Boy, that was short lived. The massive EU and US rescue efforts to pump equity into banks, the TARP, the increase in the Term Auction Facility (from $150 billion to $900 billion), the Fed offering unlimited dollar swaps to foreign central banks, and those monetary authorities themselves engaging in liquidity operations, appears to have come to naught, or at least very little, as far as equity investors are concerned.
We had expected the market to revert to its old lows, because the economic bad news has only just started. Even with these unprecedented efforts, a successful fix to the banking system does not mean lending will resume on its former terms. Indeed, that would be a singularly bad idea, since overly generous lending created dud assets, which is at the core of this mess. But even if things were to normalize, lending standards will be tighter than before, which means deleveraging regardless, as debt is reduced to a sustainable level. But we never thought we’d see a reversal this fast.
However, we had pointed to this chart earlier from Paul Kedrosky (without previously reproducing it in this blog). Most readers and investors have seen the recent equity markets as representing reasonable value, forgetting that Alan Greenspan made his famous “irrational exuberance” remark in 1996, and that one can make a case that thanks to low interest rates (due to Greenspan failing to allow for the impact of cheap imports on prices in his interest rate policies) that equity prices were distorted for more than a decade. Thus what me may be getting is a nasty combo plate: a reversion of valuations to historic norms when fundmentals are taking a dive:
The Wall Street Journal gives an overview of the carnage (even that word is becoming commonplace):
Dire economic data knocked stocks sharply lower Wednesday as investors braced themselves for an ugly recession unlike the relatively brief, shallow downturns the U.S. has sometimes suffered over the last two decades…
“I don’t just think we’re going to test the lows. I think we’re going to violate them and break lower in a big way,” said Kent Engelke, managing director at the brokerage Capitol Securities Management, in Richmond, Va. Referring to the possible fallout in the broader economy from the credit crisis, he added: “We don’t yet know what that is, because this situation is so unprecedented. Every road sign has been obliterated.”
The Dow’s losses accelerated as the closing bell approached, leaving the blue-chip measure down 733.08 points for the day, off 7.9%, at 8577.91, hurt by losses in twenty-nine of its 30 components. The only exception was Coca-Cola, which climbed 1.1% after posting a strong profit report.
Originally published at Naked Capitalism and reproduced here with the author’s permission.