Likely Depression, Fed’s Stealth Cut, VIX Record, Cramer Cashes Out, and More!

by Addison Wiggin & Ian Mathias

  • Majority of Americans think depression "likely", Cramer calls it quits
  • Blood on the streets around the world… England, France, U.S, emerging markets suffer historic declines
  • Volatility spikes to record high… a historical look at what to expect next
  • Fed cuts lending rate by 75 bps, but doesn’t tell anyone
  • Dubai whistles past the graveyard… announces plans for another record-tall skyscraper

  Here’s a cheery statistic for you: 60% of Americans say the United States will “likely” enter a depression soon, reads a CNN poll published this morning. Not recession, depression.

The cable news syndicate showed a random selection of people 1930s statistics like 25% unemployment, widespread bank failures, market crashes and millions of families homeless and impoverished. 60% nodded their heads, saying such an outcome was “likely” in the near future.

And you say we’re gloomy.

  “Whatever money you may need for the next five years,” Jim Cramer told the legions of Cramericans yesterday, “please take it out of the stock market right now.”

Mr. “There’s always a bull market somewhere” officially checked out of the current market, suggesting that a the current drama could cause “as much as a 20% decrease in the stock market.”

  Despite his flare for the dramatic, we happen to agree with Cramer on this one. Sentimentwise, we’re nowhere near this BusinessWeek cover story of August 1979:

“The Death of Equities” cover unofficially kicked off the biggest bull market in U.S. history.

“Things are starting to change,” admits a cryptic Byron King, “and they will probably change in ways that few of us can truly anticipate. So what do you do with your money, especially your investment funds? Take it all out of the market? Put your money in the bank? Stuff the mattress with cash? Buy gold? Move offshore and wait it out? These are just some of the ideas that have been emailed to me.

“I sure don’t blame you for being totally defensive. But you don’t want to lose sight of the larger picture, either. We’re at the edge of a deep ditch. It’s going to be tough getting through the ditch. But over time, we’ll get to the other side and climb out. And then you are going to have to deal with the previous issues — overshadowed by recent events — of depleting energy and mineral resources.

“We’ll be back to a world of energy and scarcity. In fact, we will never leave that world. We’ll just be distracted along the way.”

  Investors around the world raced for the proverbial exits yesterday.

Traders in the U.K. suffered their biggest one-day point loss ever. The FTSE 100 fell a record 391 points, or 7.8%. France’s major index, the CAC 40, fell 9% — its second worst day on record.

The MSCI Emerging Markets Index plunged 11% — its biggest daily percentage decline since Black Monday 1987.

For its part, the Dow plunged below 10,000 for the first time in four years. At its lowest, it had fallen 800 points, a record single-day point decline. By day’s end, it managed to eke out a 369-point loss, a mere 3.6%. The Dow opened this morning at its lowest level since November 2003.

  In response, the Federal Reserve cut its main lending rate by 75 points last night — they just didn’t tell you. The Bernanke clan is now offering funds to banks at 1.25%, well below its target rate of 2%.

  The Fed also introduced another new auction facility.

The Fed’s new fund will be used to buy distressed commercial paper. By buying up corporate bonds, asset-backed debt and similar instruments, the Fed hopes to de-ice a market that thousands of companies use to fund payrolls, pay debts and meet other cash needs.

The Treasury will fund a yet-to-be-named Federal Reserve account with a yet-to-be disclosed amount of money. Heh.

The total commercial paper market has a value of about $1.6 trillion… today. That’s roughly equal to the amount of Treasuries the Fed has exchange for worthless mortgage-backed securities in anno Domini 2008.

  On the news, the Dow opened 100 points up this morning. But the old gray lady quickly lost heart. She’s already back in negative territory as we write.

  No surprise then the Volatility Index (VIX) hit an all-time high Monday. By pushing the VIX as high as 56 and closing at 53, traders in Chicago have officially announced this current crisis to be the most volatile and uncertain since the VIX was launched, in 1993.

For comparison, this is the VIX’s sixth trip past 40, a level that signifies some high drama amid markets. Previous stints include:

  • Last week, when the House failed to pass the rescue bill.
  • WorldCom’s bankruptcy in 2002
  • Sept. 11, 2001
  • Long-Term Capital Management’s collapse in 1998
  • The worst of the Asian financial crisis of 1997.

What’s interesting about this hallmark? If you take a look at the S&P 500’s performance after each of these spikes, it rose an average 15% (give or take) in the following year.

  But before you go diving into the S&P, take a look at this long-term chart:

If you had invested in the S&P 500 10 years ago, you would be down today. If you had invested five years ago, you’d be down too. Unless you have a knack for stock picking or finding bottoms, the U.S. stock market has been a lousy store of wealth over the last decade.

So much for your broker’s talking points.

  A quick kudos to John Wayne Burritt… his Easy Money Options traders sold their S&P 500 and financial sector puts yesterday for around 163% and 38% gains, respectively. If timed well, both were worth much more during the worst of yesterday’s drama.

Either way, those gains should easily be enough to pay for the inexpensive entry fee for EMO, and then some. If you’d like to try your hand at options trading without putting up a large upfront subscription fee, you need to check out Easy Money Options .

  Currencies around the globe aren’t taking this banking crisis too well. The Icelandic krona, most notably.

When the Icelandic central bank took its second largest lender into receivership, yesterday, krona traders fled… despite the government’s suspension of trading on the stock market and a flat-out guarantee of all bank deposits. The krona lost over 30% in one trading session. The hemorrhaging stopped only this morning, when government officials promised to peg the krona to the euro.

Yeah… to the euro… heh.

  The dollar stumbled off its 13-month high yesterday. Talk of an “official” rate cut, in particular, is giving dollar bulls a rash. The dollar index scores 80.7 today, a full point below yesterday’s high. The euro and pound are consequently a hair stronger, at $1.36 and $1.75, respectively.

The yen is still feeling its oats. It grew as strong as 100 today, before slipping back slightly.

  Gold ate up dollar weakness last night. Today, it opened in NYC $20 higher than yesterday’s average of $880 an ounce.

Oil, too, bounced back. The black goo is up around $3 today, to $91 a barrel.

  Meanwhile, in Dubai, the UAE government has announced plans to build another “world’s tallest skyscraper, ” just down the street from the current, but uncompleted record holder:

The world’s first kilometer-tall building?

Should developers meet their goals, the Nakheel Tower will contain over 200 floors, 150 elevators and 500,000 cubic meters of concrete. And it will be nearly 100 meters taller than the Burj Dubai, the current record holder. Current projections put a $38 billion price tag on the Tower over a 10-year construction.

According to the development team, if all the steel reinforcement in this building were to be laid end to end, it would reach from the building site in Dubai to New York City.

They’ve already begin planning a unique sunset elevator show, in which participants can watch the sunset on the harbor on the ground floor, then take a high speed elevator to the top to watch it again miles away.

Seriously… what a remarkable bubble in petrodollars forming over there.

The Dubai government also announced the creation of a new “mixed use” city, called the Jumeirah Gardens. It will be a new “city within the city,” officials said, that will cost around $95 billion over the next 12 years to build. Yawn… stretch…

  “Thanks for the roll call vote and how they voted,” writes a reader, referring to our listing of the House and Senate votes on the bailout bill. “This is the first step to cutting off the head of the snake. I am going to paste this list in my office for all the Democrats and Republicans to read when they start telling me about how good they have managed our business. I am sorry for my country and for the world.”

  “Thanks for posting the names of the senators who voted against the bailout,” writes another. “Just for curiosity, how many of them are running for re-election in November? And perhaps even more useful, please post the names of those who voted YES and are up for re-election this time around.”

The 5: You can find that information at

“Relaxing the mark-to-market accounting rules by the SEC,” writes a reader, “certainly makes one rethink the claim that the taxpayer/U.S. Treasury will make money from the $700 billion purchase of distressed assets. Do you think I could select the value of my retirement savings (ignoring market valuation today) and sell the whole thing to Mr. Paulson?

“Where do I sign up for this deal? And the talking heads wonder why the person on Main Street is angry. Oh, I forgot, we are just too ill informed or dumb to understand the complex financial system that our leaders have run into the ground. Sorry, I guess my anger is showing.”


Addison Wiggin
The 5 Min. Forecast

P.S. The Oscarologist, a blog dedicated to the hunt for the Academy Award, this week listed I.O.U.S.A. first among its predictions for the Oscar nominee in the documentary category. 

Tomorrow, as you may know, David Walker and I will be discussing the film at the National Press Club in the context of the second presidential debate. That ought to be interesting. Neither candidate is willing to discuss deficit spending, the national debt, Social Security, Medicare, Medicaid, the national savings rate or trade policy during the campaign. They don’t believe they can win votes on these issues…


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