Remember this book?
Sure, bad things will happen now and then, but ultimately the Dow Jones Industrial Average will end up at 100,000 in the year 2020. In other words, "two decades of above-average economic growth with price stability."
Or this one?
To a growing number of analysts, it's not a question of if the Dow Jones Industrial Average will blast into the financial stratosphere, but how high it will go.
Or the most publicized of the genre:
Most books that predict a sky-high stock market make their forecast either by extrapolating the trend line of the market's recent past or by looking at the demographics of the baby boom and the vast amounts of retirement funds chasing stocks. In Dow 36,000, James Glassman and Kevin Hassett see a bright future for stocks, but rather than looking at external factors, the two base their prediction on the intrinsic value of equities and their ability to generate cash.
These were bubble books, published in the late 1990s when the Dow was still below 10,000. This is the chart for the past five years ...
So today the Dow returned to levels we haven't seen for years, and Wall Street is sounding like a monster that cannot be satiated:
"It's hard to be bullish based on monetary policy or bailouts alone," said Chris Johnson, president of Johnson Research Group, in Cincinnati. "It doesn't address the fundamentals of the stock market, which have some very deep problems right now."
"The bailout plan was needed but more needs to be done to fix things, and we're not even sure a rate cut will be enough," a trader at GFT Global Markets says. To many Wall Street veterans, a painful, long recession unlike anything the U.S. has suffered in decades seems increasingly likely, with the fallout likely to spread to other countries.
That last sentence sounds ominous, but "Wall Street veterans" don't have a good history of predicting the long term. See the aforementioned books if you need a reminder of that fact.
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1. Posted by fedgovernor on October 6, 2008 @ 10:26 | Permalink
The only way out of the crisis will be bold action:
1) All adjustable rate mortgages should be, by law, converted to fixed-rate mortgages at today's interest rate. This gives the Fed a weapon to fight inflation that it no longer possesses and eliminates uncertainty. (The Fed cannot raise interest rates to fight inflation because doing so creates foreclosures.)
It is the uncertainty caused by ARMs that is causing all other dominoes to fall.
Once that uncertainty is eliminated, the mortagees can know what their note will be going forward. Actuaries can then properly measure risk for mortgagers. Once the risk is measurable, a market will form to trade the risk.
2) Bankruptcy reform must be allowed to proceed; we must allow judges to force mortgage holders to negotiate in good faith by giving them the power to reset principal. Foreclosure must become the measure of last resort, since foreclosure lowers the value of both the home being foreclosed on, AND the homes next door that weren't involved.
Limiting foreclosures limits the damage to only the homeowner involved.
3) The Senate Banking committee needs to be hung, jailed, and then tried. In that order. The House banking committee should come next.
4) The capital gains tax should be waived, entirely, temporarily. Why exactly, are we taxing the creation of capital? Isn't that what the world needs at the moment ... more capital? Then we should stop punishing its creation!
5) Corporate taxes should be eliminated, temporarily. Why are we taxing corporations which create jobs when at the same time, we are trying to reduce unemployment? Unemployment causes people to stop making their house payments. That leads to foreclosures and the ever spiraling black hole.
6) Commercial banks simply cannot be trusted to own securities - ever. How many times do we have to be taught this lesson? Reinstate Glass-Steagall. Bankers should not be allowed to roll the dice with my deposit.
7) There is criminal activity occurring in the market. Some highly televised frog marches would go a long way toward restoring market confidence.
8) "Naked short selling" is nothing less than fraud. If I tried what they do on Wall Street, but did it instead on e-Bay, I'd be arrested for fraud. So ... arrest the naked short sellers. Frog-march them per #7.
When we see any of these things occurring, then that will be my signal that the crisis is being taken seriously.
So far, the politicians response to the crisis has been "Oh, just throw some money at it and it will go away. This only helps Obama, anyway!"
That is why your retirement fund is disappearing before your eyes.
So Barney Frank's lover can stay employed.
2. Posted by fedgovernor on October 6, 2008 @ 10:31 | Permalink
By the way, as I predicted here:
http://www.theconglomerate.org/2008/09/time-to-take-ou.html#c132715731
We have a long, long way to go.
3. Posted by Bruce Boyden on October 6, 2008 @ 22:22 | Permalink
This might be a good time to shop my next book, "Dow 0".
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