Thursday, October 02, 2008
I've never done this before ... here goes (all times are EST). For conference details see this item at The Big Picture.
5:05 - Already pretty far behind. Nouriel says it's not a choice of a V-type or U-type recession. It's a question of whether it will be a U-type or a L-type recession (think Japan). Nouriel thinks the Fed will cut rates next (I could have told you that).
5:12 - We're about eight minutes in and Barry's just drinking coffee so far.
5:15 - He just scratched his head and now he's shuffling his papers.
5:16 - Run on the banking system, generalized panic right now - Bear, Lehman, AIG, Merrill, yada, yada, yada - everyone's scared s#%tless and no one knows who to trust. The demise of the shadow banking system, everybody is at risk, not much good has happened lately.
5:18 - Nouriel paused and took a breath and Barry thought he was going to get to talk but no - commercial paper coming to maturity, shadow banking system, commercial banking system, systemic meltdwon.
5:20 - Just added the "Read more..." thingy below - this might get pretty long.
5:21 - Nouriel still talking, Barry still shuffling his papers.
5:22 - Libor spreads, collapsed payments system, bailout plan was flawed, have to do something more radical - need a blanket guarantee on all insurance policies.
5:23 - Is there more than the title slide?
5:24 - More coffee for Barry, fixes his tie, scratches head.
5:25 - Nouriel still - real economy in free-fall, retail sales falling in June, July, August, consumption at 70 percent of GDP means recession, everything is falling. The only bright lately was net exports, but this won't last due to recent dollar strength and slowing economies abroad.
5:27 - Nouriel still - have to recapitalize the banking system, right now the housing sector in insvolvent, have to do what was done for the Great Depression by buying the assets. At this point we have to do something more radical.
5:28 - Barry speaks.
5:29 - Barry thinks it will be a "fair" recession, not another "great" depression and his book - Bailout Nation - is going to be late because he has six more chapters to write.
5:31 - Since Nouriel covered the credit crisis (thoroughly) Barry's going to talk about equities. Is this going to worse than 1987? It already is.
5:33 - Barry's talking about secular market cycles (me: yes, we're in the middle of a long-term bear market for stocks that most people don't even know about. I just got a note from Fidelity pleading with me to not sell my stocks).
5:34 - Here we are again, down 25 percent from the last peak with maybe another 20 percent to go. Correction - rally - correction.
5:35 - Another 15 to 20 percent down from here is realistic - prices are coming down but P/Es are contracting even faster. Could go to 975 on the S&P500.
5:36 - Oil is going down to $68-$70 a barrel. People say, If oil goes down that's great for the consumer, but it's the other way around - oil is going down because the economy is bad.
5:38 - Sentiment - a 60-40 chance of the House voting the bailout plan down tomorrow (or maybe it was the other way around).
5:40 - Stock investors haven't been punished enough to lose the muscle memory of buying the dips. We are just starting to see the impact of credit on the real economy - Toyota and Honda are down. Bailouts always have unintended consequences - LTCM was an undercapitalized, highly leveraged hedge fund that traded thinly traded paper - no surprise that we are where we are. Greenspan had a lot to do with this - what are the unintended consequence of this one?
5:43 - Zack Gast (sp?) of Risk Metrics begins. Now he's onscreen. All the names popped up on WebEx - must be about 700-800 people on.
5:45 - Credit cards, auto loans showing significant deterioration. Struggling borrowers - full value of these loans will be lost. Nothing to recover on credit cards, repossessed autos worth a fraction of what is owed.
5:47 - (me: fingers getting tired.)
5:48 - Commercial real estate price declines will produce even more losses. Cost-basis assets and fair-value assets (what does he think we're accountants?)
5:50 - The vast majority of mark-to-market items have not been run through earnings reports (not reflected in earnings). Capital adequacy "hit" doesn't happen until it hits earnings. Many institutions would be insolvent if loans were held as fair-value instead of cost-basis. This doesn't matter until a liquidity event happens.
5:53 - (I'm used to having a Tivo where I can pause and go back 8 seconds...)
5:54 - Bailout specifics - FDIC limit increase will help, but not by much. Assets were expected to be purchases above fair-value which makes this a bailout, regardless of what they want to call it.
5:56 - Money center banks will benefit most from the bailout - assets have already been marked down. Regional banks will be hurt most because of less write-downs.
5:58 - (I wonder how long my cordless phone battery lasts.)
5:59 - One hour in - questions?
6:00 - Question #1 - Why have Paulson and Bernanke accepted this plan when most economists have not?
6:01 - Nouriel - Paulson wanted to bail out his friends on Wall Street. Congress was busy - a rush job. Ritholtz - thinks vote may fail tomorrow.
6:03 - Question #2 - What happens if this doesn't work?
6:04 - Ritholtz - one or both of candidates will convene a panel - break from top-down approach and come up with a better approach than taking toxic assets. Have to recapitalize banks and get confidence back.
6:05 - Question #3 - Which world economy will do best/worst in the period ahead?
6:06 - Nouriel - bursting of housing bubbles in Ireland, UK, Spain - recession in Europe, exposure by banks - Estonia, Latvia, Turkey, Bulgaria, Romania. Strong euro was weakening economy, hurting exports. American banks are highly leveraged, but European banks are even more leveraged. European banks that are too big to fail are also too big to be saved. Will get as ugly or uglier in Europe. In China, a hard landing is growth falling to +6 percent.
6:08 - Ritholtz - Good news is China and India stocks are already down 50-60 percent. Asset management business is running at 55 percent cash.
6:10 - Question #4 - What about gold?
6:11 - Ritholtz - stunned that gold is under $1,000. Massively inflationary policies coming up. Difference between gold coins and paper gold on futures markets. That gap will get bigger. A good place for 5 or 10 percent of a portfolio.
6:12 - (me: Hi K haha - someone was reading my blog and listening to the Webcast??)
6:13 - (There may have been another question about short selling - I was checking for comments on this post... fingers getting tired... wasn't this supposed to be just one hour?)
6:14 - (They're talking about insurance - I just left a comment for K haha.)
6:15 - Question #6 - What about the dollar?
6:16 - Nouriel - people have realized that Europe and Japan are going into a recession - the rally in the dollar has been overdone - narrow range in the next 12 months - euro in $1.50-$1.60 range - big problems for U.S. finances in the next two years will hurt dollar - until recently, China was buying lots of dollars to help exports - now down to zero - we are expecting China to buy assets now to help bailout the system.
6:19 - Question #7 - Any safe havens in stocks?
6:20 - It depends on your timeline. Bearish on homebuilders for a long time buy bought a little after they went down 75-80 percent as a trade. Also - defense and infrastructure and small-to-medium biotech - very long term.
6:21 - Question #8 - Upcoming elections - economic advisors?
6:23 - Ritholtz - Obama good, McCain bad - Obama's got Goolsby (sp?), Volcker, and Buffet, and McCain has Phil Gramm.
6:25 - Roubini - U.S. looks like the U.S.S.R right now - whoever is next must do sensible things for financial markets - boom and bust becoming more extreme will only result in a bigger disaster down the line.