Wednesday, March 26, 2008
Be careful what you believe.
A television ad for Morgan Stanley’s brokerage service flickers across the screen, showing a retired couple walking across a beach with a dog and their grandchildren. Smiles and ease and comfort drip off the screen. It is a happy, shiny future that they are selling. Separately, a letter goes out from Morgan Stanley to their private clients warning of a “50% chance of a systemic crisis." Which do you believe?
Executive Summary
- Keeping a wide-angle view on this developing crisis is the only way to avoid being whipsawed, and the stakes have never been higher (at least in our lifetime).
- The US financial markets, and probably the world’s, peered over an abyss on the night of Sunday March 16, 2008, but were rescued by very unusual and concerted official actions.
- On the “happy, shiny” side of the equation, we have the fact that stocks mysteriously went up immediately on the open after the announcement of the collapse of Bear Stearns, and have continued up since.
- On the “Cold, Hard Facts” side of the ledger, indicating that a particularly nasty recession is already underway, here is the recent data:
- Housing data was similarly unambiguous. Sales were down, mortgage rates were up, foreclosures up, construction down, and prices slid at a rate “not seen since the Great Depression.”
- Unemployment claims ratcheted higher.
- Consumer confidence hit a 35-year low.
- Global trade has decelerated to a standstill.
- Retail sales are in the cellar, plunging by more than expected, and auto sales are fading fast.
- The Empire state index clocked in at a record low.
- T-Bills gave a very strong recession reading, by briefly trading at 0.21%.
- Tax receipts for the federal government are down by 12% over the past year.
- You can choose to believe that the worst is behind us (stocks), or you can choose to believe the facts (everything else). But be sure to choose carefully, because the penalty for being wrong here will be particularly steep.
- Simple preparations will go a long way toward mitigating the effects of a possible systemic financial crisis.