Dreaming of 2008

I note that the DOW was down over 400 points today but it was only the fourth largest decline this month. Lest you missed it, today was the 18th. Seems like 2008 all over again. Problem is, I think we had some advantages then over where we are today.

Let's go back in the way back machine to those frothy days in 2008. Lehman collapsed and confidence was lost. No one would lend to anyone else in the financial world and we were seemingly on the verge of complete financial meltdown. Fortunately, governments around the world had the resources to come in and save the day. They propped up failing "to-big-to-fail" institutions, gave out a lot of virtually interest free money and gave that can the biggest kick of its life.

I for one did not like the government reaction. More big institutions should have been dismantled. Some, who were pushed on other big institutions should have simply failed - just ask BofA laboring with its CountryWide acquisition. Moral hazard was not avoided; it was built up to enormous proportions. And those were the good old days.

Today, the very institutions that saved us from disaster are now the cause of the current problems. Sovereign debt is at unmanageable levels in much of the EU and getting there in the U.S. Banks, unfortunately, are still heavily exposed to losses, especially due to sovereign debt they own. This is not isolated to the EU banks. Yes, they have the direct exposure but U.S. banks have nearly as much indirect exposure on derivatives. We are all connected now.

So the banks are still in trouble and the governments that bailed them out are also in trouble. The bullets in the U.S. stimulus gun are spent (though I am still anticipating QE3, which will achieve nothing), and to add to the pain, we are cutting spending at a time when the economy is on the brink. The PIIGS, already in a recession, are being forced to do the same big time, which will certainly add to their problems over the short to mid-term. The economy in the EU is stagnant at best, with Italy showing the best performance at .3% growth. Japan - out of the question. China - cutting back. In short, trouble lies ahead however you spell it.

At its base, this is a confidence game. When the investors/speculators lose confidence, the money dries up for financial institutions and sovereign entities alike. And when that happens, it will not be pretty. I sense we are getting close. One major bad move in the EU, U.S., China or the like could push us over the line and destroy confidence, which is precarious at best at the moment. Confidence, like it or not, is fickle, and world economies being tied to it when S&P is on a downgrade tear is not a good thing. Perhaps they thought they were doing the principled thing in downgrading the U.S., but perhaps they were doing something even more stupid than giving mortgaged backed investments AAA status when they deserved FFF. S&P deserves all the government investigation they can get for their continued irresponsible ways.

Obviously part of the market turmoil today was due to Morgan Stanley saying the U.S. and Europe are on the brink of recession. Citigroup came out with a somewhat better forecast after the close, so we will see how the market digests that, though Asian markets are down as I write:

http://www.bloomberg.com/news/2011-08-19/u-s-gdp-growth-estimates-cut-at-citigroup.html

Let's Cover Some Ups and Downs Today

Unemployment up, existing housing sales down, inflation up, mid-Atlantic manufacturing down, gold up, markets down, mutual fund withdrawals up, Antartic ice down. Okay, that should be enough.

I am on the sidelines and plan to stay there for a while. After all, how many people are currently anticipating that the economy will take off and the stock market will climb significantly? Seriously, how many?

Disclosures: I have no positions in anything mentioned herein and do not anticipate taking any for at least 72 DAYS.

Disclosures: None