The Dow Jones is crashing and burning. Over the last few weeks $8.5 trillion dollars of value have been lost in the stock market. We are consistently setting new records of financial destruction.
Does anybody have any other requests for lessons? This is a complex field, and I find it beneficial for me to do these, since I end up doing the same for my colleagues at the office anyway.
Okay, sorry for the delay in this. I'm busy with work all this week, because my company is hosting a conference. But I've got some time tonight, so let's go.
Give us an estimate on the damage. Are we looking at Great Depression #2?
Damage has been pretty bad so far. Trillions of dollars of value have been lost in the stock market, not to mention the billions of dollars of stock value lost from the banks that crashed. We've lost quite a lot of money.
I don't think a Great Depression #2 is going to happen, because we have safeguards in place to prevent an entire stock market crash. I'm not 100% sure about this, but I believe the safeguard is an off switch. Seriously. If it looks like the market will literally crash they'll shut down all trading floors until investor confidence is restored. I'm sure they were tempted a few times last week during the six consecutive days of triple digit losses in the Dow, but there's still chance for improvement.
It's not impossible, it could happen, but my guess is that it won't. Technology is more sophisticated now, and since anyone can have instant information about every stock market in the world, we should be able to prevent anything catastrophic from happening.
When will be the best time to jump in and buy up discount stocks? and which stocks would be least likely to fail completely?
Well, I'm not a stock picker by profession. I can give you some advice, but I would recommend doing your own due diligence if you're actually serious about investing.
I would recommend looking at some of these other banks and financial institutions. There are some that are surviving. Most have taken pretty bad hits, but not enough to knock them down. Wells Fargo just bought Wachovia for $15 bill, so they've obviously got cash in hand. I would say that Citi is too big to fall down, but we said the same thing two months ago about the Big 5 Investment banks which are now no more.
Precious metals are seen as being a good hedge. A hedge in financial terms is like a counter-bet. It's an investment that helps you minimize damage to other stocks or investments if they go bad.
For example, gold is often a good hedge. You may have several investments in stocks from several industries, but they might all be industries that require good economic times. Luxury goods and automobiles for example are industries that do well when people have a lot of money, and do poorly when people are saving money. But gold is a universal currency, and it has value that the entire world recognizes. In poor times gold tends to appreciate, because people know that gold has a definite value. Thus, gold is a hedge against other stocks that are more directly tied to economic success.
But gold right now runs for like $800 bucks or more per ounce. So it might be out of your price range.
My guess right now is to look for banks. Some of them may indeed be undervalued at the moment, because investors were nervous before and consequently removing all of their money in a panic, driving prices down. When this crisis finally starts receding, people will look at these banks and see that they're strong enough to endure crises, and intelligent enough to not waste money on bad investments.
AGAIN FOR THE RECORD I DON'T DO THIS AS A PROFESSION. That's my disclaimer to say that if anyone seriously invests money based on what I said I accept no responsibility.
The bank my dad works for is actually doing fine right now; he works as a loan officer for a local bank in Texas, and he told me that the bank didn't follow the same trend a lot of other banks were following, and they played it safe. Now I think they're actually getting more business because they're not having to deal with so many foreclosures and all that business. There's still hope! Blah, I've been talking to my friend about how I kind of wish all this was happening after I'd already been out of college and with a stable well-paying job, because if the economy DOES collapse-- I'm in sorry shape, along with a lot other people in this forum. Student loans and (for me) no real solid job experience... if it comes down to a Second Depression, I'm gonna have to forget about college (probably) and go work work work! Probably at a job that I will never enjoy. Poo!
I know absolute jackshit about the stock market, and it's a topic I've been interested in learning more about. What makes stocks go up or down and when money is lost from the market, where's it go? Does anybody benefit from the stock market losing money?
Well, the value of shares in the stock market are determined by investors. Stocks are shares of ownership in a company, and the value of a portion of ownership is determined by what people are willing to pay for it. When more people want a stock, the value rises, and when people don't want it, it falls. That's supply and demand.
What happened earlier was that people were so afraid that they were selling off all their stock, causing prices to drop drastically. So value was lost, but it's not like there was a big pool of money that just disappeared. It was perceived value of stock that just disappeared.
Many people had their money tied into retirement 401k plans, and they lost this value. Their plans involved stocks having expected growth over a very long period of time, which they would sell off in the future for retirement money. But this money summarily disappeared. Now some of this should come back, but I'm not very familiar with 401ks. Remember, I'm technically still bad with finance. While it may come back over the course of months or years, this doesn't benefit people who needed that money now.
Short selling
People can benefit from stocks losing money. This is called "short selling". This stuff gets confusing, so bear with me. Short selling is when you sell something you don't technically have yet. I'll try to illustrate an example.
Let's say that The Orange Belt is a largely successful multinational conglomerate, and it is a public company on the New York Stock Exchange. Right now, you can buy OB stock for $10 dollars a share.
We shall use Chris and Jakey again as an example. Chris wants to invest in some OB stock, so he decides to find everyone's favorite shrewd entreprenuer, Jakey. Chris approaches Jakey and says he would like to buy some stock.
Jakey agrees to help. However, Jakey has been closely following the business news of the OB over the last several months. He knows that the CEO, Mario Panighetti, has had shotty internet access lately. He doesn't rickroll with the frequency of the old days, and he's even begun drinking and professing his love lately.And most importantly the forecasted release of his new Zelda comic has fallen further behind. Overall, Jakey believes that the stock is going to fall in value next month.
So, Jakey decides to take a gamble and short sell some shares of OB stock. He tells Chris that he will sell him 10 shares of OB stock for $100 dollars total. Chris obliges. Jakey decides to borrow 10 shares from me for investment purposes. I oblige, under the condition that I get 10 shares back by the end of the month.
This is a gamble, so the following two things could happen:
a) Mario holds a press conference for the shareholders and announces that the Zelda comic will not be released this quarter, due to unforeseen circumstances. He then rickrolls the conference and walks off. The shares drop to $5 dollars each by the end of the month.
Jakey then buys 10 shares at $5 dollars each and gives them back to me. He received $100 from Chris one month ago, but he spent only $50 dollars buying the new shares. Once again, Jakey has made a profit, this time a whopping $50 profit. You all know what he does.
b) Mario holds a press conference, but this is different. He not only releases a new Zelda comic this quarter, but releases a second one just to apologize! He then rickrolls the conference, this time to applause and cheer. Shares skyrocket up to $20 dollars a share.
Jakey is now a sad entrepreneur. He still has to deliver 10 shares of stock to me, which means he has to buy 10 shares at $20 dollars each. He spent $200 dollars after receiving only $100 dollars. Jakey cannot afford any sexy parties.
Again, this is a simplified version. Normally, when short sellers borrow stocks, they have the collateral to insure them. Most traders will also do a "locate", meaning that they actually have shares they can borrow. Some firms will do naked shorts though, which is when you sell shares without actually confirming if you have them. However in the US, there was a law passed in 2005 that prevents traders from doing that. For once the SEC had foresight and thought that might blow up in their faces someday.
WASHINGTON -- Big financial-services companies taking government money are girding for a congressional backlash against their efforts to influence federal controls on their industry.
Sen. Dianne Feinstein (D., Calif.) said Monday she will propose a bill requiring that financial institutions participating in the Treasury's $700 billion financial-markets rescue plan be banned from lobbying with that money.
Sen. Feinstein's move came the same day that financial-services giant American International Group, Inc. said it will stop lobbying U.S. lawmakers and regulators, after coming under congressional pressure and questioning over how it is using more than $120 billion loaned by the government to keep the company afloat.
Reports filed Monday by financial-services companies suggest that the industry increased lobbying spending as the financial crisis deepened, partly in an effort to combat tougher controls over their businesses. House and Senate watchdog committees are scrutinizing industry spending, and its efforts to roll back regulation, particularly as big banks and brokerage houses are preparing to benefit from the taxpayer-funded rescue plan.
The attacks on financial-services lobbying represent a threat to a significant piece of Washington's $3 billion-a-year lobbying industry. The finance, insurance and real-estate industries have spent more than $230 million so far this year on lobbying, according to the nonpartisan Center for Responsive Politics.
Financial-services lobbyists said Monday they would fight any congressional measure that bans lobbying completely. But some agreed that a targeted ban on using taxpayer money for lobbying was part of the price of admission to the Treasury's Troubled Asset Relief Program, or TARP.
Senator Feinstein's proposal would likely include a requirement that institutions submit detailed descriptions of how they use taxpayer rescue money, to show that it's not spent on lobbying, said a spokesman for Sen. Feinstein.
Sen. Feinstein said in a statement, "Federal dollars were not intended to be used for lobbying, and it would be unconscionable for these companies to misuse taxpayer dollars in this way."
Currently, only government-sponsored secondary mortgage market giants Fannie Mae and Freddie Mac are banned from lobbying, under terms set when they went into federal conservatorship last month.
Congressional filings submitted on or before the Monday deadline showed that third-quarter lobbying spending by Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. Inc., Bank of New York Mellon Corp. and State Street Corp. all equaled or exceeded the previous quarter. The filings were still incomplete late Monday.
The reports also show that that Freddie Mac spent $1.3 million on lobbying during the third quarter. Freddie Mac, the filing showed, lobbied to influence nearly every aspect of Congress's and the government's effort to reverse the mortgage-market slide this summer, in part by imposing tighter regulations on mortgage companies.
Goldman Sachs reported third-quarter lobbying expenses of $1.04 million, up from $980,000 between April and June. State Street and Bank of New York Mellon reported expenses of $190,000 and $118,543, respectively, up from $180,000 and $114,543 in the previous quarter.
AIG on Monday canceled about 160 events scheduled for coming months that were to cost $80 million, AIG spokesman Nick Ashooh said. Congressional overseers have raised questions over a series of lavish events thrown by AIG in the days after its government rescue, including a $440,000 weekend at a California spa for top business producers.
As part of its internal review, Mr. Ashooh said on Monday, employees were told that any personal expenses incurred during the California weekend must be reimbursed.
Sooooo.... We bailed out AIG to save the world. Our taxpayer money was used to prevent total financial collapse. Not only do they use our money for lavish California spas, they also use it to lobby the people who gave it to them to convince them to let them use their money with less regulation and oversight.
Good job AIG. Go fucking die. We should have let you.
Reports filed Monday by financial-services companies suggest that the industry increased lobbying spending as the financial crisis deepened, partly in an effort to combat tougher controls over their businesses
Oh delicious. Let's spend more money to patch over the money we already lost.
Wall Street's burning down again. Dow dropped like 300 points in the first 90 minutes of trading (that's very bad).
People are afraid of global recession. They sell all their stocks. Everybody selling at once causes a global recession. Standard definition of self fulfilling prophecy.
The problem here is that people are jackasses that only think in the short term. Investors idolize Warren Buffet, yet they can't seem to fully understand why he's buying a shitload of stock right now. He's buying because he's lived through several serious Wall Street recessions, and he knows that stocks come back bigger and stronger in the long run. Hell if I had money that wasn't artificially inflated by a strict communist government policy I'd be buying up major bank stocks left and right. They're going to fucking be around, they just might suck for another year or more.
Wall Street banks in $70bn staff payout
Pay and bonus deals equivalent to 10% of US government bail-out package
Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.
Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.
Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.
The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.
At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.
In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.
At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.
Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m.
None of the banks the Guardian contacted wished to comment on the record about their pay plans. But behind the scenes, one source said: "For a normal person the salaries are very high and the bonuses seem even higher. But in this world you get a top bonus for top performance, a medium bonus for mediocre performance and a much smaller bonus if you don't do so well."
Many critics of investment banks have questioned why firms continue to siphon off billions of dollars of bank earnings into bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions. One source said: "That's a fair question - and it may well be that by the end of the year the banks start review the situation."
Much of the anger about investment banking bonuses has focused on boardroom executives such as former Lehman boss Dick Fuld, who was paid $485m in salary, bonuses and options between 2000 and 2007.
Last year Merrill Lynch's chairman Stan O'Neal retired after announcing losses of $8bn, taking a final pay deal worth $161m. Citigroup boss Chuck Prince left last year with a $38m in bonuses, shares and options after multibillion-dollar write-downs. In Britain, Bob Diamond, Barclays president, is one of the few investment bankers whose pay is public. Last year he received a salary of £250,000, but his total pay, including bonuses, reached £36m.
“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”
It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.
Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.
The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.
Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.
In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.
(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)
“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”
Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.
It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.
In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.
Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”
Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City’s books.
As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.
I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.
•
The markets had another brutal day Friday. The Asian markets got crushed. Germany and England were down more than 5 percent. In the hours before the United States markets opened, all the signals suggested it was going to be the worst day yet in the crisis. The Dow dropped more than 400 points at the opening, but thankfully it never got any worse.
There are lots of reasons the markets remain unstable — fears of a global recession, companies offering poor profit projections for the rest of the year, and the continuing uncertainties brought on by the credit crisis. But another reason, I now believe, is that investors no longer trust Treasury. First it says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.
Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either. (And let’s not even get into the less-than-credible, after-the-fact rationalizations for letting Lehman default, which stands as the single worst mistake the government has made in the crisis.)
On Thursday, at a hearing of the Senate Banking Committee, the chairman, Christopher J. Dodd, a Connecticut Democrat, pushed Neel Kashkari, the young Treasury official who is Mr. Paulson’s point man on the bailout plan, on the subject of banks’ continuing reluctance to make loans. How, Senator Dodd asked, was Treasury going to ensure that banks used their new government capital to make loans — “besides rhetorically begging them?”
“We share your view,” Mr. Kashkari replied. “We want our banks to be lending in our communities.”
Senator Dodd: “Are you insisting upon it?”
Mr. Kashkari: “We are insisting upon it in all our actions.”
But they are doing no such thing. Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead. And those pleas, in this environment, are falling on deaf ears.
Yes, there are times when a troubled bank needs to be acquired by a stronger bank. Given that the federal government insures deposits, it has an abiding interest in seeing that such mergers take place as smoothly as possible. Nobody is saying those kinds of deals shouldn’t take place.
But Citigroup, at this point, probably falls into the category of troubled bank, and nobody seems to be arguing that it should be taken over. It is in the “too big to fail” category, and the government will ensure that it gets back on its feet, no matter how much money it takes. One reason Mr. Paulson forced all of the nine biggest banks to take government money was to mask the fact that some of them are much weaker than others.
We have long been a country that has treasured its diversity of banks; up until the 1980s, in fact, there were no national banks at all. If Treasury is using the bailout bill to turn the banking system into the oligopoly of giant national institutions, it is hard to see how that will help anybody. Except, of course, the giant banks that are declared the winners by Treasury.
JPMorgan is going to be one of the winners — and deservedly so.
Mr. Dimon managed the company so well during the housing bubble that it is saddled with very few of the problems that have crippled competitors like Citi. The government handed it Bear Stearns and Washington Mutual because it was strong enough to swallow both institutions without so much as a burp.
Of all the banking executives in that room with Mr. Paulson a few weeks ago, none needed the government’s money less than Mr. Dimon. A company spokesman told me, “We accepted the money for the good of the entire financial system.” He added that JP Morgan would use the money “to do good for customers and shareholders. We are disciplined to try to make loans that people can repay.”
Nobody is saying it should make loans that people can’t repay. What I am saying is that Mr. Dimon took the $25 billion on the condition that his institution would start making loans. There are plenty of small and medium-size businesses that are choking because they have no access to capital — and are perfectly capable of repaying the money. How about a loan program for them, Mr. Dimon?
Late Thursday afternoon, I caught up with Senator Dodd, and asked him what he was going to do if the loan situation didn’t improve. “All I can tell you is that we are going to have the bankers up here, probably in another couple of weeks and we are going to have a very blunt conversation,” he replied.
He continued: “If it turns out that they are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.”
No one should be surprised that a powerful political steamroller has developed for a second economic "stimulus" package. Federal Reserve Chairman Ben Bernanke has blessed the idea, and even President Bush has provided vague support. Some congressional Democrats urge a $300 billion plan; some private economists propose up to $500 billion. The case for "stimulus" seems obvious. It's extra insurance against an economic free fall. No one wants a perverse cycle of falling confidence, production, jobs and stocks leading to more loan losses and financial failures -- which then depress confidence, production, jobs and stocks.
Still, the case isn't airtight. The first $152 billion stimulus earlier this year had only a modest effect. Americans saved perhaps three-quarters of the personal tax cuts that were the centerpiece of the stimulus. The same might happen with new tax cuts. One popular idea to aid states and localities with money for roads and other infrastructure improvements might take so long to begin that it would provide little immediate economic boost. Moreover, the economy does have self-correcting mechanisms. Lower home prices already show signs of spurring more buying. Falling oil prices now provide some support for consumer spending.
But if Congress and the White House do proceed, they should rise above self-indulgence. The great danger is that a new stimulus will become an excuse for politically pleasing tax cuts and spending programs that have only a modest economic effect and do nothing to improve the long-term outlook. What we really need is a package that also addresses the future.
Herewith, three proposals.
First, let's not let lower oil prices permanently filter through to consumers. We've seen this movie before. A surge in oil prices produces calls for conservation, less dependence on imported oil and more fuel-efficient cars. Then oil prices drop, and we revert to our energy-wasting habits. This sets us up for the next price surge or any politically motivated cuts in foreign oil production.
My suggestion: Raise fuel taxes the equivalent of one cent a gallon per month for four years (total: 48 cents). For now, consumers would benefit from most of the lower prices, but they'd also be on notice that prices won't permanently stay down. To offset any depressing effect of higher fuel taxes, we could lower other taxes in lock step. But the signal of higher long-term prices should affect Americans' driving habits and vehicle purchasing preferences. Congress has increased fuel economy standards for new vehicles from today's 25 miles per gallon to 35 mpg by 2020. But it must also create a market in which buyers favor fuel efficiency.
Second, we should increase the earliest age that workers can qualify for Social Security from 62 to 64. This change (again) should be phased in over four years. When people retire early, they take a cut in their Social Security benefits to reflect the fact that they'll receive benefits longer. At 62, benefits now average about 75 percent of benefits at the normal retirement age (today, 66 years). Many retirees later regret that, by starting benefits so early, they crimp their monthly payments.
Raising the minimum eligibility age wouldn't save the government much, if any, money on the assumption that the monthly payments at 64 would be higher. Although people would work longer, their retirement would ultimately be made easier by higher monthly benefit checks and by delaying by two years the need to rely on savings. This change would also indicate Congress's willingness to tackle the larger problems of Social Security and Medicare.
Finally, Congress should explicitly authorize offshore drilling for oil and natural gas in the Atlantic, Pacific and Gulf of Mexico. Last month, Congress let lapse the long-standing bans against this drilling. But Congress might try to reimpose some type of ban, citing lower prices. This would be a mistake. Exploration and production can be environmentally safe. At best, it will take years before new projects begin producing and thereby limit dependence on insecure foreign oil. Why wait? America's huge foreign oil bill weakens our economy but also destabilizes the world economy. Oil producers don't spend all they earn, dampening worldwide demand.
I am not naive. These are all controversial ideas. The odds against their enactment are perhaps 100 to 1. But wouldn't it be refreshing if politicians disproved the conventional wisdom that they will do only (a) what's popular or (b) what crises compel them to do? Wouldn't it be a pleasant surprise if the president-elect -- whoever he is -- could work with the present Congress to produce a package that addressed both the present and future? Now that would be real change. Heck, it might even improve confidence.
Comments
Does anybody have any other requests for lessons? This is a complex field, and I find it beneficial for me to do these, since I end up doing the same for my colleagues at the office anyway.
Damage has been pretty bad so far. Trillions of dollars of value have been lost in the stock market, not to mention the billions of dollars of stock value lost from the banks that crashed. We've lost quite a lot of money.
I don't think a Great Depression #2 is going to happen, because we have safeguards in place to prevent an entire stock market crash. I'm not 100% sure about this, but I believe the safeguard is an off switch. Seriously. If it looks like the market will literally crash they'll shut down all trading floors until investor confidence is restored. I'm sure they were tempted a few times last week during the six consecutive days of triple digit losses in the Dow, but there's still chance for improvement.
It's not impossible, it could happen, but my guess is that it won't. Technology is more sophisticated now, and since anyone can have instant information about every stock market in the world, we should be able to prevent anything catastrophic from happening.
Well, I'm not a stock picker by profession. I can give you some advice, but I would recommend doing your own due diligence if you're actually serious about investing.
I would recommend looking at some of these other banks and financial institutions. There are some that are surviving. Most have taken pretty bad hits, but not enough to knock them down. Wells Fargo just bought Wachovia for $15 bill, so they've obviously got cash in hand. I would say that Citi is too big to fall down, but we said the same thing two months ago about the Big 5 Investment banks which are now no more.
Precious metals are seen as being a good hedge. A hedge in financial terms is like a counter-bet. It's an investment that helps you minimize damage to other stocks or investments if they go bad.
For example, gold is often a good hedge. You may have several investments in stocks from several industries, but they might all be industries that require good economic times. Luxury goods and automobiles for example are industries that do well when people have a lot of money, and do poorly when people are saving money. But gold is a universal currency, and it has value that the entire world recognizes. In poor times gold tends to appreciate, because people know that gold has a definite value. Thus, gold is a hedge against other stocks that are more directly tied to economic success.
But gold right now runs for like $800 bucks or more per ounce. So it might be out of your price range.
My guess right now is to look for banks. Some of them may indeed be undervalued at the moment, because investors were nervous before and consequently removing all of their money in a panic, driving prices down. When this crisis finally starts receding, people will look at these banks and see that they're strong enough to endure crises, and intelligent enough to not waste money on bad investments.
AGAIN FOR THE RECORD I DON'T DO THIS AS A PROFESSION. That's my disclaimer to say that if anyone seriously invests money based on what I said I accept no responsibility.
Stock market value
Well, the value of shares in the stock market are determined by investors. Stocks are shares of ownership in a company, and the value of a portion of ownership is determined by what people are willing to pay for it. When more people want a stock, the value rises, and when people don't want it, it falls. That's supply and demand.
What happened earlier was that people were so afraid that they were selling off all their stock, causing prices to drop drastically. So value was lost, but it's not like there was a big pool of money that just disappeared. It was perceived value of stock that just disappeared.
Many people had their money tied into retirement 401k plans, and they lost this value. Their plans involved stocks having expected growth over a very long period of time, which they would sell off in the future for retirement money. But this money summarily disappeared. Now some of this should come back, but I'm not very familiar with 401ks. Remember, I'm technically still bad with finance. While it may come back over the course of months or years, this doesn't benefit people who needed that money now.
Short selling
People can benefit from stocks losing money. This is called "short selling". This stuff gets confusing, so bear with me. Short selling is when you sell something you don't technically have yet. I'll try to illustrate an example.
Let's say that The Orange Belt is a largely successful multinational conglomerate, and it is a public company on the New York Stock Exchange. Right now, you can buy OB stock for $10 dollars a share.
We shall use Chris and Jakey again as an example. Chris wants to invest in some OB stock, so he decides to find everyone's favorite shrewd entreprenuer, Jakey. Chris approaches Jakey and says he would like to buy some stock.
Jakey agrees to help. However, Jakey has been closely following the business news of the OB over the last several months. He knows that the CEO, Mario Panighetti, has had shotty internet access lately. He doesn't rickroll with the frequency of the old days, and he's even begun drinking and professing his love lately.And most importantly the forecasted release of his new Zelda comic has fallen further behind. Overall, Jakey believes that the stock is going to fall in value next month.
So, Jakey decides to take a gamble and short sell some shares of OB stock. He tells Chris that he will sell him 10 shares of OB stock for $100 dollars total. Chris obliges. Jakey decides to borrow 10 shares from me for investment purposes. I oblige, under the condition that I get 10 shares back by the end of the month.
This is a gamble, so the following two things could happen:
a) Mario holds a press conference for the shareholders and announces that the Zelda comic will not be released this quarter, due to unforeseen circumstances. He then rickrolls the conference and walks off. The shares drop to $5 dollars each by the end of the month.
Jakey then buys 10 shares at $5 dollars each and gives them back to me. He received $100 from Chris one month ago, but he spent only $50 dollars buying the new shares. Once again, Jakey has made a profit, this time a whopping $50 profit. You all know what he does.
b) Mario holds a press conference, but this is different. He not only releases a new Zelda comic this quarter, but releases a second one just to apologize! He then rickrolls the conference, this time to applause and cheer. Shares skyrocket up to $20 dollars a share.
Jakey is now a sad entrepreneur. He still has to deliver 10 shares of stock to me, which means he has to buy 10 shares at $20 dollars each. He spent $200 dollars after receiving only $100 dollars. Jakey cannot afford any sexy parties.
Again, this is a simplified version. Normally, when short sellers borrow stocks, they have the collateral to insure them. Most traders will also do a "locate", meaning that they actually have shares they can borrow. Some firms will do naked shorts though, which is when you sell shares without actually confirming if you have them. However in the US, there was a law passed in 2005 that prevents traders from doing that. For once the SEC had foresight and thought that might blow up in their faces someday.
Lobbying Backlash Builds in Congress
Sooooo.... We bailed out AIG to save the world. Our taxpayer money was used to prevent total financial collapse. Not only do they use our money for lavish California spas, they also use it to lobby the people who gave it to them to convince them to let them use their money with less regulation and oversight.
Good job AIG. Go fucking die. We should have let you.
Oh delicious. Let's spend more money to patch over the money we already lost.
Political geniuses at work here, folks.
http://www.funnyordie.com/videos/f88f8d6385
Wall Street's burning down again. Dow dropped like 300 points in the first 90 minutes of trading (that's very bad).
People are afraid of global recession. They sell all their stocks. Everybody selling at once causes a global recession. Standard definition of self fulfilling prophecy.
The problem here is that people are jackasses that only think in the short term. Investors idolize Warren Buffet, yet they can't seem to fully understand why he's buying a shitload of stock right now. He's buying because he's lived through several serious Wall Street recessions, and he knows that stocks come back bigger and stronger in the long run. Hell if I had money that wasn't artificially inflated by a strict communist government policy I'd be buying up major bank stocks left and right. They're going to fucking be around, they just might suck for another year or more.
Patience is lost.
Link the 1st:
Desperately Seeking Stimulus