Stock Market Bloodbath and Greenspan’s Retreat

[babylonsister]

http://www.smirkingchimp.com/thread/5878

Stock Market Bloodbath and Greenspan’s Retreat
by Mike Whitney | Mar 5 2007

The contagion in the global markets is spreading like a brushfire and the shakeup that many of us have been anticipating for over a year appears to be unfolding. Whether this is the “Big One” or not is irrelevant; a major downturn in the stock market will expose many of the systemic vulnerabilities in America’s “matchstick” economy and, hopefully, trigger greater congressional involvement.

Last night Japan's Nikkei 225 index fell for a fifth day in a row wiping out 8.6 % off the value of shares since hitting a seven-year high a week ago. The market declined by 3.34 percent to 16,642.25 points -- its biggest one-day fall in nine months. (CNN). The mood in the market is decidedly grim and normally enthusiastic investors are quickly dumping over-inflated shares of popular stocks.

It’s a bloodbath and it’s bound to carry over into US markets where the damage could be considerably worse.

The catalyst for the global correction is the growing strength of the yen and its effects on the “carry trade”. Americans will be hearing a lot about the carry trade in the next few weeks as well as other unfamiliar terms. In fact, we’re all about to get a crash course in sub-prime loans, hedge funds, derivatives and the “global liquidity crisis”. These are the main factors involved in what appears to be the beginnings of a major stock market flameout.

In the next few weeks, we’re going to hear industry mandarins and banking chieftains blame everyone else for the disaster they’ve created. Overstretched and underpaid Americans will be blamed for not saving their paltry wages and people with poor credit will be assailed for taking out loans they had no realistic chance of paying back.

But the real culprits are Alan Greenspan and the Federal Reserve. These are the guys who engineered the lethal “low interest” policy (after the dot.com meltdown) and flushed nearly $10 trillion into the flagging economy. Greenspan created the biggest equity bubble in history and put America’s economic future on a treadmill to oblivion. Recent gains in stocks have been predicated on margin debt, shaky hedge funds, and a plethora of cheap money that has nested in the market; all of these are directly related to Fed policy.

The Fed increased the money supply at such a furious rate over the last 6 years that it’s only natural that a certain amount of it would wind up in the stock market. That tells us that the skyrocketing market had less to do with growth (GDP) and confidence, than it did with the bundles of cheap greenbacks Greenspan sluiced into the system.

[fed-up]

1. prepare for the worst-get OUT OF DEBT NOW nt

[MazeRat7]

2. A strong yen is good for US companies but do prepare for the coming rate hikes...

at least for capitol goods companies like CAT where the yen is concerned. I believe Fed rate hikes will be here in May, which will have a negative impact on the market. I don't agree the "sky is falling" and see plenty of opportunity ahead that is positive for US companies and some emerging markets.

Unfortunately, the blogger referenced in the OP sounds more like he is interested in making political points than salient financial ones. Certainly if I used a "broker" and he spun that line to me... I would fire his ass and be mad I hired someone that is obviously clueless.

MZr7

[live love laugh]

3. You know...sometimes people around here sound like Chicken Little

I know for sure that in 2000/2001 the same dire predictions spread like wildfire on DU and not just for a brief time but for months. Heeding them, for a long time, I stayed out of the stock market back then and I really lost a great deal by doing so. This past May was the first time that any significant drop occurred and that was scary, I pulled back only to see stocks soar again afterwards. Now we have the current drop being touted as THE BIG ONE. At some point, the predictions--although they are well meaning--become as dangerous as the market itself because the timing is just not predictable.

The bottom line is, you pays your money and you takes you chances.

[Skink]

4. We haven't really seen a Bear market in sometime though.

The sharp fall off after 9/11 was harsh of course but what followed was mostly a period of stagflation followed by a nice little rally. I believe it is time to act conservatively. Ride out the storm. Be careful not to panic.