Imminent and severe market correction

[kransky]

Marc Faber on Lateline Mon night

http://www.abc.net.au/lateline/content/2008/s2389900.htm

TONY JONES: You've said recently of some of the largest European banks, the crucial problem is they become too big to fail, but also too big to be saved. Tell us what you mean?

MARC FABER: Well, I think first of all, in a perfect market you have hundreds and hundreds of competitors and if one competitor fails or goes bankrupt it's not the end of the world, because it's just one of a few hundred. In banking, it has become a business that has become heavily concentrated among a few large players and if one of these large players fails, it goes through the whole food chain of the financial system and like a domino stone that falls down, it hits the next domino stone and so forth and so on. And that is the first problem. The second problem is that in comparison to the GDP of some countries, bank's assets are far larger. And so I think that if these countries bail out the banking system they expose themselves to eventually going bust.

TONY JONES: Yes, you point to the leverage ratio of some of the giant banks like Deutsche Bank and Barclays. Can you explain to us what you mean by pointing to those leverage ratios, and what are the implications of these incredibly high ratios in those two giant banks?

MARC FABER: Let's say we are businessmen and we run our businesses and we have equity of 100 and maybe we borrow 50 and then we have a relatively high cushion in carrying our business, even if we have one year's loss or if business turns down. What the banks and investment banks and companies like Fannie Mae and Freddie Mac have done over the years is they have increasesed leverage, and that has been evident through excessive debt growth in the system everywhere in the world, but in particular in the US and in other Anglo Saxon countries. And the end result was that, say, banks they have equity of one and then assets of anywhere between 20 to 50. In other words, the cushion of safety, which was the equity was very small when compared to assets. So when assets start to go down, the equity is gone almost overnight.

TONY JONES: It is incredible. You've said that Barclays has a lending ratio of 60. The Deutsche Bank has a lending ratio of 50, that's $1 of equity to $50 of assets. Now that seems to be way out of kilter with economic rationalality?

....

TONY JONES: Do you think the Europeans are facing a financial crisis in their banking system, potentially worse than the United States?

MARC FABER: Could be in some cases. In some cases the banks are more leveraged and national banks or the GDP of these countries, unlike the US, do not support a bailout. I'd like to point out in the US we have now an additional problem coming out. Commercial real estate, and then rising unemployment, rising default rate and globally, we have the credit default swap that is still a time bomb and the whole derivatives market, that is another time bomb. Then in the US, just in the last few days, the following has happened. Last week the S&P the stock market was down something like 18 per cent. But in the past when the stockmarket was down, Government bonds in the US rallied. But in the last couple of days this hasn't happened. The bond market was also weak. Obviously, if the Government bails out the entire system, the credit of the Government diminishes and in my opinion Treasury bonds in the US should already be rated as junk bonds. I'm sure the US Government will eventually go bankrupt. Maybe not tomorrow, but as far as the eye can see, we will have deficits in the US Government, deficits of more than $1 trillion annually.

TONY JONES: Do you think Australia is going to get swept up to the same degree, or are we insulated?

MARC FABER: No, I think probably even worse, because don't overlook the fact the US is in very bad shape, but very simply put ... here, I oversimplify, the US doesn't produce anything, it consumes. So if consumption goes down in the US, Okay, Americans become a bit slimmer, that's very good if the obesity rate drops in America and they consume less electronics, they drive around a little bit less, it's not the end of the world. But the translation mechanism goes then into the producers for America. Notably, China and other Asian countries that then have falling industrial production and diminishing exports to the United States. And, therefore, their demand for raw material goes down and so the Asian economies are like a warrant on the US economy. When the US does well they do particularly well, and when the US does badly they're hit very hard and that then goes through to the resource producers, to OPEC, to Russia, to Australia and these countries in my opinion are actually quite vulnerable, especially given the large foreign debt of Australia.

TONY JONES: We're also already, in fact, hearing that some steel mills in China are cutting demand for iron ore. They're actually calling on smaller miners in Australia to actually postpone delivery of orders. Do you think that will spiral, get worse?

MARC FABER: Yeah, I think so, because if you look at the global synchronised boom 2001 2007 it began in the US and then it led to strong growth in China and as China was growing strongly, the industrial production went up, exports went up and then capital spending went up very substantially. And when capital spending picks up, then obviously the demand for commodities does not only go up because of local consumption and industrial production, but because of the capacity expansion. And when the recession comes the expansion is cut down and that leads to a slump in the demand for commodities. We've seen the Baltic Dry Index collapse, oil prices drop from close to $150 a barrel to around 80. Of course it will hit Australia, and very badly so.

TONY JONES: You've also pointed, and I'd mentioned this before to the asset bubble in housing prices in Australia. Are we, in this country, do you think, due for a major correction?

MARC FABER: Yes, I think so, major correction. Because if you look back at Australia we always had booms and busted and they tended actually to be more pronounced than in the United States. So I think we had a colossal boom in home prices and to some extent, also in commercial real estate in shopping malls and so forth and that will go in reverse. It is very difficult to call the bottom, but I think these things take time and if you look at Japan, we peaked out in 1989 on the Nikkei at 39,000. We're now at 9,000 or so. So it can take a very long time and I think this crisis will be a crisis, a milestone in economic history. The way people used to ask, "Are you born before 1929 or after 1929, or before the World War II, or after World War II?" People will ask in future, "Were you born before 2007, or after 2007?"

 

[davo8]

I'm not sure how much more bad news is or isn't factored in, but the recent falls were obviously overdone in the short term, and thus the rebound. It even looked like capitulation low to me.

Given that few of us have lived through one, let alone traded one, I beg to differ. Capitulation has a sense of desperation, of hopelessness, of lack of interest. Capitulation is (or follows) flat with low volatility, not V-shaped with VIX of 70. This is NOT the bottom.

I'm not sure if you can absolutely say how much is factored in either davo.

When you say the 'sucker is broke', are you saying the entire financial system is going to break down and be replaced by something else? Or, just that there will be a lower low? As you asked, sub 800 on the S&P and what next?

There are unknown unknowns out there -- I just don't know what they are! All I know is they are going to happen and the market is going lower.

My view is that much of the financial system is permanently broken. After it's nationalised, socialised, deleveraged and recapitalised it isn't going to work the way it used to. Any financial stock you buy now is pure guesswork. Most will never really recover.

 

[Kauri]

the weakness in stocks and commodities etc today isn't because banks are still on the brink of catastrophe at the moment but the fear is that the "D" word is taking over from the "R" word as the most likely path for the economy. another 50bp US cut at the next meet??? if so then the canon is empty... only the pop-gun left....

Cheers
........Kauri

 

[chops_a_must]

the weakness in stocks and commodities etc today isn't because banks are still on the brink of catastrophe at the moment but the fear is that the "D" word is taking over from the "R" word as the most likely path for the economy. another 50bp US cut at the next meet??? if so then the canon is empty... only the pop-gun left....

Cheers
........Kauri

What do you mean, "canon"? They didn't have one! They've been using the pop-gun all along!

 

[Sean K]

Crikey, you rarely here a Rio or BHP downramping their prospects.

Or is this a good sign that lower growth is factored in to their prices?

I love the comment on the $10b bandaide by the gov at the bottom of the article.


No riding China's back: Rio Tinto
David Uren and Matt Chambers | October 16, 2008

THE nation's reliance on China to carry it through the impending global slowdown has been dealt a blow, with mining giant Rio Tinto saying it no longer expects the engine of Australia's resources boom to bounce back this year.

Rio Tinto chief executive Tom Albanese said yesterday a post-Olympics slowdown in commodities demand would drag on longer than the company had thought just two weeks ago and the company may slow mine expansions.

"We expect to see Chinese economic data in the third quarter of this year showing an exaggerated economic slowdown because of the Olympics effect," Mr Albanese said. "It now seems clear that any bounce in net demand will be delayed until next year."

.....

"There's a danger they fired off half their ammunition before they've seen the enemy."

 

[chops_a_must]

All I have to say is, LOL. Various shorts again...

 

[cuttlefish]

I've got a few of those open as well - will be interesting to see what happens today (though odds are I'll sleep through most of it ).

 

[CAB SAV]

It's taken a while but now that so much has come out regarding all the bailouts, focus will turn to state of economies, particularly US. No traders should be surprised that the markets will deteriorate a lot furthur now. When data comes out shortly showing unemployment rising quickly in US, expect big falls and with all other indicators such as declining retail,manufacturing etc. continuing to deteriorate. If the general public were to be informed as to the real implications of the trillions of dollars tied up in junk derivatives, well turn to the "is there a god" thread.

 

[Aussiejeff]

the weakness in stocks and commodities etc today isn't because banks are still on the brink of catastrophe at the moment but the fear is that the "D" word is taking over from the "R" word as the most likely path for the economy. another 50bp US cut at the next meet??? if so then the canon is empty... only the pop-gun left....

Cheers
........Kauri

What "R" word? As far as I am aware NO US leader of importance has admitted that "RECESSION" has arrived - yet. It has always been termed by the High and Mighty as "might move toward a recesssion" or "not in recession - yet".

I did hear on the radio today some analysts saying America's economy was "in a Rut"! Does that count as a filthy "R" word *shudder*?

Then again, maybe you are right and they will bypass the filthy, unspeakable "R" word and go directly to the even more unspeakable "D" word . Then again, the High and Mighty might like to define a slide into "D" as merely "tending towards a Dip"!

Well, we DO know by now that they are all a bunch of DipSticks who have attended Word Smithing For Idiots 101 - the lot of 'em. That's a given! It is nice to have some certainty there at least... LOL

aj

 

[James Austin]

indicative opens on the majors sitting at -10% as i write,

fall at open may be even bigger than overnight SPI futures indicate

** or maybe instos messing with the mums and dads, scaring them into a sell, so they can buy even cheaper

 

[dhukka]

Thanks for that kransky, always like listening to Marc Faber, doesn't pull any punches and is usually pretty close to the mark with his analysis.

 

[spooly74]

What "R" word? As far as I am aware NO US leader of importance has admitted that "RECESSION" has arrived - yet. It has always been termed by the High and Mighty as "might move toward a recesssion" or "not in recession - yet".

I did hear on the radio today some analysts saying America's economy was "in a Rut"! Does that count as a filthy "R" word *shudder*?

aj

Oct. 15 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. is in a recession and policy makers' interest-rate stance is aimed at addressing the risks of a deeper downturn.

http://www.bloomberg.com/apps/news?pid=20601087&sid=asSZxyFTNrAU&refer=home

 

[Ageo]

So let me ask you guys, i have no doubt that the market will tank (severley), but with all this capital injection (Trillions of paper money thrown into the system globally) do you guys think it will creep up a little before tanking? i mean surely this money will temporarly prop the market up (along with interest rate cuts etc...), but then once that all dries up i would expect hell to break loose?

 

[Sean K]

So let me ask you guys, i have no doubt that the market will tank (severley), but with all this capital injection (Trillions of paper money thrown into the system globally) do you guys think it will creep up a little before tanking? i mean surely this money will temporarly prop the market up (along with interest rate cuts etc...), but then once that all dries up i would expect hell to break loose?

Isn't it already off 35% or something? You're waiting for it to tank? LOL

I suppose it can go down another 100% or so...

 

[Ageo]

Isn't it already off 35% or something? You're waiting for it to tank? LOL

I suppose it can go down another 100% or so...

Kennas i havent seen unemployment rise a fair amount as of yet, i havent seen many business's going bust as of yet and i havent seen the whole system turn upside down on its head as of yet. So to answer your question yes im waiting for it to tank.... after all the worthless paper money that floods the system.

 

[MrBurns]

Kennas i havent seen unemployment rise a fair amount as of yet, i havent seen many business's going bust as of yet and i havent seen the whole system turn upside down on its head as of yet. So to answer your question yes im waiting for it to tank.... after all the worthless paper money that floods the system.

When that happens what about cash ? Money in the bank will be worth less than it is now ? Hyper Inflation ? Time to go for gold yet ?

 

[Aussiejeff]

When that happens what about cash ? Money in the bank will be worth less than it is now ? Hyper Inflation ? Time to go for gold yet ?

How much gold will I need to exchange for a can of baked beanz at my local Coles?

Will my $50 gold coin be "worth it's weight in gold" or the $50 face value?

Will Coles accept gold?

So many questions, so little time!

PS: If I grow carrots, will they be worth as much as gold nuggets?

 

[MrBurns]

How much gold will I need to exchange for a can of baked beanz at my local Coles?

Will my $50 gold coin be "worth it's weight in gold" or the $50 face value?

Will Coles accept gold?

So many questions, so little time!

PS: If I grow carrots, will they be worth as much as gold nuggets?

Come on you're really Wayne Swann aren't you.......

 

[Ageo]

When that happens what about cash ? Money in the bank will be worth less than it is now ? Hyper Inflation ? Time to go for gold yet ?

Well i dont know everything but you dont have to be Mr Buffet to understand that whats happening is only just the start of it......

Hyper inflation? well isnt that when you flood the market with money that wasnt there? where is all this money coming from? i do know 1 thing thow that gold will be a safe haven for people simply because thats what they believe (its proved itself in the last few weeks that when economy heads south, gold tends to trend north).

Back to my question thow, do you guys believe with all the cash injection (which still has to happen) that the market will prop up a little before it tanks?

 

[MrBurns]

Well i dont know everything but you dont have to be Mr Buffet to understand that whats happening is only just the start of it......

Hyper inflation? well isnt that when you flood the market with money that wasnt there? where is all this money coming from? i do know 1 thing thow that gold will be a safe haven for people simply because thats what they believe (its proved itself in the last few weeks that when economy heads south, gold tends to trend north).

Back to my question thow, do you guys believe with all the cash injection (which still has to happen) that the market will prop up a little before it tanks?

I dont really want to but I think I'm going to have to buy gold in the next week or so. Thanks for your input.

No I dont think the market will be propped up, confidence has gone.

Sooner or later people will realise this will not end with shares going back to where they were.

It will end will shares at a low that just sits there, the time to buy will be when everyone else shruggs their shoulders and walks away.

Same with property I remember when there was no fuss over property, no one gave a toss, that was the time to buy.

And in both cases shares and property you can take your sweet time about when to go back in because when the time is right there wont be any rush, just general apathy.