Hello: I have nothing to say to the original poster. In my opinion the guy is a con artist. As regards the US economy, it is clear that we have always seen cyclic behavior. Also FOMC policy has often intervened in this cyclic behavior and not always in a positive fashion. I am sure Dr. Roubini is a wonderful and skilled economist, and yet, even though I am not an economist, I suggest people look at the following INTEREST RATES When the FED began its policy of raising short term interest rates, ask yourself "what was the long term interest rate"? and now, after a series of short term raises, "what is the current long term interest rate"? What you will notice is that the bond market has behaved very well in that time. In fact the long term rates have DECLINED since that time. INFLATION Strangely both the public and some professional observers seem to believe that the increased cost of energy is inflationary. In fact this is not true. The cost of energy (particularly the cost of fuel) has acted as a tarif. Stop and THINK about it. We all HAVE TO USE OUR CARS. We have to take our children to their activities, we have to go to work, to schools, and we do so because we live in a society that by and large has not adapted to mass transit. Because we have to use fuel, we do so, but we cut back on other purchases. The net effect of this is to curtail other inflationary activities. Also this curtailment makes it difficult for manufacturers, wholesalers and retail distribution to obtain "pricing power". In other words, the rising cost of fuel is keeping prices of other capital goods from rising, because it limits demand for other goods. Figure it out. Steve
i wonder if the -markets- did this on purpose: rose the price of oil to offset liquidity elsewhere.......
Con artist? That's actually very funny - you must moonlight as a comedian? Long term rates have declined while the Fed has been raising short term rates, ok. Isn't this indicative of an inverted yield curve? Inverted yield curves have traditionally signalled a recession without fail. In addition, these high rates will not come down due to inflation pressures. I see where you're coming from with the higher energy costs limiting inflation through reduced demand for goods argument. However, the longer energy costs stay high, the igher the probability that these costs will begin to feed through to other basic materials such as grains, cotton, and all the synthetics. Once these costs begin to feed through, businesses will be forced to either raise prices in the face of lower demand (double bad whammy) or absorb the added material costs themselves and cut costs elsewhere. That's where the headcount reductions begin (unemployment is at historical lows). Rising unemployment combined with the housing slump and high energy costs are going to smack the avg consumer around very, very ungently. Even if the Fed pauses, the markets may rally on that news, but watch out. The Q3 numbers are going to be a smack in the face for all the optimists and the recession will be in full swing. The housing slump is going to hit harder than expected, energy costs will not come down, and the Fed won't be able to bring rates down to stimulate demand growth for fear of allowing inflation to run. If the Fed pauses, markets will rally, but then recurring inflation would force the Fed to RAISE rates again after pausing. This would be very very bad. The Fed SHOULD raise again at the next meeting, but there's too much pressure on Bernanke to do the wrong thing and I don't think he wants to put himself in a position to be scapegoated in the event raising rates triggers a severe correction and "signals" the beginning of the recession. So he pauses, we rally, then he has to raise again, and we crash. The issue is that we have a confluence of negative factors (housing, energy, inflation) all rearing simultaneously, meanwhile we've created a massive deficit during a boom cycle (when we should be accumulating a surplus) which has limited the tools available to the administration to intervene fiscally. There's no arguing with the current state of the US economy and coming global recession. all of these factors didn't build overnight - they're the result of irresponsible policies and too much short-term focus by the administration. I'm not doing this to be "right". We're all supposed to be traders trying to make money right? Just a heads up. Like I said, you can thank me in Q4 or Q107... until then feel free to hurl insults at me is the markets rally on weak legs. =) - the con artist(???)
The cause for concern may have been obscured as this thread progressed ... The OP's initial post raised a couple red flags. Ironically, there is some chance the trade will work out okay (not great, but okay). I've not been able to get comfortable, though, to believe the OP has sufficient experience to commit a significant portion of their net worth to any single trade.
You're right, I don't have the experience =). Which is why I welcome any advice! Right now I'm sticking to long puts with a range of expiry's and strikes. I've though about put spreads but (i think) the market's going to move so low that I'm not sure my lower strike puts would fetch premium worth the foregone upside. Any ideas on how to maximize this trade? I'm also going to play the rally after the pause at the next Fed meeting. SF Fed chairman (said to be one of most influential) basically said the Fed cant ignore the lag in the interest rate mechanism and keep raising until they see the effect take hold in the inflation numbers b/c if they keep raising until they see inflation abate, it means they would have gone to far and over-tightened. This is a reasonable point - and raises the likelihood of a Fed pause. I think a call spread would do the trick... market's going to rally, but not break through significant levels once people realize the Fed is panicking (by pausing) in the midst of a coming recession. That's when the rally disappears like ALL THE BIDS DROPPING OUT OF YOUR STOCK and poof. Hello severe correction+recession.
You know the more I think about it, the better I like the idea. Yep, I think you folks (those who agree with the famous Nobel Prize winning economist Dr. Roubini) should have the courage of your convictions. Not only should you committ a significant portion of your personal net worth, but if I were you, I would set about raising as much additional capital as possible. I realize that one could go back to my list of Nobel Prize winners and perhaps review the opinions of other scholars, but really why do that when we have Dr. Roubini's word? Finally we have the generosity of our Wharton Alumnus. What else could you folks want. At this point, if you hesitate, I think you are missing the boat. Now get out there and raise some cash!
BNT mate, more seriously, and looking at this past friday's GDP figure that triggered Roubini's latest pronouncement on recession risks in 2007, i know he's not looking at this figure in isolation etc, that there are other figures pointing towards a (desired) slowdown etc... however this was just an advance chain-weighted REAL gdp figure if your wharton mind sees what i mean... v.volatile historically, can be revised way up or down next month etc etc... other than strictly intraday, hardly the kind of figure one wld want to base much on, particularly a trading strategy, don't you agree? (plus its not even a bad figure imo, but i am no roubini ;-) ) now i do concur with roub' that stagflation lite is a rather high prob scenario for the next few quarters... but thats just an opinion, mostly reflecting the current lack of visibility as to how bad the coming blow-ups in china's opaque economic system, what pace and economic impact the coming transformations in the energy mkts, pace and credibility of european integration etc etc
its more than just a reasonable point... once you've removed 'accomodation' / stimulation required in the wake of the internet bubble burst, 9/11 etc, your back to fine-tuning... therefore u want to provide all the economic actors with a slightly longer horizon than just 1 month, for one, and yes 2 months IS a much longer horizon than 1 as your aware, cause its indicative of a new tuning 'pace' notably, until the mkt eventually recognizes we've reached an 'equilibrium' range as far as all the key variables, and the Fed can go 'stationary' for a while... one other thing, despite being only one of the factors at play in US interest rate decisions, to an extent the fact that the BoJ (the ECB as well to a lesser extent) is able to continue to raise and at what pace says things about Jpn GDP growth / growth expectations (and world growth potential) AND has a notable impact on worldwide inflation & inflation expectations... watch this space ;-)