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Earthquake In The Markets:not Many Dead

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Guest wrongmove

Earthquake in the markets:not many dead

"Was that it, then? Like disappointed teenagers skulking out of an overhyped horror film that failed to live up to expectations, readers of the breathless stories about a global financial meltdown this summer may be left wondering what happened to the blood-curdling climax of this sensational plot. Where was the longed-for mass murder of private equity billionaires? What about the sadomasochistic suicide pact between hedge fund managers and investment bankers?

Where, most importantly, was the hysterical rate-cutting by fear-crazed central bankers that was supposed to bring this disaster to a classic slasher-movie climax?

Let’s start with the end - since it really does now look as if the worst of the summer crisis came to an end last week. It is now clear that the emergency rate cuts and other panic measures that many investors had been screaming for throughout the summer - and which puritanical pundits were rather prematurely denouncing as an immoral and reckless handout to greedy, undeserving financiers - are not going to happen. The leading central banks confirmed this last week.

First, Jean-Claude Trichet, the President of the European Central Bank, hinted strongly that the rate increase that he had (rather foolishly) preannounced at the beginning of August was still on the agenda - although no longer the racing certainty that it seemed to be a month ago. Secondly, the Bank of England insisted on continuing to lend to banks in London that were caught short of overnight funds only at its penal emergency rate, despite the fact that the banking industry was clearly suffering some very severe dislocations. Then on Friday, the most important policymaker of all, Ben Bernanke, the Chairman of the US Federal Reserve Board, finally spoke out publicly - and he seemed as calm and unflustered as the market pundits had been hysterical and panicky.

What Professor Bernanke said in the key passage of his eagerly awaited speech was predictable and straightforward: “It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”

This statement meant in practice that the Fed had no intention of disrupting the normal course of its monetary operations and there would be no emergency rate cut before its next policymaking meeting on September 18. At that meeting, however, the Fed probably would do what it was likely to do anyway some time this autumn, even in the absence of this so-called crisis. It would announce a modest reduction in US interest rates. This easing would, in any case, have been justified, as I have argued since late May, by the slowdown in the US economy and the weakening of inflationary pressures. The only difference made by the summer financial crisis would be to bring forward by a month or so the modest monetary easing that US economic statistics were suggesting anyway.

The positive stock market reaction last week to all this monetary inaction suggests that the central bankers have won their war of nerves with the overexcited financial pundits and are well on their way to restoring the boredom that they like to be the dominant emotion in the economic policy world. In saying this, I do not imply that the central bankers’ policies are necessarily right. I believe that the ECB will make a big mistake if it raises the eurozone’s baseline “repo rate” from 4 per cent to 4.25 per cent on Thursday, which I still believe it will. The European economy is now weaker than America, Japan or Britain and the German financial system is showing more signs of distress than either the City of London or Wall Street. .............."

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Earthquake in the markets:not many dead

" Let’s start with the end - since it really does now look as if the worst of the summer crisis came to an end last week."

I really do believe this is the sentiment of the markets now and some sort of stability will be maintained (for a while). This is the mother of Bull traps! With everything looking on the face of it normal this is going to allow the US housing market to continue its severe decline and the inevitable impact to the US economy will be greater.

The thing to watch is the financials because they are due to report in September which could raise the panic again, but given wall Street no doubt the results will be better than expected! :rolleyes:

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Methinks that people are not taking the stock market drops very seriously because they believe they are sitting on a moutain of home equity and thus they think they are rich. Wait until it dawns that we are in the midst of a HPC as well as a SMC, then we will be seeing a strong reaction from the public

Best,

L

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Haha. I hope this fool put his money where his mouth is! Go on then mate, go all in on the stockmarket and make yourself a fortune! :lol:

Isn't it funny how simple it is to fool people? Manipulate the inflation rate, (hence the deflator) and suddenly all the nominal economic indicators look bullish, whoopee! <_<

..I guess someone's got to be left holding the bag when it all goes bang..

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I also believe the Bank of England should be much clearer in taking a further rate hike off its agenda.
Britain will be hit more directly than any other G7 economy by the smaller financial profits and banking bonuses that will be an inevitable consequence of the summer’s financial turmoil
- even if the long-term effects of this shakeout prove quite modest, as I believe. Moreover, the Bank of England has been less successful than other leading central banks in managing the short-term dislocations in London’s financial markets.
The Bank has allowed an almost unprecedented gap of almost a full percentage point to emerge between the officially established 5.75 per cent base rate and the rate of 6.6 per cent actually paid by banks in the City’s money market.
This means that large parts of the British economy are now paying a much higher interest rate than the one that the Bank’s Monetary Policy Committee voted for a month ago - and if this situation persists much longer,
the credibility of the MPC’s economic forecasts must inevitably be questioned.
Moreover, the summer’s financial turmoil has created a much wider gap between market and official interest rates in Britain than in the American and European markets. This gap, along with the settlement glitches that have caused several brief episodes of panic in the London money market this summer,
raise questions about the Bank’s technical competence in running money market operations,
which used to be second to none.
The Fed, by contrast, seems to have got almost everything right
. It has kept market interest rates quite close to its target Fed funds, thereby minimising the economic impact of the summer crisis. Mr Bernanke now has the opportunity to cut interest rates slightly, which is probably what he always wanted - but to do so without any sense of panic, in his own good time. How dull. But then, as Keynes remarked, the best thing one can say about a central banker is that he made his job seem as dull as dentistry. Central bankers have not yet quite achieved this ambition. But, despite lurid headlines, there is still very little chance of a central banker making it into Hollywood horror films
.

It appears there is a shift going on. Ben has got his act together whereas the muppets are still muppeteering. The fallout in house prices in the US has been severe and will likley get worse over the next 24 months. It is only just starting here and against the backdrop of unsound fiscal management that exists in the miracle economy we should see much steeper falls and for much longer than the US where the Fed "seems to have got almost everything right." To give the BoE the benefit of the doubt--they are not their own masters but the creation of the miracle man whose agenda is not as simple as the bank's remit to control inflation.

Edited by Realistbear

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There are two key pieces of data that stand out to me:

(1) Trade Volume (Yahoo)

The volume of this recovery is noticeable by it's absence, well below yearly averages. Given that last week was a public holiday in the UK and this week in the US it might well be understandable, but even so, it would seem that much of the market is perhaps unconvinced that the problems are over or at least not willing to find out. Certainly this recovery is not well supported, and could fall quickly if challenged.

This belief is supported by the second piece of data:

(2) Persistently Low Government Debt Yields (Yahoo)

Historically you would expect a rally in the stock market to be accompanied by an increase in risk-free government debt yields. It stands to reason, when you think shares are attractively priced- you buy. But with this persistently low yield on the 10 years notes (and most other government bonds) combined with the low trading volumes, I am definitely not convinced that this rally is genuine.

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AGREED.

I bought puts on the bank index (BKX) and the broker index (XBD) last friday

The time after labor day in the us, is often a time for re-evaluation:

http://www.greenenergyinvestors.com/index.php?showtopic=2368

Thanks for the link, some interesting analysis.

I have been out of shares since February due to my fear of the impact of the subprime issue. During this event I have learnt that the fear I had was very understated, however I have also learnt a lot about how complacent markets can be especially ones that are being so well managed. It has been miraculous how easily they have restored investor confidence and I may myself start contemplating reentering again if this is not a bull trap as I stated but in fact the start of the mother of all bubbles!

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Haha. I hope this fool put his money where his mouth is! Go on then mate, go all in on the stockmarket and make yourself a fortune! :lol:

Isn't it funny how simple it is to fool people? Manipulate the inflation rate, (hence the deflator) and suddenly all the nominal economic indicators look bullish, whoopee! <_<

..I guess someone's got to be left holding the bag when it all goes bang..

And isn't it equally funny the number of people on here who BELIEVE that just because they WANT something to happen (eg SM crash / HPC / Total global economic meltdown - yes you Cgnao!!) then it WILL happen??? You don't always get what you want!

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