About a week ago Ben Bernanke used the word possible when referring to the likelihood of the US economy falling into a recession. Yesterday, the Fed used the words severe and protracted down implying that the US economy is very likely to fall into a recession this year, if not already. To me, it seems that what the Fed think about the economy is much worse, darker and more pessimistic and the reason they might not want to say it straight to the public is the fear of a potentially sharp decline in the stock markets. In other words they are gonna keep talking to the public by…… installments until they tell us what the real situation is.
On the other hand, we have the dramatic fall in the UK house prices. Is anybody surprised? I don’t think anybody should. Nationalization of Northern Rock’s debt followed by the housing bubble explosion, followed by rate cuts (definitely on Thursday) , followed by an already declining pound against the Euro is the situation in the UK. Whereas, housing bubble explosion, followed by rate cuts, followed by Bear Sterns rescue (debt nationalization again), followed by a dramatic decline in the US dollar, followed ultimately by a recession in the US economy. Do the 2 above scenarios look similar with a slightly different sequence? Is there any chance the UK economy will gall into a recession too? And the question is: Which country is going to suffer next? EMU countries maybe? Difficult days for Fiscal and Monetary policies…

Best regards Todd
Panagiotis Babalis

Hi Todd,

There won’t be any soft landing in this recession/chaos. I fear that by the time the dust settles, quite a few known and trusted Institutions will have gone under. Risk analysis models have to be changed ASAP, based on more rigorous theories that allow for greater uncertainty.

Granted, financial markets rarely subscribe to mathematical logic and information theory. However, risk analysis models with greater rigor will provide for a better understanding and anticipation of events, before they occur. Coincidentally, at this very moment, there’s a workshop in Tucson AZ that is discussing these models.

Todd,

Bernacke’s position is similar to that of a sailing club instructor, who has suddenly been made the Captain of the Titanic. However, while he is no Volcker, he is thankfully not another Greenspan. The losses/write-off’s reported by the financial institutions like the UBS are possibly what the powers-that-be want the market to know. On the flip-side, one wonders whether the financial institutions themselves are aware of the risk they carry.

It is very difficult (read virtually impossible) to presently even venture a guess as to how much the “tainted products”, like those linked to sub-prime financing, have penetrated into the International financial system. One can only reasonably assume that it is a lot more than reported. I hear that even financial institutions in leading emerging markets have invested quite a bit in these products.

The next trigger will likely be a further confidence event in the U.S. market, which the Fed is working hard to prevent. If a current-day George Soros decided to short and then start some sort of run on one of the publicly-traded banks, even the Fed would be hard pressed to be able to act swiftly - and broadly - enough to prevent a rapid loss of confidence contagion. If we think of the top 8 banks and which ones might be susceptible to a cash call in the area of 8 to 10 billion dollars - and that would be most all of them - then the pieces are in place for a dramatic and suitably panicked rush to the exits in the near future.

Dear Todd,
They shouldn’t call you Mr Doom & Gloom but DR…
I agree with you 100%. Please stop feeling guilt about giving your opinion and telling it like it is. It is no fault of your own that we all find ourselves in this situation.
Keep it coming… I look forward to reading the “real news” and respect your word. May GOD by with us.
Best regards
Manoj

Hi there

I totally agree. Of course I’d like to think bullish but how can you when you study the facts. On the other hand I also understand that the Fed and the financial analyst would like to draw a more positive picture and keep the spirits high in order to avoid further selling. It will need severe measures in the financial system, honesty towards your clients and above all a change in attitude. In order to further consume and get the economy going, we will need to act and stop living beyond our means. It is always harder to go back and resist the temptations of bonuses and fancy lifestyles you can’t afford.

Thanks, warm regards and I really enjoy your blog,

Nadja, Switzerland

Todd,
How else can the U S.get out of trouble.They are up to there eyes in
debt to the rest of the word.How about printing Dollars,and causing
massive inflation,a weak dollar will devalue foreign investment, at
the same time help exports.At the same time again,lower interest rates will bail out the banks,as usual.

Oh, Todd; you are a realist and neither a pessimist or optimist. If all of us could become realist, we would be saved from lot of problems. US Fed continues to throw money even if it doesn’t solve the problem and this will create hyper inflation. It is better to let the bubbles be blown apart so we all can restart the life.

Todd,

I agree with your negative assessement about the economy
There are too many bad signs
unemployement rate
bank crisis
falling dollar
world wide inflation.

So how come the Dow hasn’t crashed like a flying ostrich?
Do they know something we don’t?
Or are they all lemmings who haven’t got to the cliff yet?