28 July 2012

"Fear of everything" driving financial markets

When large institutional investors are fearful, they move money into U.S. Treasuries, driving down the yield on those instruments.  This past week, the yield on the 10-year treasuries reached an all-time low:
Investors afraid the European Union might unravel, after Spanish bond yields spiked and talk of a Greek exit returned to the table, fled for the apparent safety of U.S. government debt... Valeri also acknowledged the weakening of the U.S. economy.  In what has been a mixed earnings season, several U.S. companies have indicated they are suffering from the global economic slowdown.
The international business editor at The Telegraph echoes these sentiments:
Europe is “sleepwalking towards disaster”, according to the 17 experts, who warned that over the past few weeks “the situation in the debtor countries has deteriorated dramatically... This dramatic situation is the result of a eurozone system which, as currently constructed, is thoroughly broken. The cause is a systemic failure."

In a veiled rebuke to hard-line politicians in Germany, the economists said the root cause of the crisis has been the boom-bust effect of rampant capital flows over the past decade – not delinquent behaviour by feckless nations... they said the current course had become hopeless. Deepening recession is “tearing at the social fabric of the deficit states”. The lack of any light at the end of the tunnel is leading to a populist backlash in both the debtor and creditor states.
And earlier this month, Nouriel Roubini spoke of a "perfect storm" coming in 2013:
Mr Roubini, the New York University professor dubbed "Dr Doom", said a number of unpleasant factors would combine to derail the global economy in 2013, including an escalation of the eurozone crisis.
Other factors included further tax increases and spending cuts in the US that may drive the world's largest economy into recession; a hard landing for China's economy; a further slowdown in emerging markets; and war with Iran
"Next year is the time when the can becomes too big to kick it down [the road]...then we have a global perfect storm," he told Reuters. 
Economic and market predictions are a dime a dozen, but I do credit Roubini's comments for getting me out of the equity markets before the crash of 2007, so I am paying some heed to his words.

Warren Buffett famously has said that he became rich by being fearful when others were greedy and greedy when others are fearful.  That sounds logical, but it's a challenging philosophy for the average person to follow in real life.


  1. I'm quickly becoming of the opinion that the little detail most bloggers are missing when dealing with Roubini's content is that every one of his statements and/or prognostications can be prefaced with, "If conditions don't change ..." when change and adaptation is the norm.
    Roubini doesn't accommodate the position that the financial sector is a sentient creature, hell bent on its own preservation and willing to do nearly anything -- with the help of sovereign governments -- to keep stealing the money.
    It becomes a little tiresome when the arm-wavers go on and on for seven years. At least I've been following this stuff for about seven years and it just keeps coming. If I were a cynical guy, I'd be tempted to say that this doom-saying was just a product, designed to fill a market niche.
    Scared people aren't rational actors.

  2. There are more folks than Roubini issuing warnings. experts such as Marc Faber, Peter Schiff, Donald Trump, and Robert Wiedemer. According to them, we are on the verge of another recession, and this one will be far worse than what we experienced during the last financial crisis.
    More: http://www.moneynews.com/StreetTalk/Massive-wealth-destruction-economy/2012/07/24/id/446424?PROMO_CODE=F8E7-1

  3. Fear of Everything....wasn't that an album by Talking Heads?

  4. So will Roubini tell you when to get back into the market or did you just miss out on having your money septuple since 1987?

    1. Noumenon, I don't subscribe to anything he writes; I just heard him on a Bloomberg broadcast via Sirius by chance when I was driving. So I got back in on my own, gradually. And I typed wrong when I wrote "crash of 1987" - I didn't even have sat radio then. It was before the crash of 2007 that I heard his doom and gloom prediction.

      But re 1987, holy cow the memories. I was pretty much fully invested in equities then, and it happened so fast that I rode it all the way down. Then, to make matters worse, when it was near the bottom I bought index puts, and watched those premiums vanish during the rebound. I learned lots of rather expensive lessons that October.

  5. You may remember Joe Granville, another famous relentless doomer.

    I read somewhere is that the doomers never call the booms, and usually miss them, thinking we will continue collapsing into a "Road Warrior" or "The Road" type situation. March 2009 was one of the greatest investment opportunities in generations. Does anybody know a doomer that called the bottom?

    The economy of the world is always crashing and booming, dying and blooming at the same time. It's way too vast and complicated for anybody to keep track of all of it. Bloomberg is pretty good, I think, because they usually present boomers and doomers every day, so you can try to balance it all out and get some feel for how things might go. Good luck. I tried to call the bottom with the solar companies and caught the guillotine blade instead!

    1. I do remember Granville, and I can totally empathize with your experience of getting burned with solar energy. Way back when I lived in Texas, sometime in the mid-1970s, I read about two fledgling solar companies, and I was convinced solar was the wave of the future. I still remember the names - Solaron and Intertechnology Solar - and I think the broker had to go beyond NASDAQ to the pink sheets to find them. Years later, after the companies disappeared, I had to "sell" the shares for a penny (total) to a friend in order to deduct the losses.


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