I spent last night working on a follow-on piece for the Huffington Post which unfortunately has not yet been posted! I am keeping my fingers crossed because Friday, this weekend, tomorrow, are going to go down in financial history. For quite a while now, almost two years, I have been waiting for a significant market correction. The main reason for that is because I have believed for some time that the US consumer was overextended and in trouble. Money was too cheap for too long, and that combined with our consumerist culture was a very, very bad combination. Deadly combination. I also spent most of my working like as a mortgage backed bond trader and had a handle on how that market was evolving. Credit was too readily available to almost everyone, and way too much junk found it’s way in to the capital markets with a stamp of approval from the rating agencies. Now I wish I could tell you that I turned this insight in to brilliant money making strategies, but really it just meant that I sat out of the equity market. I spent time searching for great managers that I thought would make us money no matter what the environment. ( ya right)
On to todays piece. What I called for in that piece was exactly what happened today in the global markets. The US market failure to stage a comback on Friday in response to Paulson’s comments was a very bad sign. Very bad. If you read the first, my first, HUFFPO piece with my writing partner Deborah Siegel on Friday, you know that we did not think very highly of the Bush Plan. What I feared is that the more time the world had to digest it, the more frightening it would be perceived. The superficial solution was out of touch with economic reality. While we were sleeping the global markets got hammered. Hammered. I guess they did not think too highly of the remarks either. In the piece I likened Mr. Paulson’s performance to that of a singer on American Idol. He gave his performance, and we were waiting for America to cast their vote by buying or selling shares. Now we have to wait and see what will happen tonight…. Even if the overseas markets recover, which I doubt, the US should still open a lot lower. There is a possbility that the overseas markets do a lot worse than the US in this sell-off, as they have been up a lot more then the US markets over the past few years. They have exploded thanks to the US consumer, so why should they not impode if the US consumer is going back in to the cave? The arguement is of course that thanks to the US consumer ( in good part) all these domestic economies have taken off and now are strong enough to stand on their own two feet. Sorry, don’t really buy it. The US still drives Global GDP. That might we true if the US was only to experience a mild recession, but not a more significant one. Regardless, markets do tend to overreact, and that is what I am expecting this time. Will it all happen tomorrow? Probably not. My guess ( and my husbands ) is that the FED is going to get busy and cut rates. The market will breath another sigh of relief, and might just be fine, temporarily. Longer term the problems have not gone away and fed actions might prove very inflationary. Further short term fixes are not going to really help what really ails America. For more on that, stay tuned….
as of right now – so far this year!
Japan NIKKEI – down 13%
Hang Seng – down 14%
Brazil – down 16%
DAX – down 16%
S & P – 9.7% 9 ( but did not trade today) – would have to drop 6% to keep in line with international market performance
2 yr treasury 2.17%
A note on writing about Hank Paulson. I had the honor to work at Goldman Sachs and for Hank. Obviously he is a very, very smart man, but unfortunately he has joined an administration that I feel has made some big, big mistakes, particularly on the economic front. He has a tough road ahead of him to get this economy back on track and I really do wish him the best in doing it.