Six Sigma ProbabilitiesPosted: March 9, 2009
“The black swan for me would be for us to emerge out of this unscathed and return to normalcy,” Taleb said. Compared with the Great Depression, this crisis is “very different, and it requires much more drastic action.”
Today’s market close set more new records. We’ve had a bear market that’s just run itself long enough to become the worst bear market on record with one exception. That one exception is the one that started on Black Friday, 1929. The second one, until today, was the bear market in 1937. There’s only been one trend recently in all of the capital markets and that is down. No one knows at this point where the bottom is and how long we’ll stay there.
These kinds of losses and numbers usually bring about what is called a Bear Rally. A Bear Rally occurs about the time investors expect the negative momentum to end. Technical traders would expect this any day now. Well, actually they’ve been expecting it any week now and any month now. They’re still looking for it. First we heard that the market was ‘oversold’ and now we’re hearing that there’s a lot of money (estimates of like $3 trillion) just waiting for the good news to get back in. The deal is that recently we’re not even seeing the hint of bounce. It’s now a black swan market.
I have a suspicion that is why our President seems to want to replace Mad Money Cramer as the tipster-in-chief. Cramer just criticizes him (which POTUS hates) and at the moment Cramer is at a loss for any technical explanation. So first, POTUS told us that there were a lot of bargains at there because of the “profits and earnings ratios” (sic). Now, in a NY Times interview, he tells us to not put our money in the mattress.
What I don’t think people should do is suddenly stuff money in their mattresses and pull back completely from spending. I don’t think that people should be fearful about our future. I don’t think that people should suddenly mistrust all of our financial institutions because the overwhelming majority of them actually have managed things reasonably well. But I think that coming out of this crisis what you’re going to see is, you know, a return to the fundamentals – hard work, investing for reasonable returns over time, saving steadily for your kids’ college education and for your retirement. All of us, thinking about our purchases and making sure that we’re taking care of the necessities before we go after the luxuries. And I think that’s true not only for individual families but I think that’s going to be true for government as well. And if we take those steps, if we return to the fundamentals, if we go back to that ad that used to run, where they say, you know, ‘we earn money the old fashioned way’ — or what is it?
So, now we have a lecture on budgeting and spending our money on fundamentals and not luxuries while the omnibus spending bill will just get signed without any significant review and revision. Evidently, what is good for the people, is not what they should expect from their government. I’m clearly on record supporting a huge stimulus bill. In fact, I’ve said that the last stimulus bill was not big enough in TERMS of stimulus and size. The President would be well-advised to review that last paragraph and consider what he’s due to sign shortly. The forecast of job creation in the stimulus bill was based on an average 8% unemployment rate. We just achieved a higher rate than that last month and the increasing downward trend is not expected to stop. The current budget bill would provide an opportunity to transfer funds for earmarks into spending that could possibly address the shortcomings in the stimulus bill.
Any one watching Obama Budget Director Orzag abuse baseball metaphors on John King’s CNN show on Sunday had to know that wasn’t going to be in the cards. That’s old business. We are told. Just wait, our time ‘at bat’ is coming up. We’re just a relief pitcher in the 9th inning. Wait until the next season and the next game.
Meanwhile, another milestone challenging the Great Depressions record as “THE ABSOLUTE WORST EVER” is the latests forcast from the World Bank.
In a bleaker assessment than those of most private forecasters, the World Bank predicted Sunday that the global economy would shrink in 2009 for the first time since World War II.
The bank did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks.
Until now, even extremely pessimistic forecasters have predicted that the global economy would eke out a tiny expansion but had warned that even a growth rate of 5 percent in China would be a disastrous slowdown, given the enormous pressure there to create jobs for the country’s rural population.
The World Bank also warned that global trade would contract for the first time since 1982, and that the decline would be the biggest since the 1930s.
In a report prepared for a meeting next week of finance ministers from the 20 industrialized and large developing countries, the World Bank said the economic crisis that started with junk mortgages in the United States was causing havoc for poorer countries around the world, not only stifling their growth but also choking off their access to credit as well.
We also have the Financial Times columnist Wolfgang Munchau suggesting we’ll be lucky to get an “L” shaped recession at this point. That means straight down then hopefully, not so far down that some of us can bottomfeed for awhile.
The US is dragging its feet over the financial sector. The European Union is doing the same, as well as failing to adopt policies that could shield it from an increasingly probable speculative attack. And judging by the state of preparations, the forthcoming Group of 20 summit is going to be a disaster.
So it looks like it is going to be an L – not a V or a U. I mean an L-shaped recession, one that starts with a steep decline, followed by very low growth for many years… This looks like Japan all over. Without financial restructuring, the economy is not going to recover. And Japan was lucky. It was surrounded by a booming global economy.
The best way to fight such a disaster is to restructure the banking system and provide short-term economic stimulus through monetary and fiscal policy. …the current stimulus package is woefully inadequate. In other words: we are looking at an L.
An L-shaped recession will make the adjustment of balance sheets even more painful. Unemployment will continue to rise. House prices will keep on falling. US consumers and banks will spend the next five or more years deleveraging, getting their respective balance sheets back in order. In that period, the US current-account deficit will fall sharply, as will that of the UK, Spain and several central and eastern European countries. This process can take a long time, and in an L-shaped recession it takes longer.
But the effect is also brutal on the rest of the world. The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan.
President Obama also said in the Times interview that he doesn’t really read blogs. He could only come up with the NY Times as a source of news so I’m sure he isn’t reading this. He did seem pretty enthusiastic about watching basketball on the TV. However, if Orzag, Geithner, or Summers manage to read any of these articles, they might mention to the president that it’s highly unusual for the president to be giving investment advice. Also, tell him that as far as I’m concerned, and since he brought it up, those mattresses are looking better every day. Otherwise, give him some advice he can read off his proper source of information: teleprompter on the left and teleprompter on the right. Maybe then he can say something that quits scaring everyone and calms the world and capital markets.