Those that feared that the end of the short-sale ban would trigger a sell-off in the shares of financial services companies were right: the stocks declined for for exactly one trading session, then set off on a two day rally that increased the Dow Jones U.S. Financials Index, between the lows marked near the open on Friday to the close of the markets today, by nearly 24%.
The global credit crisis is now officially a five-alarm blaze: the central banks of the U.S., England, the E.U., Japan, and China are working in a historically unprecedented and coordinated fashion to calm the markets and prop up the global financial system.
Central bankers are finally coming to the realization that the global financial crisis is NOT a liquidity crisis, but rather a crisis of confidence based on the rapidly deteriorating credit worthiness of financial institutions small and large. This crisis is the culmination of years of banks chasing after each other to sell debt against ever-weakening standards, fueled by artificially low input costs in the form of a Fed Funds rate that stayed too low too long, and exacerbated by investment banks that sought in 2001, and were given, a regulatory increase in reserve requirements from 7x to 40x.
Since Alan Greenspan cut the Fed Funds rate to 1% in the wake of 9-11, and the Wall St. banks sought regulatory relief in the same period and used similar arguments (increasing the M2 money supply will help ward off a post 9-11 recession), you could say that Osama bin Laden may have finally succeeded in what he set out to do: end the longest period of free and unfettered economic growth in the history of the planet.
While I do not believe that this crisis will result in the end of social democracies and the fundamental tenets of free market economics, nor result in the kind of suffering that marked the dark years of the Great Depression, the period that started with Ronald Reagan in which the financial markets facilitated individuals and businesses to take wild risk, to pursue a crazy dream, or to rapidly turn a small business with a great idea into a multinational powerhouse is over.
In the upcoming decades, for better or for worse, we will be back to a time when cash is king, when credit will be meted out conservatively, in which businesses will grow gradually over time, and in which Americans will be forced to make hard choices in which they must figure out how to do more with less. It will be a simpler time, to be sure. And, it will be a time of dramatically lower earnings per share growth.
This fear has been at the heart of the recent stock market sell-off, and is why a two-day, 24% gain in financial stocks only takes them back to where they were three days before. The fear is that, in a period of single-digit earnings growth, the years of +20x P/E ratios is over, that this recovery will NOT be like the others.
While I was long skeptical of the extremes in valuations that led to boom and bust cycles, I somehow prefer that to the future that I now see taking shape. The old future was one that was marked by optimism, by self-confidence, by Greenspan's "irrational exuberance", in which you could take a business plan written on the back of a napkin and find investors willing to front you a cool million to get it off the ground. Somehow, that feels more American to me, even if it proved wildly irresponsible in many cases, than the future that now seems to be in store for us.
Christian Antalics
The global credit crisis is now officially a five-alarm blaze: the central banks of the U.S., England, the E.U., Japan, and China are working in a historically unprecedented and coordinated fashion to calm the markets and prop up the global financial system.
Central bankers are finally coming to the realization that the global financial crisis is NOT a liquidity crisis, but rather a crisis of confidence based on the rapidly deteriorating credit worthiness of financial institutions small and large. This crisis is the culmination of years of banks chasing after each other to sell debt against ever-weakening standards, fueled by artificially low input costs in the form of a Fed Funds rate that stayed too low too long, and exacerbated by investment banks that sought in 2001, and were given, a regulatory increase in reserve requirements from 7x to 40x.
Since Alan Greenspan cut the Fed Funds rate to 1% in the wake of 9-11, and the Wall St. banks sought regulatory relief in the same period and used similar arguments (increasing the M2 money supply will help ward off a post 9-11 recession), you could say that Osama bin Laden may have finally succeeded in what he set out to do: end the longest period of free and unfettered economic growth in the history of the planet.
While I do not believe that this crisis will result in the end of social democracies and the fundamental tenets of free market economics, nor result in the kind of suffering that marked the dark years of the Great Depression, the period that started with Ronald Reagan in which the financial markets facilitated individuals and businesses to take wild risk, to pursue a crazy dream, or to rapidly turn a small business with a great idea into a multinational powerhouse is over.
In the upcoming decades, for better or for worse, we will be back to a time when cash is king, when credit will be meted out conservatively, in which businesses will grow gradually over time, and in which Americans will be forced to make hard choices in which they must figure out how to do more with less. It will be a simpler time, to be sure. And, it will be a time of dramatically lower earnings per share growth.
This fear has been at the heart of the recent stock market sell-off, and is why a two-day, 24% gain in financial stocks only takes them back to where they were three days before. The fear is that, in a period of single-digit earnings growth, the years of +20x P/E ratios is over, that this recovery will NOT be like the others.
While I was long skeptical of the extremes in valuations that led to boom and bust cycles, I somehow prefer that to the future that I now see taking shape. The old future was one that was marked by optimism, by self-confidence, by Greenspan's "irrational exuberance", in which you could take a business plan written on the back of a napkin and find investors willing to front you a cool million to get it off the ground. Somehow, that feels more American to me, even if it proved wildly irresponsible in many cases, than the future that now seems to be in store for us.
Christian Antalics
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