The beat goes on – one sector gets pumped up...and then it gets whacked.
Jim Cramer says he’s never seen anything like it...
Not the crash of Drexel Burnham Lambert in the ’80s...not the Asian currency crisis...not the LongTerm Capital Management blowup...not the dotcom bust...
Now, he says, the mood of gloom on Wall Street just gets worse and worse...with no sign of let up. Thousands of layoffs. Stocks in steady decline.
That makes us a little sad, here at The Daily Reckoning headquarters. We don’t like to kick an industry when it is down...and we like kicking Wall Street.
But you can see why the former Masters of the Universe are so blue – their bonuses are falling. So is the value of their stock options.
“Banks struggle to get capital,” begins an article in the Wall Street Journal .
When JP Morgan bought Bear Stearns, for example, everyone thought they had stolen the company. It was clearly the bottom – or so they believed. And they had a $30 billion guarantee from the feds. What could go wrong?
But the whole financial sector has continued to sink...and now J.P. Morgan’s deal is looking less sure.
(Even the best of companies – such as Warren Buffett’s Berkshire Hathaway – are getting beaten down.
Yesterday, the Dow held steady. But last week was a bad one...with stocks losing 3.8% and the Dow falling below 12,000. Oil gained another $1.38, bringing the going rate for a barrel of crude to $136.
The dollar gained against the euro, and gold fell $16.
What is amazing about Cramer’s point of view is that he seems to be surprised. What did he think? That the bubble in the financial industry could expand forever? Or that the Fed could pump it up again, even after it sprung a major leak?
Sorry, Jim, it just doesn’t work that way.
The financial industry used to represent about 10% of the entire stock market’s earnings. Then, as credit grew, the financial sector invented new ways to separate people from their money. During the period known as the Great Moderation, the percentage of earnings coming from Wall Street rose to 40% of the total. Now it’s coming back down. It’s over.
We don’t have to tell you, but the ‘Great Moderation’ was a big fraud. There was nothing moderate about it. Instead, it was a period of extravagance...excess...over
But every bubble pops. And the force of a correction is equal and opposite to the deception that preceded it. Naturally, the correction in the financial industry would have to be substantial. Nor is the Fed able to stop it. When a bubble bursts, the Feds can pump as hard as they want; the new cash and credit will go into a new bubble, not the old one.
You haven’t seen another bubble in the dotcom industry, have you? That one blew up eight years ago. It hasn’t come back – despite the best efforts of central banks all over the world. And don’t expect another bubble in housing either. We’ve seen the highest prices for housing – in real terms – that we will probably see in our lifetimes.
What’s up next? See below...
*** The next bubbles are probably coming in oil...commodities, and – many experts believe – in emerging markets.
We see the hot air flowing into the oil market, for example. Barron’s reports that $260 billion has gone into indexed commodity strategies – up from only $13 billion at the end of 2003.
And looking at a chart of the NASDAQ, 1990-2000, we find it looks familiar. Yes, dear reader, the oil market 1998-2008 looks a lot like the dotcom market (traded on the NASDAQ) eight years before.
Of course, many are the reasons why you might think oil will get more and more expensive. But so were the reasons that you might have expected the dotcoms to keep going up. And prices of
‘Oil is different,’ we can hear you saying. The economy can’t function without it. More and more people are buying it. The Nigerians are blowing up pipelines. Production has peaked out. T. Boone Pickens says it’s going up. The Chinese are hoarding for the Olympics, and so forth.
Maybe so. But human beings err, said Rosmini. The more reasons they have to believe something...the more they tend to believe it to excess. And the sadder they are when their beliefs are proven incorrect.
As to emerging markets, Alan Abelson, in Barron’s, believes they are in bubble-mode too. “Decoupling” is hooey, he believes. When the world economy heads down, they’ll go down with it.
But many emerging markets are already down – big time.
Today’s paper tells us that
Still, colleague Manraaj Singh, for example, thinks
“...Which begs a simple question: are we stark raving bonkers to still be in love with
“At the end of May, inflation in the country hit 25 per cent – the highest level since 1993.
“And then there is the trade deficit. It is expected to be above $15 billion for the first five months of this year. That’s a considerable increase on the 2007 deficit of $12 billion.”
But the Bank of Vietnam is serious about fighting inflation, he says. It raised rates from 12% to 14% last week – still more than 10% below the level of CPI.
“That was the second interest rate rise in just three weeks and makes the highest in
“Better yet, the government has indicated that it may raise rates even further in order to bring inflation down to single-digit figures by the end of next year.
“Even here in
“Just look at the other great bugbear that has spooked international investors –
“There’s a world of difference between a country that has a trade deficit because it is importing equipment and material to build factories, power plants and roads, like Vietnam is doing; and one that has a deficit because it is addicted to imported Sony Playstations, iPods and cheap sneakers.
“Again, we’ve seen global markets reeling under the impact of surging energy prices. But what very few people realise is that
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