This Time It’s Different

First off my apologies for failing to make the pre-open comment on the ES as promised in my blog yesterday. Something came up that prevented it.

Here are my thoughts for today.

I was watching CNBC the other day and someone was congratulating the FED for acting more effectively and promptly than the Japanese Central Bank did when the Japanese crisis first broke. He also said that ‘the US experience was different this time’.

It’s always different – humans have a tendency to substitute fact for wishful thinking. Remember Dow 36,000? So what are the facts regarding the Japansese and current crises?

In Volume 4, Issue 47, John Mauldin’s ‘Outside the Box‘, the guest author, ‘The Absolute Return Letter’ provides some facts.

  1. This crisis began with housing and will not end until housing prices return to the mean of housing prices relative to the disposable income. Currently in the US, prices are 2 standard deviations away from their mean. For this to happen, we need to see housing prices fall precipitously or remain flat for around 4 years; and the excess supply of housing must be eliminated. There is a 10 months supply overhanging the market, the greatest it has been since 1984.
  2. All countries of the world face inflationary pressures – the emerging countries – Russia, India, China etc more so than the developing ones.
  3. US housing prices in 2006 rose more than the housing prices in Japan in the 1980s and the Japanese decreased the cost of money more quickly than the FED has done.  
  4. The US advice to the Japanese was ‘let the weak banks fail’. I quote the observation about the US practice today: “(The US ) are now at risk of making exactly the same mistake as the Japanese. A number of U.S. banks have capitulated over the past year, and both Fannie Mae and Freddie Mac are in pretty serious trouble at the moment. What do the Americans do? They spend tax payers’ money to try and fix something which is unfixable, not at all dissimilar to the policy mistakes made in Japan 10-15 years ago. This could have quite severe implications for U.S. GDP growth for years to come”

 If this is so, the FED remedial action is little different to that of the failed policies of the 1980s to 2000. It didn’t work then and it won’t work now. So, guys and gals, gird your loins for a bumpy 2009 and beyond.

2 thoughts on “This Time It’s Different”

  1. Ray

    We will have to wait for more announcements today.

    Meanwhile, Senate Committee Chairman Chris Dodd said lawmakers have reached a fundamental agreement on the principles of a $700B rescue plan. The provision will allow the Treasury to acquire equity stakes of participating companies.

    Still unresolved is whether the bill will include a provision authorizing bankruptcy judges to change mortgage terms. The agreement still must be passed by the House and Senate and signed into law by the president.

    President George Bush reiterated on Thursday that the US was facing a serious financial crisis and urged bipartisan cooperation on the bailout bill.

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