It was bad enough that the Nikkei traded down over 9% today and most of the rest of Asia fell 6% to 8%. But the opening of European markets is a dramatic vertical trajectory down:
DJ Stoxx 50 down 8.3%,
FTSE down over 10% in five minutes, now down a comparatively modest 9.23%
Dax 30 down 9.8%
CAC 40 down 9.8%
The yen is at 98 to the dollar, Brent crude is at $79 a gallon, gold is $926 an ounce.
Dow futures are down a mere 229, S&P 500 futures 25.
Update 4:20 AM: Some recovery from the awful open, paralleling what happened in Asia. FTSE down only 6% (every think “only 6%” would apply to a market move?) , Dax down 8%, CAC down 7%.
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It’s over. I don’t care what the G7 or G20 does. Global trade frozen. Hedge funds wiped out. $2 trillion CDS triggered and unpayable. Rome is indeed burning to the ground.
Thank you, Yves. No one on earth has done a better job of aggregating key facts as disaster unfolded. A few more days, maybe, then financial collapse.
I know it’s interesting as hell to remain on deck, in the public interest. Let me know when you’ve had enough and want to leave.
A.
Are we getting to a buying opportunity of a lifetime with this type of capitulation? Or do we get a suckers rally with another waterfall as the real economic recession hits home with cutbacks by consumers and companies in 2009?
FYI: Lehman Failure May Spark Record Payout for Credit Swap Sellers
More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly how much is at stake because there’s no central exchange or system for reporting trades. It’s that lack of transparency that has increased the reluctance of financial institutions to do business with each other, exacerbating the global credit crisis and prompting calls for regulation of the market.
The use of credit derivatives have grown more than 100-fold in the past seven years as investors began using the swaps to bet on companies’ creditworthiness.
We are in very deep doodoo, no doubt about it. These are extraordinary times that will require extraordinary leadership. I don’t see that around us right now.
What worries me the most is that we almost *have to* go through this hell to force a change in attitudes and ideology. It seems that Professor Pain is the only teacher we, humans, will listen to.
We’ve become too comfortable, too complacent to believe that a tsunami of digestive remains could hit the aerodynamic tunnel with us tied up at the other end of it.
That has enabled the emergence of the wedge politics, carelessness toward savings, infrastructure maintenance, research for alternative energies and sound regulations.
We are about the pay the price, and it could be a very steep one thank you very much.
Update: the Vienna stock exchange has suspended trading. This is not a major place of trading, but certainly noteworthy.
@anonymous at 3:52 – no, it’s not necessarily “over”. A complete meltdown is in the cards, but this is NOT 1930. The financial and economical world has grown much, much larger and more complex since then, with lots of additional capital and ressources around. A stock market fiasco like we are seeing now is far less likely to bring Complete and Utter Doom like it did back then.
Of course there is that ugly issue with the CDS maturing, and other gremlins in the woodwork. But I would still be hesitant to say it’s necessarily “over”.
To me, a good analogy for the differences between 1930 and now is a forest fire: right now, the tree that a lot of critters have been living on is on fire, no denying that. These critters (stockbrokers and their ilk) are in mortal distress Right Now. In 1930, there pretty much only was that single tree, so all the critters in the world were terminally screwed. Since then, many more trees have grown, though, each of them with an additional population of critters.
Which of course doesn’t mean that we are not in for one hell of a ride. After all, the other trees might catch fire as well, and confounding the problem is that we dont really know how close to each other they are. But today is NOT a situation where everything necessarily has to burn to the ground, especially if some evasive action is taken. After all, fires do not spread instantaneously. You do have time to react.
A.
It may be that the collapse will concentrate minds. In the FT this morning Willem Buiter points to a continuing denial in the Eurozone:
“Gordon Brown is absolutely right in his proposal that the G7 offer state guarantees, on ‘commercial’ terms (really terms that provide the state with an adequate risk-adjusted return on the funds it commits) to restore life to interbank lending. Banks today don’t lend to each other without high-grade security at any but the shortest maturities. When banks don’t lend to each other, they don’t lend to the real economy – non-financial businesses and households. That is the road to economic disaster.
“If French officialdom believes the interbank lending market in the eurozone to be in materially better shape than in the UK, it is detached from reality. In addition, the euro area member states, the rest of the EU member states and indeed the US are well behind the UK as regards putting in place the fiscal underpinnings for the survival of their banking sectors. The notion that the ECB and the rest of the Eurosystem can play the role that is played in the UK by the fiscal authority, is a dangerous delusion.’
If people are not agreed on the route to go, coordination in support of decisive action becomes impossibly difficult. But it may be that the sheer scale of the crisis is now going to push everyone in the same direction.
When banks don’t lend to each other, they don’t lend to the real economy – non-financial businesses and households. That is the road to economic disaster.
O.k., please clue me in on this one. Why would that be the case?
Banks not being willing to lend to other banks I can sort of understand at the moment. Even with collateral, there is the possibility of the other bank blowing up in short order, and some sort of snafu happening with the collateral.
But the real economy? If some entity has real collateral of tangible value, that they actually, provably own, why wouldn’t a bank lend to that entity? Especially since in this market they could be creative about the conditions of the lending? What am I missing here? Why wouldn’t banks be actually eager to get “proper” loans with collateral from outside the fluff economy on their books right now?
A.
I think it’s time to reclassify CDS’s as gambling contracts and so make them unenforceable at law.
(comment Markets Live FTAlphaville)
Pensions selling equities… hang on – anyone remember BT in 03… That signalled capitulation point….
(comment Markets Live FTAlphaville)
sticking with my September 14, 2008 prediction – DOW 6,000
We may never in our lives see another chart like that FTSE guillotine—unless its when N’Yawk opens today. I know that I’ve been a Pre-mature Anti-Capitalist my whole life, but still watching the stern of our financial Titanic lift free of the icy North Atlantic is not a moment for jublilation.
Remember to go out on the town tonight and have a bang-up time, while the credit card readers are still working. It may have to last us for awhile . . . .
With Ford at 2.08, I’m thinking that an “American icon” company — maybe an auto maker — goes under.
Let Hank Paulson consolidate and run it. Only need one model — the Sheeplewagen.
Cash, Ricardo Kline — cash, my man! I show up in my eerily quiet branch of Monster Bank and cash large checks frequently. They don’t say nothin’ …
What is unfolding seems to be so much more powerful and vaster in scope and import than any of these pathetic little self-promoting schemes to keep things the way some imagine they used to be.
It looks like one of those moments in history that tells us however much we all think we know what the driver should be doing there really isn’t a driver and hasn’t been for quite a while.
If, for example, Libor/Ted Spreads are right, aren’t we on the eve of a run out of Treasuries? Aren’t money markets simply saying there is nowhere to invest in the US right now, and earn a safe return?
Shouldn’t the issue be then how to organize some profit and yield producing economic activity in the US starting off at the macro-level?
Mr Buiter is a very sad guy. Without the discount window of the ECB the UK banks would have died 6 months ago.
It's not very intelligent to state such fingerpointing phrase to the French when the situation is far worse in the long term in the UK than in EU. I would say it's dangerous regarding the crisis we're in.
The UK must now STFU a little and prepare to stare in the abyss it has itself created, along with its US counterparts. The future of EU is with Russia (not meaning only russia), & im affraid it is something the UK don't want to hear about. But it will happen.
I think most people, even in the UK, don't want no new labour policy applied anywhere and are striclty fed up with this credit binge the brits have enjoyed the last 8 years. It's about time anglo saxon economic vision get tamed, & im not talking about communism : i'm talking about normality.
There's nothing left in the UK except financial craters : I understand what it means for UK I the long term, but it is something they'll have to sort out by themselves, & the firts step toward rebirth is called humbleness.
Isn’t it technically possible for the DOW to go zero? What I mean is that if stock prices have been inflated over the past 10 years due to multiple purchases with leverage then isn’t it the product (price*buying volume*time) that must be deleveraged? Something like conservation of area above and below the 200 day moving average.
A quote from either Admiral Beatty or Admiral Jellicoe, during the Battle of Jutland, could be adapted here; “I can’t help feeling there’s something wrong with my bl**dy stocks.” (With apologies as to the phrase used: I’m quoting somebody else’s words.)
To Anon of 7:04, I’m in cash, baby, more than ever in my life. As a working stiff who lives paycheck to paycheck more or less, that’s not saying much. But I’m good for October, and if the banks aren’t working by Samhain we start making other lifeplans anyway.
What we are witnessing is the fact that THERE IS NO EASY SOLUTION to a situation where you have the bursting of an asset price bubble in the context of a real economy with high debt levels.
In theory, there are numerous monetary and fiscal policy tools that SHOULD work. In practice, they are being tried and found wanting.
All that we can hope for at this point is that the capital asset deflation DOES NOT turn into a general goods and services deflation.
If that happens, then our only option is to wipe out the debts that are strangling the economy – either by massive monetary inflation, or if even that fails, then by outright cancellation of debt via legislative fiat. Strong medicine, with strong side effects, but there is no alternative.
We are going to go on a ‘wine tour’ for the weekend with a couple, one of whom is a NY professor of accounting and CPA who’s been saying that the Dow will go to 5000, gold will be 3500 an ounce, and a new monitary system will be created all within 2 years. Still not comfortable about gold…but his 5000 Dow seems most likely. And he added GM will go bankrupt fairly soon.
I am thinking how much wine can I buy for the weekend while stocking up on oatmeal?
Touching wood here, but we were able to secure not only a loan within the past few weeks but a line of credit and we’re a small company who is growing. not that i doubt that banks are tightening their credit, but it’s not all dried up, fyi.
And if you think about it, those of us who are working, and have 401ks mixed in the madness, if you have 20 – 30 years and are buying monthly then realistically you should be fine.
Unless, that is, things cease to exist as they are now and we experience a tabla rasa.
Personally, re: 401K i put “real” money in, I want “real” money back at some point, but i’m willing to wait it out.
Anonymous at 7.28am:
Buiter is not a Brit — he is Dutch, and has consistently argued for the UK to join the Euro.
He is not being superior about the French. All he has been claiming is that the North Atlantic banking system as a whole is basically insolvent, that the problems cannot be solved by monetary policy alone, and the French have yet to adequately to grasp this.
In general, when my countrymen suggest they should be seen as an example by the rest of the world, I squirm with embarrassment.
On this occasion, however, the Brits have clearly (if belatedly) seen that the kind of statist Swedish approach recommended by Nouriel Roubini and Yves Smith provides the only way out of the blind alley in which we have got ourselves.
And large helpings of humble pie are being eaten — as when the Tory leader David Cameron went to see Carl Bildt for instruction on how to do things the Swedish way.