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I'm surprised this has not been discussed here yet.
Currently, north american exchanges are down about 10% or from their highs, the Canadian dollars has fallen around 4 cents, there are billions of dollars in right-offs. Will the market soon reach the bottom of the trough? Will it crash another 20%? Will this be a minor recession?
I'm not panicking. At least, not yet.
The immediate problem is the 'subprime' (i.e., high-risk) mortgage meltdown in the US. Lots of financial institutions piled into them during the housing boom, but no-one knows exactly who is most exposed to this risk. As a result, no-one is willing to lend anything to anyone, until people figure out just who really is in trouble. And investors are bailing out of companies that might be vulnerable.
The central banks - which have learned their lesson from 1929 - are intervening in the market by acting as the 'lender of last resort'. It should be noted that this is not free money for investors, they are *loans*, at relatively high rates of interest. They're also implementing measures that will make it easier to borrow in the market (such as modifying collateral rules). This part of the adjustment should take a couple of weeks.
The longer-term risk is of a US recession, associated with a slowdown in the housing sector. Then again, people have been predicting a recession for several years now, and it hasn't happened yet. The risk is real enough, but it's not yet a certainty.
Interesting that someone quoted on CBC today said that the reason Canadian stocks were down, despite good fundamentals (whatever that consists of) was that US hedge funds needed cash to cover their losses, and thus sold their foreign holdings. If so, and if this [i]does[/i] turn out to be a hiccup, then those stocks could turn out to be real bargains.
Of course, if it [i]is[/i] the start of something bigger, all bets are off.
OTOH, no-one has the loose change (aka 'liquidity') to buy up all those cheap stocks...
Sounds a bit serious. The Bank of Canada is holding off on that rate hike they've been promising everyone for months.
Originally posted by Stephen Gordon:[b]OTOH, no-one has the loose change (aka 'liquidity') to buy up all those cheap stocks...[/b]
I guess that's because potential lenders are afraid to lend money to buy them, right?
I'm not sure what to make of this, but I don't have a good feeling about it. At any rate, I'm glad my job is fairly recession resistant.
[ 16 August 2007: Message edited by: Agent 204 ]
The White House declined to comment on the sharp moves in financial markets, and stuck to its view that the U.S. economy was fundamentally sound and should continue to grow.
Bad, but necessary.
The thing that confuses me about this whole stock market crash\scare is that the biz mags have been sounding serious warnings about the impact of sub-prime and the attendant collapse of the housing market boom for months now. So when it happens it's almost as if no one has been paying attention. Whether this is on purpose is another matter.
The cheap stock buyback issue aside, what's going to happen to all these now cheap and unsellable houses? It was one of the biggest building sprees on record, I believe. And if hte sub-prime market was geared towards people who didn't have the money to buy homes, then perhaps the US at a fed or state level could take on what has become the sub-prime burden and back the loans of people in need of homes. It'd be a very public buyout and bailout of a speculative (to use a generous term) market but it could be used for good....
Yeah it could... probably not by the Bush administration though.
Originally posted by Farmpunk:[b]The cheap stock buyback issue aside, what's going to happen to all these now cheap and unsellable houses?[/b]
Not much. The number of houses involved with subprime mortgages is very small.
Actually, I thought something was up when I saw reports on the over heated housing market in Calgary.
Being close to fifty, I remember the last time that happened. So none of this surprises me any.
The dollar being down so quickly and dramatically will help the stressed manufacturing sector, as long as it continues to slide.
In the short term, much pain for investors who invested in derivatives or ABCPs. Asset backed commercial paper,90 day loans backed by car loans etc that offer high return short term exposure.
In the long term, the bankers who started and perpetuated this scam will benefit from the fees they "earn" straightening this mess out and YOU,my friends, will do ALL the suffering.
Either through lower pension fund returns,mutual fund exposure to derivative losses,ownership of stocks with derivatives exposure,lowered access to affordable credit,higher bank fees or any combination of the above, the little consumer WILL pay the whole tab for this fiasco while the sneaky bastards who bundled BBB rated derivatives into "investment grade" money market instruments look the other way.
Ontario Teacher's, Barrick, Dallas Police Pension, CALPERS ( California state employees pensions) the fiasco extends its tentacles everywhere. The only winners,as usual, will be the lawyers and the banks as the pension and mutual fund big boys start suing.
Oh, yeah....don't forget, all you little folks will also be paying for the lawyers.
[ 24 August 2007: Message edited by: jester ]
Steven: The only option for those who are not market savvy,ie players is to sit tight. Market fundamentals will return and stocks driven below value by downward spiralling margin calls and institutional selling to cover panicky redemptions will soon come back up.
Some "cheap" stocks are a bargain but one has to have the informed opinion to determine which are bargains and which are turkeys being dumped as the recent gains are pared.
Even worse than indiscriminate bargain hunting is succumbing to market hysteria and panic selling good stocks. Sit tight and wait it out.
If they get cheap enough, then maybe they'll be sellable? (Maybe this remark/question is proof that I'm not an economist.)
No, that sounds right. The 'real' (as opposed to financial) consequence of the whole thing is that the housing industry - which has been an important source of growth in the US - will take a hit as the stock of houses gets absorbed. If existing houses can be had at distress prices, fewer people are going to pay to have a new one built.
While the numbers appear daunting, the foreclosure rate in the US does not affect the great majority of homeowners who are not selling.
It is the risk-takers who are exposed to the consequences of leverage,either in real estate or financial markets who will suffer most.
The sub-prime market is only 11% of the US mortgage market. The majority of home-owners and investors have little direct exposure to either sub-prime or derivatives and most of the "panic" is media driven.
This correction is strenghtening the reputation of the Candollar. In the near future,the Cando and Swissfranc will become refuges from the sinking greenback and the dysfunctional Euro.