Over the last weekend, I was glued to the television and Twitter in horrific despair at the Mumbai blasts.
A lot has already been said about what should be (and should have been) done. I am more interested in forming a descriptive mental model about what is happening, rather than a prescriptive model of what should.
Public and political sentiment sometimes moves like a glacier, and sometimes like a waterfall. Crises create so much panic and so many unscripted moments that they reveal a lot of truth about the world we live in. They are like the glimpse into the real personality of the beauty pageant contestant when she suddenly trips on stage. Crises reveal a rare view of truth in a world full of wish-thinking and make-believe.
This change in public sentiment is not an ephemeral spiritual thing, but rather one that can be measured through the rigors of science and statistics.
And so here is one chillingly revealing statistic from another crisis, the Asian tsunami:
In Ireland, 87 per cent of the population believe in God, a survey by the Market Research Bureau of Ireland found in January. Rather than rocking their faith, 19 per cent said tragedies such as the Asian tsunami, which killed 300,000 people, bolstered their belief.
When I talk about the current financial crisis with friends and family, I often sense that many do not fully comprehend the scale of the crisis nor of the bailout so far.
So I created this graph based on data from Jim Bianco of Bianco Research (via Barry Ritholtz)
(Click to zoom)
Here is the raw data:
Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:
This is good news for those of us who are brave (or foolish) enough to be starting a business now:
U.S. entrepreneurial activity fell from 12.4 percent of the total workforce in 2005 to 9.6 percent in 2007, according to a joint study by Babson and Baruch Colleges.
Lawrence Summers, Obama’s soon-to-be top economic advisor, strikes a pragmatic tone on the crisis. Rather than toe the party line on greed and corruption in Wall Street, he points out that financial crises are not new and are actually rooted in human nature rather than on financial innovation.
He seems to be quite candid in this interview - but it remains to be seen what happens after he enters the Washington jungle.
David Merkel is the first of the “guru bloggers” that I follow and respect to call it a depression:
I’m going out on a limb here, and I’m going to suggest that we have already entered a depression. The concept of a depression is even less objective than that of a recession, but some suggest that a decline in real GDP of 10% or more is the criterion, which we have not attained yet.
I don’t think a 10% decline in GDP is the right threshold. Depressions are different because of their widespread nature, often coming through financial systems that are in danger.
As it is now, many things are happening that are depression-like. Here we go:
Record high levels of total debt to GDP
Many go hat in hand to the government.
The spreads of the bond market are at record levels since the last depression, and maybe comparable.
There is policy paralysis and confusion. No one knows what to do or leave alone, they act blindly or cower in fear.
Ultrasafe investments have record low yields.
Banks don’t trust each other.
GDP is shrinking, and unemployment is increasing at a rapid rate.
Financial businesses are failing and shrinking at high rates.
The government comes in to “help” the markets, and ends up replacing the markets.
The security of banks and other financial entities is open to question.
Now that we’re staring into the abyss for stocks again, I thought I’d check to see what the recently launched Yahoo! Glue had to say on stocks.
Stocks are devices used since medieval times for public humiliation, corporal punishment, and torture. The stocks are similar to the pillory and the pranger, as each consists of large, hinged, wooden boards; the difference, however, is that when a person is placed in the stocks, their feet are locked in place, and sometimes as well their hands or head, or these may be chained.
With new lows on the S&P and the Nasdaq, and from what I’m hearing from other investors, it does feel like we’ve entered the discouragement phase in the sentiment cycle:
DISCOURAGEMENT AND AVERSION
After a long price slide, the area where churning takes place is between the Discouragement and the Aversion phase, after a significant decline has already taken place. Often, this appears as a head and shoulders bottom, a cup and handle or a saucer dish pattern. As the public continues to dump stocks, short sellers become bold and bearish. Their views are supported by bad news and poor economic data. Prognostication of lower prices to come is undoubted. This is when everyone knows that the market cannot ever go up again, and that anything, even cash, is preferable to owning stocks.
One of my most profitable investment tools has been an understanding of why sentiment can often produce counter-intuitive results. Consider this statement by the Indian Finance Minister Chidambaram:
“Hotels must cut tariffs; airlines must cut prices; real estate must cut rates of apartments and homes they sell; car makers and two-wheeler makers must cut prices,” he said, while addressing industrialists at the Indian Economic Summit being organised by the World Economic Forum and the CII in New Delhi.
Of course the Finance Minister wants GDP growth at the cost of profitability, especially in an election year. Every economic transaction adds to the GDP, even if it is loss making for the parties involved. You could boost GDP by paying half of the unemployed workforce to dig a ditch, and the other half to fill it up (yes, India actually has a program along those lines.)
But the deeper question is - why don’t these industries (especially real estate) cut prices to get inventory moving ?
The answer lies in sentiment - real estate is not supposed to go down. Realtors have sold the emerging markets this marketing drivel for too long. A normal market would attract buyers as prices go down. But in today’s sentiment-driven world, reducing prices actually might scare away buyers who see something that “isn’t supposed to happen”. Realtors worry (correctly) that a precedent of lower prices will encourage buyers to wait even longer.
So now we wait for the ongoing credit crunch to force the realtors to sell sell sell, and for the sentiment to turn. And you can bet the market will overreact on the downside too.
Many people are underestimating the tidal wave of demand destruction that is looming over our heads.
Deepak Shenoy gets it almost right:
What’s the buzz word this time? Energy. This boom has fuelled an enormous amount of money into energy - from research to discovery to exploration to production. There’s now solar and wind energy coming up. Nuclear’s picked up steam unintended. In India, coal and gas fired plants are coming up - mega and ultra-mega who coined that? power projects. There’s investment in distribution and transmission. And most of this has already gone in, in the hope that power will sell for a lot.
Will it? I honestly doubt that. We in India cannot imagine “too much” power. I think that’s what we in the cities will have - because no body has yet figured out how to make people in the villages pay, and no one is yet thinking of drawing lines to them. Too much power means it will become cheap - and I mean in five to ten years, not tomorrow.
This, I think, is the next boom, come 2014 or so. Businesses built on the back of seemingly unlimited power supply - from refrigeration to recreational vehicles - will start to benefit the most. And the biggest will probably come from an area I cannot yet imagine, but I’m sure it will start becoming visible in the next few years
The only correction I’d make to Deepak Shenoy’s thesis is - We already live in a world designed for “seemingly unlimited power supply”! There will be excess power in the future - but that will be because there will be very few avenues to deploy the power that is coming online.
And before you start thinking of “China and India”, let me just say this - it doesn’t matter how many emerging market citizens yearn to live western lifestyles - the only thing that matters is whether they can afford to pay market prices for that energy and the products that depend on it. And right now, even at these depressed prices, the answer is - they cannot.
So - suggesting that cheap energy prices will create a new boom industry is like saying that cheap paper will create a new boom industry. Ultimately it is demand that pulls industry, and not the cost of raw materials. Hence any prediction on what the “next boom” will be must define clearly where both the demand, and the ability to pay will come from.
Laid-Off Foreigners Flee as Dubai Spirals Down - NYTimes.com No one knows how bad things have become, though it is clear that tens of thousands have left, real estate prices have crashed and scores of Dubai’s major construction projects have been suspended or canceled. But with the government unwilling to provide data, rumors are bound to flourish, damaging confidence and further undermining the economy.
Soros: "Bad Bank" for Troubled Assets Is Bad Idea "That (the "bad bank" proposal) will help relieve the situation, but it will not be sufficient to turn it around," Soros said during a live interview at the Davos economic conference in Switzerland. Instead, Soros said he would create a "good bank" and re-capitalize the good assets.
He admitted his alternative plan is not likely to get support because it too closely approaches nationalization. "The political will to do that is not there," he said.
China’s Economy Faces 2009 ‘Hard Landing,’ China faces an economic “hard landing” and the risk of social unrest with growth slowing to 6 percent or less this year, the weakest pace since 1990, Fitch Ratings said.
The Start-Ups We Don’t Need — The American, A Magazine of Ideas It also takes a lot of entrepreneurs to create lasting jobs. To get one business employing at least one person ten years from now, we need 43 entrepreneurs to begin the process of starting a company. And how many jobs will that startup have, on average, ten years after it was founded? The answer is nine. In short, 43 people have to try to start companies so that we can have nine jobs a decade from now. That’s not the spectacular yield that you might expect if you read the press reports about the job creation of start-ups.
Econbrowser: Federal Reserve balance sheet The bottom line is that Bernanke has made a gamble with something approaching 2 trillion. If the gamble wins, taxpayers owe nothing. If the gamble loses, taxpayers are committed to borrow a sum equal to any losses and start making interest payments on it.
