Japan’s Past & U.S.A.’s Future, Unfreezing Libor, Better Housing Data, A Challenge, and More!

by Addison Wiggin & Ian Mathias

  • Japanese stocks back to 1982… so much for the “lost decade”
  • Asia plummets, U.S. market reacts with rally? What’s giving traders reason to buy today
  • The new policy Bill Gross thinks will fix the credit crisis
  • Home sales perking up… Rob Parenteau on what must happen for housing to fully bottom
  • In the inbox: “Where does the money go?” and a reader challenge we couldn’t resist

The Japanese market skipped back to the future this weekend and surfaced in 1982:

We’ve been writing about Japan’s “lost decade” since 2002, when it looked like the U.S. was going to enter an economic cycle similar to the boom and bust that wrecked the Nipponese economy in the 80s and 90s. 

Now, it appears we’re looking at three lost decades. Sayonara.

  The Shanghai Composite found a new low of its own this weekend, too. The Shanghai Composite is now down 72% from its 2007 high, a two year low. All the hype over the Chinese stock market over the last two years?

Poof… gone.

In all, Asia had a rough start to the trading week.

  The South Korean central bank slashed interest rates by a record 75 points today. The Bank of Korea lowered its rate to a still lofty 4.25%, aiming to “guard securely against the possibility of a sharp contraction of real economic activity.”

  Further to the left on the map, Kuwait has slipped into crisis mode. The Kuwaiti government propped up Gulf Bank, its biggest bank, by suspending trading on GB stock and guaranteeing its deposits.

Kuwaiti market makers responded with a walkout at the KSE, their second tantrum in the last four days. Most of the traders marched to the closest government building for an orderly bout of pissing and moaning.

“We want the government to intervene,” a protestor told the AFP, “to rescue the bourse and traders. We want the government to buy stocks. This month, I have already lost half my investments in the bourse.”

  Last stop on our globe trot of trouble today? Eastern Europe. Ukraine and Hungry are getting emergency bailouts from the IMF. Ukraine will get a 2-year loan of $16.5 billion, while Hungry will get a similar amount to be announced later this week.

They’ll mark the first and second nations to get official bailouts from the IMF during this credit crisis, but likely not the last. Emerging markets beware… 

  Of course, all this international drama has made its way back to I.O.U.S.A., the root of the credit crisis. Dow futures were showing an opening decline of 250 points. But by the markets open at 9:30, the Dow eked out a mere 100 point, or 0.8% loss out of the gate.

Why? The Fed announced the terms of its new commercial paper funding facility (CPFF). The CPFF started today, with some surprisingly favorable rates. When it adds liquidity to this $1.5 trillion market, the Fed said it will charge 1.8% for unsecured commercial paper and 3.8% percent for asset-backed commercial paper.

  Among other things, the CPFF is expected to quickly unfreeze the Libor, the rate at which banks lend to one another. The three month rate currently exceeds 3.5%. That’s well below its high, but still a far cry from where the Fed wants it: 1.5%. Overnight rates have improved too, down from over 6.8% to 1.2%.

  “There’s no way three month Libor can stand” at its current level, said the steward of the CPFF Bill Gross. Gross suggested this morning that the program will cause the gap between the Fed’s target rate (1.5%) and the three month Libor (3.5%) to “close very quickly.” Should he be right, we may just get through the first stage of this credit crisis. 

  Just as Libor begins to close in on the Fed’s target rate, there’s a serious chance Bernanke and company will cut interests rates again this Wednesday. Futures pits in Chicago now price a 86% chance of a 50bps cut at the FOMC meeting Wed. Traders are giving 14% odds of a 75bps slash, and a 25bps reduction is already fully priced into the market. If the Fed doesn’t cut… heh, look out.

  As we mentioned, the U.S. markets managed to avert another mini-crash on Friday. Market’s were “limit down” – the biggest falls regulators allow – in premarket trading. Stocks did end up on the downside on the day, but as major indexes fell “only” 3.5%, it could have been a whole lot worse.

Traders just didn’t have it in ‘em… so the crash will be saved for another day.

  We did manage one record in Friday’s market action. The VIX hit 89.5, another all time high. Uncertainty amid options on the S&P 500 was at its highest ever Friday afternoon.

For perspective, the VIX averaged around 17 all of last year. It hasn’t closed below 50 in three weeks. 

  Friday’s existing home sales data helped buoy the market, and today’s new home sales number is doing the same. New home sales bounced 2.7% off their 17 year low in September, the Commerce Department said today. New homes are now being sold at an annual rate of 464,000 homes, despite economist predictions of another monthly decline.
The good news ends there. New home sales are still down 33% from this time last year. The average price is down too, 9% from September of 2007. The average new house sells for $218,400, the lowest median price since 2004.

  “We have to wonder whether this [improvement in housing] will hold in the months ahead,” writes Rob Parenteau, who has taken over the helm of the Richebacher Letter. “Layoffs are mounting across many industries and the prospect of further foreclosures weighing on the market must be rising.

“Initial unemployment claims are pushing through the prior two recession highs. As personal income growth slows, household debt servicing is bound to become even more problematic, barring a much lower mortgage rate environment.

“While the money markets seizing up was the clear-and-present danger, the attempt to reel in mortgage rates must be the next policy priority. Beyond that, perhaps with a stabilization in the equity market from oversold conditions, value players may start to arbitrage corporate bond yields in. Without this type of sequencing, a lower fed funds rate does not mean much beyond some possible psychological relief for equity investors. 

“Refi activity remains well below its peak rate level back in February, and the longer it takes to get mortgage rates down, the more homeowners will be unable to refi as home values fall below mortgage loan values. Surprisingly, bank real estate loan activity has not fallen off a cliff, although that is mostly because households are still tapping home equity lines of credit, while mortgage loans for purchases have gone flat.”

  It’s Monday, so surely another bank has failed over the weekend. Yep, this time it was “omega” day for Alpha Bank of Atlanta. The FDIC swooped in over the weekend and transferred all of Alpha assets to Stearns Bank, based in Minnesota. The 59 Alpha clients still dumb enough to have more money in the bank than is insured lost about $3 million on the deal.

Alpha is the 16th bank failure this year.

  This week, we expect business as usual in the currency and commodity markets.  
The dollar remains the “flight to safety” reserve currency of choice. The dollar index is up a point and half from Friday, to 87.4. The euro and pound are still in the doghouse, at $1.24 and $1.54 respectively. The yen is still soaring, at 93.
And thus commodities, which are priced in dollars, are under pressure. Gold remains at Friday’s levels of $730. Oil, also suffering the fear of waning global demand, is down to $62 a barrel. The world’s friendliest cartel, OPEC, is rumored to be looking to cut production again, despite last week’s 1.5 million bpd slashing.

  “Where’s all the money going?” asks a reader. “I always thought that money — even fiat money — once created, stayed out there. So where are all those billions? Or are they just bits on a computer spreadsheet somewhere, i.e. the Fed cannot even be bothered to print it?
“The dash for cash means that money is (or at least ought to be) flowing to those whose debts are being (if only partially) repaid. Where’s the cash, and what are its proprietors doing with it? Putting it under the mattress, as in the Depression?

“My ultimate fear is that all those people who were so busy beavering away on the global economy right up until this summer will suddenly want to put down their tools and stop doing the things that the world really needs them to do. Of course, that is exactly what happens when money stops flowing.”

The 5: Most of that money never really existed in the first place. In the simplest terms, a bank can lend ten dollars for every one dollar they have in reserve. When the crisis began, banks began using their reserves to pay off their own debts, or simply held them and stopped lending. The Fed and Treasury – and governments around the world — are pulling every lever and pushing every button in an effort to replace the nine missing dollars in the real economy and restore confidence in the system.

So far, not so good.

  “I am an Agora Reserve member of several years,” writes a reader who began his email “I challenge you to publish this in the 5.”

“I have made money by following the advice of your newsletters. Luckily, before your editors so advised, I started taking profits about 18 months ago. Unfortunately, I did not sell my principal in as many stocks as I should have. So goes investing… live and learn. But I am very disappointed in your much-hyped Emergency Retirement Recovery Series . It is a barely disguised advertisement for Strategic Short Report. Obviously, the financial crisis is hard on your business and cash flow.

“However, to advertise short selling or put options for scared investors to gamble with their retirement money — without any warnings whatsoever about the high risks involved in these products — is not what I would expect from an honest publisher. In fact, it seems to me to be hardly better than the CDS’s or other risky products that were sold to unsophisticated investors without transparency or warning of risk. I wonder how wise it is for someone to put their ’emergency retirement ‘ monies into shorts or put options without adequate warning and discussion of asset allocation. Shouldn’t investors only invest in such risky products with a small speculative portion of their retirement monies?

“Unfortunately, none of the Agora publications (and I read them all) discusses asset allocation, risk as a function of age, or rate their recommendations for risk. Obviously, Agora is primarily interested in resources and hard assets. That is fine. However, as the present situation shows, asset allocation has a place in investing, especially in any honest discussion of ’emergency retirement recovery.’”

The 5: You bring up a good point about asset allocation. The first installment in our webinar series is intended to show investors – those who don’t know as much as you do – that there are ways to save your bacon, even make a little, when the market isn’t cooperating. You don’t have to sit back and take your losses like a patsy. 

“Maybe we should have called it,” suggested Ian by IM this morning “the ‘Decent Way To Hedge Bets And Make Money But Only With 10% Of Your Portfolio Series.’”

We have to admit, though, we’re puzzled by the tone of your letter. You dare us to publish because you think we have something to hide? The Strategic Short Report is included with your Reserve membership at no additional charge. What do you think that does to our cash flow? We appreciate the feedback, but you can leave your attitude on your side of the computer screen.


Addison Wiggin,
The 5 Min. Forecast

P.S. If you’d like to know what our friendly correspondent is referring to, we’ve opened the webinar up to anyone who’s interested… until 11am EST tomorrow.


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