Haunted by greed
We did some of the damnedest things with our money at the peak of the market. Everybody was getting rich, so what was not to like? But now fear is back. And it's mad as hell.
The Daily Reckoning
Usually, markets stumble along, day after day. But occasionally, their hearts start racing and palms begin to sweat. They stop sleeping at night and begin pacing the room. When this happens, one of two emotions has gotten the better of them – greed or fear.
Greed made fools of investors for many years. At its height – probably in 2006-07 – people were ready to do the damnedest things with their money. Mums and Dads bought an extra house – sure it would go up. The Masters of the Universe then sold the debt to each other.
Rich investors gave their money to hedge fund managers – and paid them hundreds of millions for gambling it away. Others paid fortunes to executives to run companies they didn't really understand into brick walls they didn't see coming. But, for a number of years, everybody was getting rich – so what was not to like?
Now, fear is back. And it's mad as hell.
This week we saw panic set in. On Monday, the Dow fell more than 350 points. After such a big drop, you'd expect a big bounce. But not Tuesday. Stocks just kept falling, with the Dow down another 508 points.
Oil rose to $US90. The dollar held steady at $US1.36 per euro. And gold rose $US22. Coin dealers say they can't keep up with the demand for bullion coins. And no wonder – smart investors are looking for shelter.
It's full-scale war, in other words, with the forces of inflation in full retreat – even rout.
Investors await every bit of news like dispatches from the front lines. Will the Dow hold at 8,000? When will the Fed cut rates? Can our soldiers keep the huns out of Paris?
The news comes fast – too fast to take it all in. Today, Russia has lent 4 billion euros to Iceland - 'we'll work out the terms later,' said the nice Russkies. The Russians are also pumping $US37 billion into its own banks. England says it will bailout its banks - with £50 billion pounds of equity and another £200 billion in loans.
The Reserve Bank of Australia has already cut their key rate by 1 per cent. This morning, the Fed, the ECB, the Bank of England and Swiss, Canadian and Swedish central banks made emergency rate cuts. While coordinated rate cuts do happen on occasion – the Fed and the ECB made cuts following 9/11 – joint statements announcing a cut at multiple banks is a rarity. But in this market, I suppose anything is possible.
At first, it looked like it might turn the tide in the Asian theatre. Reports last night showed Asian stock markets holding the line. But this morning comes news that Japanese stocks are falling even harder – down 9 per cent today alone.
In the United States, the Fed says it will buy commercial paper; that is, it will buy up loans made to US companies ... or even loan the money directly to troubled firms. And not just financial firms. General Motors says it is turning off the lights at all its European production plants.
The poor investor doesn't know what to make of it. It seems like only yesterday he was told that everything was all right. Alan Greenspan said so. So did Hank Paulson. And Ben Bernanke. And George W. Bush. We have the strongest economy in the world. We're unbeatable. Our economy is so dynamic! Our financial sector is so inventive! We're just so damned smart!
The Japanese can live with a 20-year slump if they want. The Europeans never seem to get their economy revved up. But Americans certainly know how make an economy hum – just give the consumer more credit!
But when the cycle turns from greed to fear ... all that credit is like excess fuel in a crash landing. It tends to explode.
When a bank takes a loss – say, from its holdings of sub-prime debt – the fractional reserve credit system sends out sparks. A loss of $US100 million causes as much as $US1.5 billion in credit to go up in flames. As the credit disappears, so does the leverage that kept up asset prices.
So far this year, the world has lost $US20 trillion in market capitalisation. By September, US property was down a total of about $US6 trillion over the last two years. That's why the feds are losing this fight – they've got much less fire power. They've just passed a bill to put $US700 billion back into the system – buying up Wall Street's mistakes.
The Fed is loaning another $US900 billion, according to yesterday's report. Put all the bailout spending together and you get a figure that is still not even 10 per cent of what Mr Bear Market has taken away.
Yes, it's all working against us now ... the credit ... fractional banking ... and our own emotions.
Bill Bonner is the founder and publisher of The Daily Reckoning
Usually, markets stumble along, day after day. But occasionally, their hearts start racing and palms begin to sweat. They stop sleeping at night and begin pacing the room. When this happens, one of two emotions has gotten the better of them – greed or fear.
Greed made fools of investors for many years. At its height – probably in 2006-07 – people were ready to do the damnedest things with their money. Mums and Dads bought an extra house – sure it would go up. The Masters of the Universe then sold the debt to each other.
Rich investors gave their money to hedge fund managers – and paid them hundreds of millions for gambling it away. Others paid fortunes to executives to run companies they didn't really understand into brick walls they didn't see coming. But, for a number of years, everybody was getting rich – so what was not to like?
Now, fear is back. And it's mad as hell.
This week we saw panic set in. On Monday, the Dow fell more than 350 points. After such a big drop, you'd expect a big bounce. But not Tuesday. Stocks just kept falling, with the Dow down another 508 points.
Oil rose to $US90. The dollar held steady at $US1.36 per euro. And gold rose $US22. Coin dealers say they can't keep up with the demand for bullion coins. And no wonder – smart investors are looking for shelter.
It's full-scale war, in other words, with the forces of inflation in full retreat – even rout.
Investors await every bit of news like dispatches from the front lines. Will the Dow hold at 8,000? When will the Fed cut rates? Can our soldiers keep the huns out of Paris?
The news comes fast – too fast to take it all in. Today, Russia has lent 4 billion euros to Iceland - 'we'll work out the terms later,' said the nice Russkies. The Russians are also pumping $US37 billion into its own banks. England says it will bailout its banks - with £50 billion pounds of equity and another £200 billion in loans.
The Reserve Bank of Australia has already cut their key rate by 1 per cent. This morning, the Fed, the ECB, the Bank of England and Swiss, Canadian and Swedish central banks made emergency rate cuts. While coordinated rate cuts do happen on occasion – the Fed and the ECB made cuts following 9/11 – joint statements announcing a cut at multiple banks is a rarity. But in this market, I suppose anything is possible.
At first, it looked like it might turn the tide in the Asian theatre. Reports last night showed Asian stock markets holding the line. But this morning comes news that Japanese stocks are falling even harder – down 9 per cent today alone.
In the United States, the Fed says it will buy commercial paper; that is, it will buy up loans made to US companies ... or even loan the money directly to troubled firms. And not just financial firms. General Motors says it is turning off the lights at all its European production plants.
The poor investor doesn't know what to make of it. It seems like only yesterday he was told that everything was all right. Alan Greenspan said so. So did Hank Paulson. And Ben Bernanke. And George W. Bush. We have the strongest economy in the world. We're unbeatable. Our economy is so dynamic! Our financial sector is so inventive! We're just so damned smart!
The Japanese can live with a 20-year slump if they want. The Europeans never seem to get their economy revved up. But Americans certainly know how make an economy hum – just give the consumer more credit!
But when the cycle turns from greed to fear ... all that credit is like excess fuel in a crash landing. It tends to explode.
When a bank takes a loss – say, from its holdings of sub-prime debt – the fractional reserve credit system sends out sparks. A loss of $US100 million causes as much as $US1.5 billion in credit to go up in flames. As the credit disappears, so does the leverage that kept up asset prices.
So far this year, the world has lost $US20 trillion in market capitalisation. By September, US property was down a total of about $US6 trillion over the last two years. That's why the feds are losing this fight – they've got much less fire power. They've just passed a bill to put $US700 billion back into the system – buying up Wall Street's mistakes.
The Fed is loaning another $US900 billion, according to yesterday's report. Put all the bailout spending together and you get a figure that is still not even 10 per cent of what Mr Bear Market has taken away.
Yes, it's all working against us now ... the credit ... fractional banking ... and our own emotions.
Bill Bonner is the founder and publisher of The Daily Reckoning
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