Stilltitled

Three stages of a Bull Market

1. the first, when a few forward-looking people begin to believe things will get better,
2. the second, when most investors realize improvement is actually underway, and
3. the third, when everyone’s sure things will get better forever.

Three Stages of a Bear Market

1. the first, when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
2. the second, when most investors recognize things are deteriorating, and
3. the third, when everyone’s convinced things can only get worse.

–Howard Marks, Oaktree

There’s no doubt in my mind that the bear market reached the third stage last week.  That doesn’t mean it can’t decline further, or that a bull market’s about to start.  But it does mean the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing. 

–Latest Letter

The economic and financial crisis will have long-lasting effects on the consumer. The personal-savings rate is going to increase over the next five to 10 years.

Consumers are starting to realize that they’ve been living in a fantasy world. They will have to begin salting away money for retirement, their children’s education and other reasons.

—Lyle Gramley, former Fed governor

India is still not going to get capital flows when the global liquidity conditions begin to ease

—Ajay Seth, chief general manager of finance at New Delhi-based Maruti Suzuki

There’s a funding problem in dollars worldwide

—Rajeev De Mello, head of Asian bonds in Singapore for Western Asset, $600b.

The redemptions that I have seen could be at least 50 per cent for the average fund. You can discount two-thirds of assets for the funds of hedge funds that have performed poorly, and there are many of them. Everybody is running for cash now, even family offices are redeeming big time. There is no sticky money any more. The impact on the market will be very big. It’s not a trillion dollars that will disappear from the markets, it’s more, and people do not realise this. The market will have a very hard time for the rest of this year and even next year

—Geneva-based hedge fund consultant: FT 

HFs lose through redemption and erosion $210b from 2Q08 to 3Q08, exceeding total 2007 inflows. Some suggest that the industry will halve to $1t

• 2007 Inflows — $194b
• 3Q08 Withdrawals — Investors withdrew over $31 billion, the largest net redemption in the industry’s history, which offset all capital inflows into hedge funds in 1H08
• 3Q08 Capital — total capital stood at $1.72 trillion at the end of the third quarter, down from $210mm from $1.93 trillion at the end of Q2

—Hedge Fund Research

We can be optimistic about the effective handling of this crisis based on several factors. The Great Crash of 1929 has taught everyone lessons in what to do and, more importantly, in what not to do. Monetary policy is being loosened, not tightened: we can thank Milton Friedman’s influential analyses for that. Fiscal policy will be expansionary, not deflationary: we all live in the age of John Maynard Keynes, whose fiscal prescriptions were unavailable in 1929 and grew out of the mistaken doctrines and policies of that time. The Smoot-Hawley tariff of 1930, which led to “competitive” increases in protectionism by all, accentuated the Crash. No one is willing to repeat that error.

—Jagdish Bhagwat: FT

Bhagwati goes on to say, “Besides, the ideology of the US is a lack of ideology.” Tell that to the RSC and Representative Shelby. Nonetheless, could this abrogation of principles presage a healthier discourse with ideology?

And to the title of the piece: But with financial innovation, the downside can be lethal – it is “destructive creation”. We have to work hard at defining the downside scenarios.

Conditions in the region’s manufacturing sector deteriorated significantly in October, according to firms polled this month.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 3.8 in September to ‐37.5, its largest one-month decline ever.

—Business Outlook Survey

Capacity utilization, which measures the proportion of plants in use, fell to 76.4 percent from 78.7 percent the prior month, which was lower than the Bloomberg median estimate of 77.9%

JCHS Lecture: Lewis Ranieri, creator of mortgage securitization