Partying like it’s 1998?

Is today’s stock market like fall 1998 or late 1970s?

By Mark Hulbert, MarketWatch

Last Update: 12:01 AM ET Sep 24, 2007

The newsletter editors I monitor are all over the map in arguing about which period of stock-market history is the closest analog to today’s market. Not surprisingly, they are issuing diametrically opposed forecasts on the basis of their chosen positions.

Many of the newsletter editors I monitor see all the hallmarks of a 1970s-like stagflation just over the horizon. During the latter part of that decade the Federal Reserve inflated the U.S. economy to try to avoid a recession. But, far from robust economic growth, the result was anemic growth at best and soaring inflation. Gold skyrocketed, while stocks on the whole proved disappointing.

 

In fact, over the four years from the beginning of 1976 through the end of 1979, the Dow Jones Industrial Average  fell from 852 to 839. And note carefully that this four-year decline was in nominal terms; the dollar itself lost more than a quarter of its purchasing power during that period.

The Credit Crisis Could Be Just Beginning

It’s just the beginning!

Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.

One of the world’s leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch — and I expected him to defend and explain the practice.

I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the “third inning.” This was pretty amusing, it seemed, judging from the laughter. So I tried again. “Second inning?” More laughter. “First?” Still too optimistic.

Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we’re actually still in the middle of the national anthem before a game destined to go into extra innings. And it won’t end well for the global economy.

Das is pretty droll for a math whiz, but his message is dead serious. He thinks we’re on the verge of a bear market of epic proportions.

The cause:   Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way.

The Empire of Debt

 

Money for nothing. Own a home for no money down. Do not pay for your appliances until 2012. This is the new American Dream, and for the last few years, millions have been giddily living it. Dead is the old version, the one historian James Truslow Adams introduced to the world as “that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.”

Such Puritan ideals – to work hard, to save for a better life – didn’t die from the natural causes of age and obsolescence. We killed them, willfully and purposefully, to create a new gilded age. As a society, we told ourselves we could all get rich, put our feet up on the decks of our new vacation homes, and let our money work for us. Earning is for the unenlightened. Equity is the new golden calf. Sadly, this is a hollow dream. Yes, luxury homes have been hitting new gargantuan heights. Ferrari sales have never been better. But much of the ever-expanding wealth is an illusory façade masking a teetering tower of debt – the greatest the world has seen. It will collapse, in a disaster of our own making.

Distress is already rumbling through Wall Street. Subprime mortgages leapt into the public consciousness this summer, becoming the catchphrase for the season. Hedge fund masterminds who command salaries in the tens of millions for their supposed financial prescience, but have little oversight or governance, bet their investors’ multi-multi-billions on the ability that subprime borrowers – who by very definition have lower incomes and/or rotten credit histories – would miraculously find means to pay back loans far exceeding what they earn. They didn’t, and surging loan defaults are sending shockwaves through the markets. Yet despite the turmoil this collapse is wreaking, it’s just the first ripple to hit the shore. America’s debt crisis runs deep.

How did it come to this? How did America, collectively and as individuals, become a nation addicted to debt, pushed to and over the edge of bankruptcy? The savings rate hangs below zero. Personal bankruptcies are reaching record heights. America’s total debt averages more than $160,000 for every man, woman, and child. On a broader scale, China holds nearly $1 trillion in US debt. Japan and other countries are also owed big.

2007 Mortgage Meltdown

Double-digit home price drops coming

 By Les Christie, CNNMoney.com staff writer – September 19 2007: 3:24 pm

NEW YORK (CNNMoney.com) — Over the next few years, more than three-quarters of the nation’s housing markets will suffer some decline in home prices. Many will experience double-digit hits in a forecast that has worsened considerably in recent months.

According to an analysis conducted by Moody’s Economy.com, declines will exceed 10 percent in 86 of the 379 largest housing markets. And 290 of the cities will experience price drops of 1 percent or more.

The survey attempted to identify the high and low points of housing prices in each of the markets, some of which started declining from their peak in the third quarter of 2005. All are median prices for single-family houses.

Nationally, Moody’s is projecting an average price decline of 7.7 percent. That’s a jump from the 6.6 percent total price drop that the company was forecasting in June and more than twice that of last October’s forecast of a 3.6 percent price decrease.

Many of the worst hit cities are in Sun Belt areas that experienced outsized home-price growth during the real estate bubble, according to Arnold Slesers, an associate economist at Moody’s. The home price correction in many of these cities will be severe as unsold new homes and leaps in foreclosures add to already big inventories.

Greenspan’s Biggest Worry

The Maestro – Alan Greenspan speaks – watch video here – We are doomed.
http://money.cnn.com/video/#/video/fortune/2007/09/17/fortune.greenspan.medicare.fortune 

Greenspan Warning

The former Federal Reserve chairman Alan Greenspan has warned there is still a good chance the US economy will slip into a recession, despite this week’s cut to US interest rates.

Mr Greenspan said the odds of a recession remain somewhat more than one in three, with home prices likely to fall further and damage consumer spending.

Greenspan Says Recession May Come

Greenspan Says Recession Still Possible After Fed Cut

By Steve Matthews and Albert R. Hunt

Sept. 20 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said the odds of a recession remain “somewhat more” than one in three even after this week’s cut in interest rates, with home prices likely to drop further and hurt consumer spending.

While lower rates may have reduced the chance of a recession, “remember, we still have a problem out there, which is a large overhang of unsold newly constructed homes,” Greenspan said in an interview today following the publication of his book, “The Age of Turbulence.” Home prices “are down only about 3 percent but they are clearly moving lower.”

Effects of Rate Cut

Investors Hunt for Effects of Rate Cut

By TIM PARADIS – 1 day ago

NEW YORK (AP) — A big rate cut by the Federal Reserve and the stock market’s huge rally in response to that move has many on Wall Street wondering: Now what?

The Fed’s decision Tuesday to slash its benchmark federal funds rate by a larger-than-expected half percentage point sent stocks soaring and lifted the Dow Jones industrials nearly 336 points. It also raised questions about the Fed’s next step and how markets might fare in the coming months.

“I think it’s probably going to help stabilize things. It seems to me that the Fed had enough room on the inflation front to really get out ahead on this,” said Bruce McCain, head of strategy for Key Private Bank’s investment management unit.

Before the Fed’s decision and even with recent moves to cut the rate it charges to loan directly to banks — known as the discount rate — Fed Chairman Ben Bernanke left some investors asking whether the central bank would cut rates at all in the face of concerns about inflation.

With that question answered, investors rushed in and put stocks a good deal above their recent lows in August. The Dow’s jump — its biggest one-day point gain in almost five years — left the blue chip index only about 1.9 percent below its record close of 14,000.41 reached in mid-July.

Still, some on Wall Street will likely question whether the Fed’s rate cut signals a deeper unease at the bank about the effect of tightness in the credit markets and widespread weakness in the housing sector.

Keep Head Down

Just keep your head down.

Recent Economic Growth Was Funded by Debt

Over the past six years, the U.S. economy has not grown much.

Relatively little growth of only $3.4 trillion in aggregate gross domestic product (GDP) was created compared with $2.7 trillion in the previous six-year period, when the starting point was much lower.

What growth has occurred has been funded by a $6 trillion increase in household debt and a $3 trillion boost in federal debt. This sort of “debt binging” is unsustainable.

The $5.6 trillion difference between how much our economy has grown and how much consumers and the federal government have borrowed to make it grow is now largely overseas in the hands of our trading partners, mostly the Chinese.

And, those overseas chickens have started coming home to roost.

As a result, the contract with the middle class has been broken.

U.S. Salaries Are The Most Unequal Since 1928

Salaries in the U.S. are the most unequal since 1928.

The median household income has been stagnant since the economic recovery began in 2001.

Adjusted for inflation, the wages of nonmanagement employees are 10% below their levels in the early 1970’s.

According to the Bureau of Labor Statistics, the average household income is now only slightly above where it was in 1973.