Juggling Dynamite

Retrospective economic evidence has now prompted most members of NBER to individually acknowledge that the US is in the midst of the worst recession since at least the Second World War. Jeffrey Frankel, a professor at Harvard University and member of the committee was interviewed by Bloomberg on November 10.
For about a year, we have believed that the US is in a recession. It started with housing and the financial sector and then moved to manufacturing and the auto industry. We know that the contagion continues to spread and that even the previously perky service sector is now in outright contraction. We are clearly still in the early stages of this recession which could last for another year, maybe more. I have long observed that based on anaemic wage and job growth, we really should have experienced a two year recession in 2001 and 2002. Had it not been for the plentiful supply of cheap credit and Home Equity Withdrawals that prompted consumption, we would have had our two year recession 6 years ago. In a sense then, the carnage now, is really just that same recession delayed and magnified.
Useful analysts could see that the economic injury from the credit crisis would be significant and long to heal. The stock market was reluctant and slow to acknowledge and re-price this realty. This fall it caught on at last, reacting rather violently. Based on the October 10, 2008 lows, after average losses of more than 40% on markets around the world, fundamental prices for stocks are relatively more attractive than we have seen in many years.
But relative valuation does not mean we have yet seen the lows of this bear market. It struck us as just a little suspicious that October 10 could be “the' low of this bear, when “the” low of the 2000-2002 bear was also October 10. Could it be that the markets had hoped October 10 was the low in wishful thinking and this had triggered some buying and a bounce? Today averages are putting the October 10 lows to the test once more. So far this morning the Dow has breached the critical 8451 and the S&P has dropped through the psychological 900 like butter. Today's close will tell us the next chapter of this tale.
I suspect that forced de-leveraging continues to be a major force behind the ongoing decline. An article by Niels Jensen of Absolute Return Partners this week guestimates this impact well:
“There is no question that hedge funds are downsizing at present. The problem is to obtain precise data on the phenomenon. If we estimate that the global hedge fund industry controls about $2 trillion of capital, and we assume that 15-20% is going to be pulled out between now and year-end (which is not far from the truth according to our sources), $3-400 billion must be returned to investors between now and 31st December.”
When we calculate the impact of hedge fund leverage, selling pressure begins to look even more ominous.
“The average hedge fund uses leverage, to the tune of about 1.4 times. This is down significantly from a year ago, but it still means that hedge funds need to liquidate investments of at least $500-550 billion in order to meet current redemption requests. And the real number is probably higher because some of the worst performing strategies this year are the ones using the most leverage. The real number is therefore more likely $6-800 billion, and that is a big enough sum of money to put downward pressure on the markets.”
These forced liquidations may well prove insurmountable headwinds against even a bear market rally, at least through December.

18 months into the credit crisis, Oppenheimer bank analyst Meredith Whitney says she is still “equally worried” now about the future of the banking sector as she was over a year ago. She discusses the ongoing negative impacts that the credit crisis has brought to our real economy and the challenges ahead as de-levering unwinds.
Watch the clip here.

My friend Laura recently tipped me off to exciting developments in Algae as a clean, domestic, alternative energy. Watch this amazing YouTube clip:

Actually we have had known about the potential for Algae oil since the 1970's. See Algae Interests Align
“Algae has been the feedstock of the future for a long time, dating back to the National Renewable Energy Laboratory’s Aquatic Species Program that ran from the 1970s until its demise in the 1990s. When virgin vegetable oil began its ascent from 20 cents a pound to 50 cents and more, algae started to attract even more attention. Some industry watchers say there are more than 200 companies pursuing plans to grow algae or process it into biodiesel. Major energy companies such Royal Dutch Shell and Chevron have partnered with some of the algae start-ups as have companies looking for a stable fuel supply, including Boeing and several airlines. The federal government has provided many grants for basic and applied research to further the pursuit of algae-based fuels.
“But what has been the result of all this interest and activity? Despite all the promising technology and money invested, there is no current commercial production of algae for energy. Is algae, as the saying goes, five years from success and always will be?
“Major players in the industry say 2009 could be the year when algae finally starts living up to its potential. Algae producers are starting to band together to share knowledge and educate investors. Two national organizations have started giving the industry a forum to spur these communication efforts. The National Algae Association is based in Texas and the Algal Biomass Organization was organized on the West Coast.”
Now that the oil men are out of the White House, one can only imagine the miraculous solutions we can find to our present problems.