that these places set people up, it's sad but true, as far as the poster goes.

I work at a Credit Union, so we don't do subprime.

Thank God I have a VA loan!

[Nick1984]

What is classified as a sub prime loan in the USA? Here in Aus the easiest loans we call "low doc" loans which basically mean minimal information is required to get a loan through fast. Basic imcome statement and asset valuation is all thats required. Loan doesnt need to be insured either. We haven't had the same problem as in the US with sub prime loans but a lot of these low doc lenders borrow US funds at your lower interest rates to pass on these low interest rate loans cheaper than our banks. They've taken a beating recently with the sub prime problem in the USA.