8 really, really scary predictions: “Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to eight of the market's sharpest thinkers and what they had to say about the future is frightening.”
1) Nouriel Roubini
2) Bill Gross
3) Robert Shiller
4) Sheila Bair
5) Jim Rogers
6) John Train
7) Meredith Whitney
8) Wilbur Ross
Some of these guys (gals) know what they’re talking about and called it. You know who they are. One of them makes me sick to my stomach (Bill Gross. Nothing but a sad little sophist) and another is really clueless (Sheila Bair. Waaaay too stupid.).
Thursday, December 11, 2008
Eight Really, Really Scary Predictions
Russian Ruble Devaluation
In Could it Happen to the Russian Bear? I wrote:
“Capital flight is a terrible thing. It happened to Iceland in Iceland Melts, 77% Single Day Drop. In Iceland: What Happens After Imploding? the immediate consequences become apparent. They are not pretty.
Could it happen to the great Russian Bear too?”
Well, it has finally started to happen. Russia is now abandoning the insane defense of the Ruble and letting the currency devalue. Some institutions within Russia are calling for a one time, sudden 20% devaluation over the Christmas holidays when nobody’s watching…
Russians Buy Jewelry, Hoard Dollars as Ruble Plunges (Update1): “Moscow resident Tima Kulikov banked on the full faith and credit of the U.S. government, not the Kremlin, when he sold his biggest asset for cash.
The 31-year-old director of a social networking Web site initially agreed to sell his apartment for rubles, then cringed at the thought of the currency weakening as it sat in a lockbox pending settlement of the contract. It wasn’t until the buyer showed up with $250,000 stacked in old mobile-phone boxes and stuffed in his pockets that Kulikov closed the deal.
“The exchange rate we agreed on wasn’t great, but I did it because the money’s going to lie there for a month,” Kulikov said. “Put it this way, the ruble’s more likely to have problems than the dollar.”
Russians are shifting their cash into foreign currencies and buying things they don’t need as the economy stalls and the central bank weakens its defense of the ruble, signaling a larger devaluation may be on the way. The currency has fallen 16 percent against the dollar since August, when Russia’s invasion of neighboring Georgia helped spur investors to pull almost $200 billion out of the country, according to BNP Paribas SA.
The central bank today expanded the ruble’s trading band against a basket of dollars and euros, allowing it to drop 0.8 percent, said a spokesman who declined to be identified on bank policy.
With the specter of the 1998 debt default and devaluation in mind, Russians withdrew 355 billion rubles ($13 billion), or 6 percent of all savings, from their accounts in October, the most since the central bank started posting the data two years ago. Foreign-currency deposits rose 11 percent.”
Russia Devaluation Gathers Pace as Central Bank Loosens Control: “Russia devalued the ruble for the fifth time in a month, widening its trading band against the dollar and euro after reserves fell $161 billion as the central bank tried to defend the exchange rate.
Bank Rossii extended the amount the ruble can decline against a target exchange rate to 7.7 percent, from 6.7 percent yesterday and 3.7 percent a month ago. The band was widened on both sides by 30 kopeks today, said a spokesman who declined to be identified on bank policy. The currency weakened 0.7 percent against the basket used to manage its fluctuations.
“They don’t have a choice but to let it weaken and the faster they do it the better,” said Beat Siegenthaler, head of emerging markets strategy in London at TD Securities Ltd. “Regular weekly steps are now the most likely scenario.”
Russia has drained 27 percent of its reserves since the start of August to stymie a 16 percent decline in the ruble versus the dollar as tumbling oil prices, the war in Georgia and the worst global financial crisis since the Great Depression caused investors and locals to remove about $211 billion from the country, BNP Paribas SA data shows.
The world’s biggest energy producer is suffering as the price of Urals crude, its main export blend, has dropped 71 percent from a July record to $40.32 a barrel, below the $70 average required to balance the nation’s 2009 budget.
The ruble fell 4.7 percent against the central bank’s dollar-euro basket in the past month. Goldman Sachs Group Inc. predicts the sliding price of oil will force a ruble drop of as much as 25 percent over the next 12 months. Troika Dialog, Russia’s oldest investment bank, is calling for a one-time, 20 percent devaluation in late January, when there is less risk of bank runs during the New Year’s holidays. UniCredit SpA forecasts a 15 percent decline by end-2009.”
Wednesday, December 10, 2008
I Give You The Stupidity Trap... Errr... Liquidity Trap
“No one has ever paid above and beyond their interest income to be in a fund. But if we see another cut, we’ll likely see negative yields.” –Peter Crane
I give you the Stupidity Trap… errr… the Liquidity Trap…
Treasury Bills Trade at Negative Rates as Haven Demand Surges: “Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.
“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”
The benchmark 10-year note’s yield tumbled 11 basis points, or 0.11 percentage point, to 2.63 percent at 4:48 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 31/32, or $9.69 per $1,000 face amount, to 109 23/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began.
The two-year note’s yield fell 10 basis points to 0.84 percent. It dropped to a record low of 0.77 percent on Dec. 5.
If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56.”
Awesome. Just awesome. What could possibly go wrong in a zero rate world? Oh wait, all those under funded pension plans can’t earn the yields they need to fund the outrageous promises that were made to indignant, arrogant Baby Boomers during this Age of Entitlement.
*** Astute market watchers may recall that it was the low rate world created by Alan ‘The Maestro’ Greenspan that inspired pension plans to ‘reach for yield’ and migrate into securitized debt such as Mortgage Backed Securities (MBSs) and Collateralized Debt Obligations (CDOs) in the first place. All aboard the failroad? Good. Giddy up! ***
Money-Market Fund Yields May Fall to Less Than Zero, Crane Says: “Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.
Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.
“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields.”
The U.S. Treasury sold $27 billion of three-month bills on Dec. 8 at a discount rate of 0.005 percent, the lowest since it started auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills yesterday at zero percent for the first time since it began selling that debt in 2001. Money- market managers could impose a system of incremental debits or charge monthly account fees, Crane said.
Institutional money-market funds that invest only in Treasuries and related repurchase agreements had an average seven-day yield of 0.12 percent, after fees, as of Dec. 8, according to iMoneyNet, a research firm also based in Westborough. The average institutional Treasury money fund charges a management fee of 0.29 percent, Crane said.
Money-market funds are considered the safest and most liquid investment after bank deposits and Treasuries.
Their shares sell and are redeemed at $1 each, and the income generated by their investments is credited daily to a shareholder’s account. At the end of every month, the credits are paid either in cash or by giving the investor more shares.
Daily Charges
According to Crane, if a fund’s expenses exceed its income, accounts could accrue daily charges instead of credits. The fund would then settle the charges at the end of the month by taking shares away.
Such charges aren’t the same as breaking the buck, which happens when investment losses cause a money fund’s net asset value to fall below $1 a share. In September, the Reserve Primary Fund fell to 97 cents a share because of losses on debt issued by the bankrupt Lehman Brothers Holdings Inc. triggering a run on U.S. money-market funds. It was the second money fund ever to break the buck.
Instead of charges, money funds could introduce a monthly account fee that is taken out in shares, Crane said. Either way, investors would lose money, he said.
No New Cash
Of the 500 largest U.S. money-market funds, 41 have daily annualized yields at or less than 0.05 percent, including four funds with zero yield. The 41 funds are probably waiving all or part of their regular fees to keep from taking money out of principle, Crane said.
Falling yields on Treasuries led some Treasury-only funds, including those run by JPMorgan Chase & Co. in New York and Boston’s Evergreen Investments, to turn away new investors. Barring new customers protects returns for investors already in the funds because managers don’t have to buy as many new Treasuries with yields lower than current holdings.
The Federal Open Markets Committee is scheduled to meet Dec. 16 in Washington. The panel is expected to halve its target rate to 0.5 percent, according to the average estimate of 72 economists surveyed by Bloomberg.”
Related Posts:
Fed Admits Quantitative Easing
From INFLATION to Instant DEFLATION
Zero Rate World, The Age of Free Money: We’re Doomed
ZIRP, Zero, Nada, Free Money and a Big Mess
Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats
Japan Stuck, Quantitative Easing in the US
Closer to ZIRP, Liquidity Trap, Lost Decade
Japan v2.0: GLOBAL Liquidity Trap
Japan v2.0
The Lost Decade
Stimulus Package: Does it Even Work
DEFLATION is Here
The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary
9) Really Scary Fed Charts: OCT, Now Crazy Scary
10) Really Scary Fed Charts: NOV, US Bankrupt?
S&P 500: Bottom at 400! "Results Always Horrific"
“The S&P may plunge another 55 percent to a trough of 400 by 2014.” –Russell Napier
Yikes. I’m one Bearish ninja, but I thought we’d bottom out somewhere in the 600’s on the S&P 500. A bottom somewhere in the 400’s is some serious cliff diving.
Mind you, read the article carefully. One of the conditions for a low of 400, is that “deflation sets in”. While I’m in the Deflationist camp I do realize that Ben ‘Helicopter’ Bernanke will do (and already is doing) everything in his power to prevent deflation. I just don't think he's succeeding...
Q Ratio defined, including formula here.
Q Ratio Signals ‘Horrific’ Market Bottom, CLSA Says (Update1): “A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.
The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, indicates the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the S&P this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to a trough of 400 by 2014, the strategist said.
“Things have always looked absolutely terrible at the bottom,” said Napier, Institutional Investor’s top-ranked Asia strategist from 1997-1999. With deflation “the value of assets falls and the value of debt stays up, then equity gets crushed. The results are always horrific.”
Shares have fallen this year as the worst financial crisis since the Great Depression caused almost $1 trillion of losses at institutions around the globe and dragged the world’s largest economies into recession. The MSCI World Index has tumbled 44 percent in 2008, set for the biggest annual decline in its four- decade history.
Bear-Market Scholar
Napier, who teaches at Edinburgh Business School, based his S&P 500 forecast on the Q for U.S. equities as well as the 10- year cyclically adjusted price-to-earnings ratio, another measure of long-term value.
Before the trough in 2014, investors are likely to see a so-called bear market rally for the next two years as central bank actions delay the onset of deflation, he said.
The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, the author of “Anatomy of the Bear,” a study of how business cycles change course. The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years.
When the gauge is more than one, it indicates the market is overvaluing company assets, while a Q ratio of less than one signifies shares are undervalued because it is cheaper to buy companies than to build them from the ground up.
At the end of the four largest U.S. bear markets in 1921, 1932, 1949 and 1982, the Q ratio fell to 0.3 or lower, and history is likely to repeat, said Napier. From the 1982 trough, the S&P 500 grew more than 14-fold to the middle of 2000, when Napier says the last bull market ended.
Quantitative Easing
Measures such as Tobin’s Q ratio and a 10-year price-to- earnings ratio are “valuable tools,” said Andrew Milligan, the Edinburgh-based head of global strategy at Standard Life Investments, which oversees about $190 billion. Milligan said he is bullish on U.S. equities for now as central bank efforts to fight deflation will push the market higher.
“For those who are worried about losing much of their investment almost overnight, very clearly you’d want to wait for those signals to give a much stronger case,” he said. The bear market will have “a painful resolution, it’s just a question of how painful, over what period of time and for what parties.”
Federal Reserve Chairman Ben S. Bernanke’s indication that he will use “quantitative easing” to prevent deflation points to a stock market rally that may last for the next two years, Napier said. With quantitative easing, a tool pioneered by the Bank of Japan, central banks can stimulate inflation by printing money and flooding the market with cash in order to encourage consumers to spend.
The government’s efforts will eventually fail as ballooning government debt devalues the dollar, causes investors to flee U.S. assets and takes the S&P 500 to its eventual bottom in 2014, Napier said.
“Bear markets always end for exactly the same reason, and that is the market begins to price in deflation,” he said. “Equities will be incredibly cheap.”
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