The Stock Market and a Looming Financial Crisis

I really suck at my economics classes. I can’t intuitively look at the charts and understand what’s going on in them. I have to plod through the equations that are posed to us on purchasing power parity and the two-period model and whatnot. I mean, I get them, but only in a theoretical way.

Our international finance professor works at the Federal Reserve here in DC. He’s been hinting at recession the entire semester. Bond yield inversion, reduced growth estimates, the financial sector liquidity crisis on sub-prime loans… Scary stuff to listen to even if it’s just his thinly-veiled opinion.

So I suck at econ and I wonder how it is that there are people like my prof who just instantly rattle off relationships between different factors without getting tripped up. I wonder if General Petraeus (PhD, Economics, Princeton) is able to do the same thing.

Econ definitely isn’t my bag, baby. But it’s proving immensely valuable… I’m glad it’s a core component of our program. I don’t really get much out of international trade class except for the fundamental concepts behind comparative advantage and free trade… We’re graphing quotas, subsidies, tariffs, voluntary export restrictions. Blah.

I prefer international finance… It bears more relevance to my daytrader’s experience, especially when our prof gets going on monetary policy and how the Fed has been interpreting economic numbers with Greenspan versus Bernanke. That’s when I really get interested. Our trade prof tends to hold back on real-world examples that we can identify with, which kind of sucks. Like last week, he kept dangling the prospect of telling “economic war stories” but never did get around them except for vague references… Worst war stories ever, man.

So I sold my Nintendo stock at 70.5 to 71.5. The stock got up to 78 twice before that, double-topping. Tonight it’s 71.5ish, even after a lot of broad-based market selling. I was looking to sell the thing at 85 or so, but what’s going on elsewhere really has me concerned.

That the banks keep writing down more and more losses because of sub-prime loans and SIVs and whatnot is disturbing. I remember watching CNBC in August while in Manhattan with my folks and thinking the worst had been done…I bought into that selling in my govt. retirement fund and sold a couple weeks ago with a few points.

What happened a couple weeks ago that spooked me was that Bernanke came out and changed his tone on the market. He said growth would slow a lot, but would not turn negative. This was a change of language from the past, in which he was not too worried about growth. The sub-prime liquidity trap has lingered on longer than people thought, which makes me wonder if the hedge fund dude I met in Manhattan was right when he said it was worse than the market knows, back in August. Inflation is not as much of a priority right now for the Fed, so it is open to cutting rates, even if Bernanke indicated he may not want to cut again. Will the Fed have to?

The markets reacted to the change in tone by selling growth stocks hard. Google, Apple, Baidu, Research-in-Motion all sold off a lot. The message was taken to be that the Fed will be assuming a neutral to contractionary policy from here on out. Now people are saying recession is increasingly more likely, and the markets are pricing in high odds of another rate cut.

So that’s why I sold. The selling was reminiscent of the beginning of the dotcom collapse in 2000. The air went out of growth stocks in the same fashion. Bids/asks floated a lot as if there were no trading at those levels.

We’ll see if I’m right on this, but it’s too risky for my tastes and it doesn’t feel like a bargain here. This is despite November-December being a pretty good time to own stocks, usually… So who knows? Just too much risk for me…

What if banks lock up even more? What is the effect of sustained $100/barrel of oil? What is the effect of a prolonged writer’s strike on Broadway and entertainment? Paul Krugman just posted about how the increased tax revenues ballyhooed by the Republicans (as a result of booming earnings, but not directly related to any tax cut effect) will reverse now that corporate margins will shrink. The OECD is estimating $300 billion in losses while the reports up till now have been less than $100 million. Our prof brought up the fact that no one is willing to buy the Northern Rock bank in England…this after prospective buyers have gone in to look at their books. Freddie Mac and Fannie Mae stock have fallen by more than 50% in less than two months. That’s before even mentioning the massive losses both in real money and in shareholder value from the major banks…

God, maybe I should just suck it up and take some more econ courses… Definitely finance classes would help with keeping books if I want to be an entrepreneur. I have to take a development economics class next semester to learn about comparative economics in different developing nations. But do I really want to subject myself to more torture? What will all these kids (and there are a lot) in my program do if finance tanks just as they graduate to get jobs working for the big banks, funds, and hedgies?