Markets Need An Intervention / Great Quote
A: Okay, so the ISM # was awful, the economy is clearly contracting and stocks are hung over from all the drugs they did from their dealer, the federal reserve. Guess what. Stocks now want an inter-meeting rate cut and rumors are starting to spread. When will it end? For god's sake, someone give the markets an intervention!
How do I describe this other then "pathetically predictable". Stocks fall, market rumors swirl and traders beg for more rate cuts! Just one more hit Benny, pleassse, and I swear I'll get out of my positions!
I seriously hope the fed exercises some monetary discipline! After the last 50 basis point cut, and subsequent market drug induced rally, the talk was that the fed did what they needed to do! One week later, reality sets in that the economy is slowing and now the markets ask for more?
The economic reports should be expected to come in weak, I discussed this only 12 days ago in my post, "First Stock Shock; Second Economic Data":
We must be prepared for how this cycle will likely play out. Now that stocks adjusted, with the help of a very aggressive 3/4 point inter-meeting rate cut by the fed, the economic reports (jobs, gdp, inflation measures) are going to be coming out and the news is widely expected to be sobering!...there is a lot coming that we will need to digest and trust me on this one, if these reports do come in on the disappointing side, the chatter in the media will change from whether we will go into a recession to how severe will the recession be!
Well it came today with a very weak ISM #. Here is what I was talking about in that post, as the recession talk now gets serious. According to today's CNN Money article titled, "Recession is here - economists":
A growing number of top economists believe that the U.S. economy has now toppled into recession. Alarm bells were set off Tuesday by a grim report on service businesses, which make up the majority of the U.S. economy. The Institute of Supply Management said that activity in the service sector declined for the first time in nearly five years. This report also indicated that employers are cutting staff.Anyone with a clear head and not phased by the powerful curtain of denial, can see that there are red flags waving. But to start with the cries for more rate cuts, and talk of an inter-meeting cut as stocks fall, is so damn played! Was I dreaming, or did we not just get 125 basis points of fed easing in the past 4 weeks? Now they want more and fast?
When will they learn that fed easing is only a week long fix for stocks, is the strongest ammo the fed has to stimulate growth, can only go 0% (hey Japan, how YOU doing?), and STILL won't fix the problems we face! Just bring on the damn recession, stop your whining, take the losses, consolidate & regulate, clean the books, take the medicine, and lets move past all this. Thats the only way.
There are major downsides to fed easing:
a) pipeline commodity inflation
b) moral hazard; bailing out risky bets encourages future behavior
c) re-inflating an asset bubble that was inflated by fed easing in the first place; delaying and worsening the inevitable correction
Right now, the hope is that the slowdown will fix the inflation problem by itself and put a floor on how severe any recession may be. But to re-inflate an asset bubble with more hot air, without allowing it to correct itself, will likely push off and worsen the eventual pop! The markets need to realize that the short term jolt they really are wishing for via fed easing, is not the answer to our problems! To see this simply look at today after such aggressive easing in past 4 weeks! Amazing. We have become a society that fears slowdowns, instead of embracing them for what they truly are: short term disruptions in economic growth usually brought on by unsustainable asset bubbles. As the recession occurs, the risky bettors are punished, shareholders and corporations feel pain, there is consolidation in the industry, the books are cleaned out, pain is embedded deep in the minds of investors, and change occurs to protect the industry from future re-occurrences.
To stop this process is to not allow the markets to fix themselves! Let it happen!
I would like to end this post with what I thought was a great quote by a commenter on Barry Ritholtz's blog The Big Picture, which depicts a great image of what is holding up our economy:
"There is no business cycle. Don't you know that the price of housing and stocks only go up? Recession bad. Perception of strong economy good. Savers bad. Spenders good."
Obviously sarcastic, but for an economy with an obvious debt/spending problem, it seems we like to punish those who save (low savings rate & inflation) and reward those who were on the wrong side of extremely risky bets. Now I know its not that simple and this is a very general comment, but seriously, we need to let the recession cleanse these problems; NOT a fiscally irresponsible fed.
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Comments (10)
Noah,
I am 100% with you on this. So-called free market capitalism at its worst. Privatize the gains and socialize the losses. Fed expected to cut after each and every big drop (but not raise rates when the corresponding pop occurs). So far the Fed's modus operandi has been to answer "Yes" when Wall Street Whiners have come a callin'. But if they answer the latest call they are really going to start running out of bullets quickly.
Colgin
Posted by Colgin | February 5, 2008 4:27 PM
technically, i think it would be a monetarily irresponsible fed. the government has fiscal responsibility. the fed and the government are technically separate entities, although it's hard to tell that the fed is separated from any entity other than it's brain right now. More rate cuts? What a travesty. If i wanted to live in japan in the 90s, i would have moved there.
Big ben needs to grow a pair and say no. The faster the market (every market) bottoms, the sooner it will start to recover. Right now, we're on a plane running out of fuel and the landing gear already fell off. You can either try to land it (stick at 3%) or keep flying (more cuts) until it drops out of the sky. No landing is going to be comfortable but if you try to land now, you might be able to stay in control on the way down and give yourself a chance.
Posted by mike | February 5, 2008 4:36 PM
the fed has to cut or wall street will cry itself to sleep.
Posted by kyleG | February 5, 2008 4:41 PM
oops, Mike I would have to agree with you. Monetary discipline is what it should be! Like the plan analagy!
Sometime this month we will know what happens with the bond insurers! It should move markets. If they get downgraded and bailout plan is limited, expect sell offs and way more write downs for financials. If this does happen, no doubt the fed will ease hard again!
I'm long gold, so easing will make me money. But the fed has a history of overshooting and at some point down the road, these rate cuts will come back fast once macro stabilizes and secondary credit markets function normally again.
Posted by Noah | February 5, 2008 4:55 PM
I agree with you, Noah. The Fed missed the boat with respect to easing, which should have begun back in August in a slow and thoughtful manner. It would not have ameliorated credit issues, but it would have restore confidence to the market and allowed the Fed to maintain some credibility.
The fact is, we need to ride this one out. I read the NY Mag article comparing today to '89, and I think it is ridiculous. I lived in NY in 89...Crime was out of control, there was no Tribeca, the West Village was shady, the Meatpacking District, as well as 14th Street, was dangerous, people had no interest in raising kids here, the parks were dirty and dangerous, and the mayor was Koch...an idiot.
I think that negative media may sour buyer sentiment enough to bring the real estate market to a halt, but I don't believe prices will go down in quality neighborhoods, unless you have a distressed seller, and if you do, vultures will be fighting over themselves for the apartment.
Posted by mh23 | February 5, 2008 8:25 PM
mh23 - good to see you here. I hate to say it, but there is not much the fed can do at this point to fix the problems that may ultimately affect Manhattan re buyer confidence. Its a recession, job losses, negative wealth effect, tight underwriting/credit, and drop in confidence that are the side effects of national housing deflation after years of unsustainable gains. However, the fed can let things take its course and prevent a future probem with re-inflation.
On a separate note, I totally 100% agree that NYC is far more desirable today than it was 20 years ago and the trend to live in this city and close to where you work is a VERY powerful one that will last well into any correction. With that said, we will most likely have a short but sweet correction. I spoke about the vultures as well here on the blog in mid 2007. Just an opinion.
Again, good to see you here.
Posted by Noah | February 5, 2008 9:21 PM
Thank you.
I know a couple that is getting ready to retire who have been looking for a place in Manhattan for close to a year. They like Cenral Park West, near Lincoln Center, Cenrtal Park South, and they keep asking me when I think prices will soften.
I told them that, if they are looking for an opportunity to get a great place and to maximize their investment and to have some real chance of appreciation in five years or so, to look at FiDi or Nolita or Places on the Upper East Side closer to First Avenue. Since they take taxis everywhere, I told them that it doesn't matter; yet they say they don't like those areas.
I think that this anecdote is a reflection of Manhattan buyers, and may become a more pronounced trend going forward, in the sense that softness in established areas is not likely, and if there is any, there will be fierce competition for the unit.
On the other hand, I like the opportunities that may open up in other parts of Manhattan, and I think for buyers that know they are going to be here for a while, the next 6 months could present some opportunities.
It's interesting, Wall Street is definitely a driving force in Manhattan Real Estate, but unless the buyer was formerly renting, they always need to sell as well and they use their bonus as the revenue to trade up. While weakness on Wall Street may diminish demand, I don't believe it will add to inventory, and if it does, and the seller is distressed, it could lead to another opportunity for vultures.
In this market, unlike '89, there is a lot of cash in the wings looking to take advantage of weakness, that was not the case in '89, when Manhattan itself was in the midst of serious decline, i.e. Detroit.
Posted by mh23 | February 6, 2008 8:03 AM
mh23,
Interested in why you think Nolita will really appreciate in 5 years. I rent there now and would pretty much kill to buy in the neighborhood, but there are rarely ANY properties on the market. The one (recent and affordably listed) 2BR there went for way over asking - I'd bid full asking. I think it's a small and somewhat overlooked, but still established neighborhood.
Posted by bjw2103 | February 6, 2008 10:36 AM
mh23: "On the other hand, I like the opportunities that may open up in other parts of Manhattan, and I think for buyers that know they are going to be here for a while, the next 6 months could present some opportunities."
I believe we need to go through the next WS bonus cycle and wait to see the effects of the slowing housing gains in Europe to truly determine the buying opportunities.
If we can assume that most of NY's home owners are not long-term holders, meaning they have the traditional window of 5yrs. And we accept that condo owners with 421a will sell before tax abatement expires in 10yrs or 15yrs - then we can guess that inventory will increase exponentially over the next 5-15 years.
Also, considering that it is confirmed we are in recession, and we are on a downward cycle which is only being worsened by the actions of the fed (which btw are solely political in an election year imho), then this recession may last a long time.
Short-term thinking may not prove fruitful. But, you never know, and I am no expert, maybe the recession will only last several weeks and not years, and everything will be alright.
Posted by Jose | February 6, 2008 11:00 AM
bjw- You may be right about Nolita. I just think that Soho is so crowded now and unbearable on the weekends that people will want to live near there, but not there. Nolita may have fully arrived, so to speak, but I like that neighborhood as well as the area around Spring and Hudson, and parts of Tribeca near Hubert and Laight. Those are areas that are within walking distance of Soho and the West Village, but they are very quiet on the weekends.
Jose- You may be right about the recession, although I think it will be more like what we had in 2001 as opposed to the early 90's. I agree with you that short term thinking is poor, but I think that there may be some scared sellers out there who want to jump out of the market becasue they fear it will get much worse.
I disagree about your projections going forward, however. There is an enormous amount of investment going on throughout Manhattan, and I just don't think we will return to the poor quality of life that we had back in the early 90's. As for inventory, right now it is very tight...I can't predict what inventory will be like in 5 years, and I don't think you can either.
Posted by mh23 | February 6, 2008 11:22 AM