When Markets Crash...

For those new readers in 1998 we started an intense study of market bubbles, in preparation for what we thought was coming. We came to some general conclusions about the elements that contribute to a market correction, break, failure, or crash, each of which has a particular character and depth that is similar but still unique enough to be classified.

We expressed this in a series of price charting patterns, and a set of mathematical relationships of price over time in a large Excel spreadsheet labeled CrashTrak©. The verbal description of the analysis was never polished or published, since this has been for private use only. It has been expressed piecemeal in occasional writings, charts and postings in the past seven years around the web. Its still evolving as more is learned and new things occur as you would expect.

We are reading what looks to be a very promising analysis of a particular period of history which includes a financial market panic in 1907 that helped to set up the creation of the Federal Reserve Bank in 1913. Since we have not yet completed the book we won't comment yet on it except to say that it appears to be a substantial, serious and highly readable history of the time from a financial and social perspective. The Panic of 1907: Lessons Learned from the Market's Perfect Storm: Bruner & Carr

Our own view tends to see 1907 as a market event more like 1987 in its character and aftermath, as opposed to 1929 which is a crash and depression. But we have an open mind and hope this book will help to refine our knowledge.

In the introduction the authors provide an excellent description of the characteristics that together create a crash environment. Its remarkably close to what we think, although expressed much more capably. We'll have to see how they expand on this in the rest of the book, and are keenly interested to see if they have captured the element of a trigger event and if so how they have done it. We recommend this template not only as a general recipe for crash environments, but as a benchmark against which to understand not only what set up 1907, 1929, 1973-4, 1987, 2000-3 but also the situation in which we are in today.

"The following detailed account of the events of 1907 draws upon this rich literature to suggest that financial crises result from a convergence of forces, a perfect storm at work in the financial markets. Throughout the dramatic story of the panic of 1907, we explore this metaphor as we highlight seven elements of the market's perfect storm.

1. System-like architecture: Complexity makes it difficult to know what is going on and establishes linkages that enable contagion of the crisis to spread.



2. Buoyant growth: Economic expansion creates rising demands for capital and liquidity and the excessive mistakes that eventually must be corrected.



3. Inadequate safety buffers: In the late stages of an economic expansion, borrows and creditors overreach in their use of debt, lowering the margin of safety in the financial system.



4. Adverse leadership: Prominent people in the public and private spheres implement policies that raise uncertainty, which impairs confidence and elevates risk.



5. Real economic shock: Unexpected events hit the economy and financial system, causing a sudden reversal in outlook of investors and depositors.



6. Undue fear, greed and other behavioural aberrations: Beyond a change in the rational economic outlook is a shift from optimism to pessimism that creates a self-reinforcing downward spiral. The more bad news, the more behaviour that generates bad news.



7. Failure of collective action: The best-intended responses by people on the scene prove inadequate to the challenge of the crisis."

The Nature of the US Financial Crisis

The US financial crisis is not one of liquidity or a credit crunch.

That could only be a symptom of some other problem in a fiat monetary system with low interest rates and wide acceptability on Treasury debt. Liquidity is just a symptom and one cannot cure the disease by trying to relieve the symptoms. You have to treat the illness, or hope that the patient can cure themselves through the natural processes of the body while you relieve the symptoms.

What has happend, what no one in the financial business seems willing to say, is that a number of corporations have been caught in a massive and pervasive financial fraud (or as their lawyers would prefer, a sustained lapse in judgement). This includes a number of the Wall street banks, big accounting firms, and in particular ratings agencies.

Who will lend or buy when the judgement of those who create, sell, and rate the product has been shown to be corrupted, false, and not valid? If you were on eBay, and the seller had a rating that showed repeated deceptively false product descriptions, would you buy from them even if Paypal offered you a favorable discount on interest rates? Of course not.

The problem is accountability and credibilty. Integrity and honesty.

Any of us would not do significant business with anyone who has shown a lack integrity and honesty in their recent business, especially knowing that they will not be held to account for any frauds they may commit against us. At least most of us would not, and at some point the supply of greater fools is exhausted.

The banks are no different. They are reluctant to deal with each other without a third party guarantee from the Fed or the government. They know that THEY have been imprudent at best, and intentionally deceptive at worst.

Have we become so used to corruption and deceit that we cannot even notice it anymore, like a family that lives near a train or a busy highway?

Until serious steps are taken to restore integrity all we are doing is perpetuating a financial system that is broken, and stumbling into a real and serious collapse that may be catastrophic when the rest of the world walks away in disgust.

The public in the US is running out of credit and cash, after many years of wage growth supression and degradation of the productive economy, and can no longer sustain this almost parasitic arrangement which Wall Street has created. The banks' solution is to find new and healthier subjects to feed upon in Asia and Europe which is what they were doing when the subprime scandal surfaced.

That is the heart of the problem. And we won't hear the truth because the boys with the cookies in their hands are afraid of getting punished by having their cookies and bonuses and maybe even their freedom taken away. And besides, they have gotten away with it before, and are trying to bluff their way out of another tight spot.

Let's see what happens, but start thinking what we can do if the system is not capable of repairing itself through the actions of our representatives in Congress. Dropping them a quick note or call to let them know what we expect would be an excellent first step.

If you wish to do more, walk away. Stop buying non-essential purchases for the rest of this month. Buy only what you absolutely need to live. Pull your money out of any of the big money center banks and broker/dealers. Stop using credit cards from the big money center banks. Pull your money out of the US stock market. Bring your money closer to home and put it into a sound local bank.

At the worst, you'll have some extra money saved. And at the best, maybe we'll feel better and see some change and help to break this cycle of fraud, bubble and bust.

IMF: Worst Financial Crisis to Hit the US Since the Great Depression

One of the best ways to insulate yourself from the risk of 'the worst financial crisis' in the US 'since the Great Depression' is to get out of risky US financial assets and limit or hedge your exposure to the dollar, now.

As best you can, as quickly as you can. We have done this. We believe that it is better to be prepared, and possibly too cautious, than to be unprepared, and devastated. The local government will not tell you this because they want your patronage until the very last minute. Have a nice gin and tonic. Relax. Spend some money. Don't worry everything will be fine.

And it's fun for us the natives to run around picking up free sandwiches and sodas and beer that fleeing tourists have dropped in their departure, and maybe even the occasional wallet. The local authorities are reluctant to sound the alarm in order to not create a panic and clog the roads out of town, and create a slump in the trade, although we suspect a number of key people are quietly slipping out of town.

The decision is to take action for your safety and head for higher ground now, perhaps not gaining some free beer and sandwiches, or to be trapped if the oncoming wave of financial defaults is as bad as the IMF says it will be in the US. The only question they seem to raise is, "where is the highest ground?" 'Not here' is the first thing that crossed our minds.

They could be wrong. We have not had a truly nasty disaster in almost five years, and the "big one" has not hit in the US for almost 80 years. We remember discussing it with our parents and grandparents. It left a mark on them. Our families did not recover until the 1950's.

The Fed's experiment in heading off disaster by running the printing presses and throwing up barricades of paper as a first line of defense might work. If you are a native its very hard to leave. If you are a tourist and are still playing on the beach, you are probably a little reckless. But you might get lucky.

Its hard to know whom to believe. Those who are warning like the IMF, and those who say there are no real problems like Secretary Henry Paulson. We have to use our own judgement. But consider what the IMF said carefully. The worst US financial crisis since the 1930s. That didn't sound like a mild slowdown to us.

There are some who think that the local government disabled the warning system. If we find out afterwards that this is true, we hope that they are dealt a justice that will be a significant page in the history books.

We felt an obligation to say what we think, and not just sneak away. The concern we have is that its almost impossible to know exactly what will happen. The IMF could have it wrong. Prof. Nouriel Roubini could have it wrong. Our gut hunch may be wrong.

We've taken our own advice as best as we can. Be aware of that; we are not neutral here. We are OUT of US stocks and hedged to currency exposure. We hope we are wrong. We will be glad if we are just being overcautious. We hope we are not being too conservative and miss a rally or two, but it suits our particular situation and age.

But we also wish we had more supplies with us as well and were even further removed from what could be a major financial and historic event. Our worst fear is that we will have to move to even higher ground. Families with children are not easy to move. If so, we hope you are there and able to welcome us, and if not us, then someone else. If you know something that people should know, then tell it, now. If we have at any time given you any benefit, any reason to feel gratitude then payez au suivant, pay it forward to someone else.


IMF External Relations Department
Morning Press
Wednesday, April 2, 2008

IMF cuts global forecast on worst crisis since 1930s

The IMF cut its forecast for global growth this year and said there's a 25% chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression. The world economy will expand 3.7% in 2008, the slowest pace since 2002, according to a document obtained by Bloomberg News at a meeting of Southeast Asian deputy finance ministers and central bankers in Da Nang, Vietnam. In January the fund projected growth of 4.1%.

The reduction is the third by the Washington-based lender since last July. Central banks will need to conduct policy "as flexibly" as the circumstances warrant, the statement said, adding that the ECB has room to lower borrowing costs. "The financial shock that originated in the U.S. subprime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system,'' the statement said. "The global expansion is losing momentum in the face of what has become the largest financial crisis in the U.S. since the Great Depression."

The world's biggest financial companies have reported about $232b in credit losses and writedowns since the start of 2007, data compiled by Bloomberg show. That's prompting banks to stop lending to all but the safest borrower, undermining consumer spending and business investment. The IMF gave a 25% chance that global growth will drop to 3% or less in 2008 and 2009, a pace the fund described as equivalent to a world recession. The last time that happened was in 2001. (We are kidding ourselves aren't we? This is going to hurt, and badly. We are already in a recession here in the US, a stagflationary recession. Unless some large countries suddenly become consumer driven economies, its going to impact the world. Even with the Japanese central bank serving as a vassal to the US and looting the savings of its people to pay tribute to the hegemony of the dollar, the world is headed into a nasty recession with the US as the epicenter. - Jesse)

U.S. Treasury Secretary Henry Paulson said today that fears that the global economy would slide into a recession are "a little overblown," DJ reported from Beijing. Still, Paulson said in an interview on Bloomberg TV that the U.S. economy has "slowed down sharply," with the risks still to the downside. "We're not through this yet. We've got some more bumps in the road," Paulson said, noting that capital markets still aren't functioning normally. (Paulson is saying what he has to say to try and keep the public in place, hoping for the best, but protecting himself and his cronies in the interim.- Jesse)

U.S. Federal Reserve Chairman Ben S. Bernanke has pushed aside central-banking tradition, scooping up $29b of assets from Bear Stearns Cos. and backstopping bond dealers. Congress wants to know where he draws the line, Bloomberg reported today from Washington. Bernanke testifies before two congressional panels today and tomorrow. The hearings mark his first trips to Capitol Hill since the Fed's March 16 intervention to avert the bankruptcy of Bear. (There is precedent for what Chairman Bernanke did, in the 1930's. As they say, actions speak louder than words - Jesse)

U.S. Federal Reserve Chairman Ben Bernanke still sees some trouble spots in the economy, but he didn't characterize the U.S. as being in a recession during a meeting with U.S. lawmakers yesterday, one of the meeting's participants said, DJ reported from Washington. (Bernanke will not and in his mind cannot admit to the crisis until there are breadlines winding around the corner of his building in Washington DC. His perceived role is to maintain 'order' without regard to the individual costs - Jesse)

ECB governor Axel Weber warned today that more financial turmoil was likely, in remarks to a newspaper after banking stocks jumped on hopes the sector could be turning the corner, AFP reported from Frankfurt. He also underscored the ECB position on inflation, stressing that in the long-term, inflation of more than 2% was not acceptable. "The crisis of confidence is not over yet. As long as the price decline in the U.S. property market continues, further turbulences have to be expected," Weber said in an interview with the German newspaper Bild. (Could you ask for a clearer statement of what to watch? In 1929 and the early thirties we had warnings from overseas while our own government and universities gave out generous portions of tragically false hope. - Jesse)