Shiller says Dow may go down to 4000

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mathwhiz
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Shiller says Dow may go down to 4000

Post by mathwhiz »

http://online.wsj.com/article/SB122368241652024977.html
Robert Shiller, professor of finance at Yale University and chief economist for MacroMarkets LLC, tracks what he calls the "Graham P/E," a measure of market valuation he adapted from an observation Graham made many years ago. The Graham P/E divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation. After this week's bloodbath, the Standard & Poor's 500-stock index is priced at 15 times earnings by the Graham-Shiller measure. That is a 25% decline since Sept. 30 alone. The Graham P/E has not been this low since January 1989; the long-term average in Prof. Shiller's database, which goes back to 1881, is 16.3 times earnings.

But when the stock market moves away from historical norms, it tends to overshoot. The modern low on the Graham P/E was 6.6 in July and August of 1982, and it has sunk below 10 for several long stretches since World War II -- most recently, from 1977 through 1984. It would take a bottom of about 600 on the S&P 500 to take the current Graham P/E down to 10. That's roughly a 30% drop from last week's levels; an equivalent drop would take the Dow below 6000. Could the market really overshoot that far on the downside? "That's a serious possibility, because it's done it before," says Prof. Shiller. "It strikes me that it might go down a lot more" from current levels.

In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have to fall to roughly 400, more than a 50% slide from where it is today. A similar drop in the Dow would hit bottom somewhere around 4000.

Prof. Shiller is not actually predicting any such thing, of course. "We're dealing with fundamental and profound uncertainties," he says. "We can't quantify anything. I really don't want to make predictions, so this is nothing but an intuition." But Prof. Shiller is hardly a crank. In his book "Irrational Exuberance," published at the very crest of the Internet bubble in early 2000, he forecast the crash of Nasdaq. The second edition of the book, in 2005, insisted (at a time when few other pundits took such a view) that residential real estate was wildly overvalued.
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Post by sopogah »

Thanks mathwiz for the link. very informative.

I've read both Shiller's books. they worth the time an effort.

If history repeats itself, and the DOW drops 91% (1929-32) from its high, the DOW will end about 1,290 (from 14,168 high of oct. 07).

I do not think/hope that this is likely, but we may see further drop from the current level.

I can answer that for sure in two years. :lol:
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Post by grayfox »

The title of this thread: "Shiller says Dow may go down to 4000"

From the article:
In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have to fall to roughly 400, more than a 50% slide from where it is today. A similar drop in the Dow would hit bottom somewhere around 4000.

Prof. Shiller is not actually predicting any such thing, of course.
Maybe I don't know how to read English, but the article says Shiller is NOT predicting Dow 4000.

That sentence about DOW 4000 was written by the journalist. He is not quoting Shiller. You are putting words into Shiller's mouth.
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Post by wab »

I loved the depression-era humor in the article.

"Many businesses are better off than ever," Mr. Cantor wisecracked. "Take red ink, for instance: Who doesn't use it?"

:)
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Post by Easy Rhino »

I saw this story reading the paper version. Shiller is a true economist, we have good reasons why we face anything between a 50% decline and a bottom that we've already tested!
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Post by Buckeye »

Most of the financial planners I have spoken with around the country have told me much the same thing: Their phones are not ringing, and very few of their clients have even asked for reassurance.
This is consistent with what I've heard from a friend who is a FA. There has been no sign of panic or capitulation.

Indeed...it might just take a DOW heading towards 4000-6000 to do the trick.
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Post by docneil88 »

grayfox wrote:The title of this thread: "Shiller says Dow may go down to 4000"...

Maybe I don't know how to read English, but the article says Shiller is NOT predicting Dow 4000.
I say the Dow may go down to 4000 too, but I certainly am not predicting that it will.
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Post by nisiprius »

grayfox wrote:[abridged]The title of this thread: "Shiller says Dow may go down to 4000." From the article:
In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have bottom somewhere around 4000. Prof. Shiller is not actually predicting any such thing, of course.
Maybe I don't know how to read English, but the article says Shiller is NOT predicting Dow 4000.

That sentence about DOW 4000 was written by the journalist. He is not quoting Shiller. You are putting words into Shiller's mouth.
I agree with Grayfox, and I think the original poster should change the thread title. I'd suggest:

"Dow could 'overshoot' and briefly hit 4000?"

Not only is the present title, "Shiller says Dow may go down to 4000," factually incorrect, but when I read that phrase, maybe it's just me, but what I infer from the wording is sustained period at that level; as if 4,000 was the "right" level from which it would make a slow, laborious climb upward, which is not at all what the article is suggesting.
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Post by jeffyscott »

Rather than the focus on the past price changes and potential future price changes, I think this part of the article should be more meaningful to long term investors:
Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it's hard to avoid stepping on them. Out of 9,194 stocks tracked by Standard & Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year -- or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash -- an even greater proportion than Graham found in 1932.
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Post by Levett »

Gummy,

Here's a chart posted in the New York Times.

http://www.nytimes.com/interactive/2008 ... TS.html?hp

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Jeffy

Post by froggy »

Jeffy, thanks for posting that. I think it balances this thread, nicely.
We'll see Dow 14,000 again. We just don't know when.

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Post by bearcub »

I can work till I am 100yrs. old When I die my family can sell my organs on the black market. Never to early to plan ahead.
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Post by gummy »

bob u. wrote:Gummy,
Here's a chart posted in the New York Times.
http://www.nytimes.com/interactive/2008 ... TS.html?hp
Bob U.
Neat! Thanks, Bob.

I had to try that meself, comparing with the worsest years ...
http://www.gummy-stuff.org/DOW-weakly.gif
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Post by Rick Ferri »

Possibility is not probability. The media likes to use the word 'possible' because it sensationalizes a story when the probability is remote.

It is possible a large meteor will strike North American in the next 12 months and wipe us off the planet, but not probable. Shiller says it is possible the Dow will fall to 4000, not a probable.
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Post by gummy »

I reckon it's easy enough to say what's "possible" or "plausible".
In Dec, 1996, Shiller said:
"... it is entirely plausible that the [Dow Jones] could dive well below 7,000 in the next few years."
In fact, the DOW went to 9,894 over the next five years ... to 12,316 over the next five years.

It was said about Shiller (in Fortune)
"... the smartest guy who'd been most wrong about the stock market."

Now, after extensive mathematical analysis I'd like to say that it is "possible" that the DOW will not go below 8,000 and will increase to 12,000 within a year. :lol: :lol:
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Post by tetractys »

gummy wrote:
bob u. wrote:Gummy,
Here's a chart posted in the New York Times.
http://www.nytimes.com/interactive/2008 ... TS.html?hp
Bob U.
Neat! Thanks, Bob.

I had to try that meself, comparing with the worsest years ...
http://www.gummy-stuff.org/DOW-weakly.gif
Looking at these charts, I see we're having a nice smooth ride down, with relatively little volatility. -- Tet
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Post by superlight »

Rick Ferri wrote:Possibility is not probability. The media likes to use the word 'possible' because it sensationalizes a story when the probability is remote.

It is possible a large meteor will strike North American in the next 12 months and wipe us off the planet, but not probable. Shiller says it is possible the Dow will fall to 4000, not a probable.
Wait a sec Rick. When Schiller asserts a possibility he is (as many people above have pointed out) not making a prediction. The word "may" is about a possibility and not a prediction.

But I'm afraid when you say "not probable" you HAVE asserted a probability (in negation) and must have some other "probability" in your mind.

I personally think we are at a juncture where no one knows. Well it's a somewhat common condition that no one knows the future ... and that's where we are today.

Someone might protest that 4000 on the DOW is outlandish from the standpoint of historical norms ... but then where we are today is already outlandish by those norms.

(I think all this argues for caution and against rash decision.)
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Post by superlight »

gummy wrote:I reckon it's easy enough to say what's "possible" or "plausible".
In Dec, 1996, Shiller said:
"... it is entirely plausible that the [Dow Jones] could dive well below 7,000 in the next few years."
In fact, the DOW went to 9,894 over the next five years ... to 12,316 over the next five years.

It was said about Shiller (in Fortune)
"... the smartest guy who'd been most wrong about the stock market."

Now, after extensive mathematical analysis I'd like to say that it is "possible" that the DOW will not go below 8,000 and will increase to 12,000 within a year. :lol: :lol:
Remember the cardinal rule - we can never calculate true odds in retrospect. We only have one history to work with. We'd need 1000 parallel worlds run through 1000 parallel "few years" to know that the odds were of 12K or 8K.

This is the hard thing that grinds against predictions and predictors ... when we get an outcome we don't really know if it [was] odd-on or a true real world statistical flier.
Last edited by superlight on Sun Oct 12, 2008 10:24 am, edited 1 time in total.
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Post by gummy »

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Post by btenny »

Gummy
Can you please add 1974 to your chart?

Thanks
Bill
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Post by gummy »

btenny wrote:Gummy
Can you please add 1974 to your chart?
Thanks
Bill
Done:

http://www.gummy-stuff.org/DOW-weakly.gif

P.S. I got this stuff here:
http://www.gummy-stuff.org/meltdown.htm
:lol:
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Post by bullie1976 »

I think it's possible for the DOW to go to zero. I need to write a book or something. When there is fear on the street, you will hear all kinds of possibilities.
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Post by Buckeye »

Looks like Shiller's 1996 statement that the Dow could dive well below 7000 is turning out true! Just took a few more than a few years. :lol:

No one at the time could have forseen the massive tech bubble to come and then the massive housing bubble to come which seemingly both combined to delay what seems to have been inevitable.

(unless of course another kind of bubble is given birth soon)
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Post by superlight »

Buckeye wrote:(unless of course another kind of bubble is given birth soon)
The Onion nailed it back in July, with "Recession-Plagued Nation Demands New Bubble To Invest In":

http://www.theonion.com/content/news/re ... on_demands
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Post by larryswedroe »

Keep things in perspective

In 1982 we had very high interest rates and very high REAL rates

Today we have neither

We also have massive injections of liquidity and fiscal stimulus all over the globe

The market certainly can go lower if for no other reason then forced sales of margin and collateral calls, let alone panicked selling
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Shiller says Dow may go down to 4000

Post by YDNAL »

The fact that we are discussing semantics indicates the high level of anxiety - even here in Bogleland. Isn't the second commandment... thou shall not listen to the noise? We all know the first... thou shall stay the course.

BTW, Shiller said it is a "serious possibility" we can hit PE10 which will take the Dow below 6000. He also said "it strikes me that it might go down a lot more."
Jason Zweig then wrote:In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have to fall to roughly 400, more than a 50% slide from where it is today. A similar drop in the Dow would hit bottom somewhere around 4000.
Robert Shiller nor Jason Zweig know what's ahead any more than anyone else. You've got the wrong subject title in your thread, Mr. mathwhiz.

Regards,
Landy

edit: to correct name mis-spelling.
Last edited by YDNAL on Sun Oct 12, 2008 11:29 am, edited 1 time in total.
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Post by bob90245 »

Buckeye wrote:No one at the time could have forseen the massive tech bubble to come and then the massive housing bubble to come which seemingly both combined to delay what seems to have been inevitable.

(unless of course another kind of bubble is given birth soon)
Right. We're now seeing the unwinding of the commodites/oil bubble. I believe that will take care of all the bubbles. Then we can start anew. :wink:
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Post by wab »

Rick Ferri wrote:Possibility is not probability. The media likes to use the word 'possible' because it sensationalizes a story when the probability is remote.

It is possible a large meteor will strike North American in the next 12 months and wipe us off the planet, but not probable. Shiller says it is possible the Dow will fall to 4000, not a probable.
Well, we can read between the lines. Shiller is a huge believer in behavioral finance. He says there is fear in the markets, and fear is what drives prices below fair value.

Shiller doesn't like to make predictions, but he is saying that the market will undershoot fair value due to fear.
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Post by Rick Ferri »

wab wrote:Shiller doesn't like to make predictions, but he is saying that the market will undershoot fair value due to fear.
I believe they already have. Companies that have no debt and double digit earnings growth are trading at a very low PEs, i.e. MSFT, CSCO. That is far below their economic fair value.

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Post by jeffyscott »

gummy wrote:I reckon it's easy enough to say what's "possible" or "plausible".
In Dec, 1996, Shiller said:
"... it is entirely plausible that the [Dow Jones] could dive well below 7,000 in the next few years."

Since the DOW was at about 6500 in Dec 1996 that statement must have been made around the time that article is dated...presumably in in 1998 or 1999. In the last 10 years the total return of the stock has been just about 0, based on the S&P 500. Anyone who followed his advice and bought TIPS instead of stocks came out far, far ahead.
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Post by bob90245 »

Rick Ferri wrote:
wab wrote:Shiller doesn't like to make predictions, but he is saying that the market will undershoot fair value due to fear.
I believe they already have. Companies that have no debt and double digit earnings growth are trading at a very low PEs, i.e. MSFT, CSCO. That is far below their economic fair value.

Rick Ferri
Unfortunately, these companies don't operate in a vacuum. With frozen credit markets and threat of global recession, sales will likely fall and so will earnings. And economic fair value.
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Post by jeffyscott »

bob90245 wrote: With frozen credit markets and threat of global recession, sales will likely fall and so will earnings.
These problems are not likely to persist forever.
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Post by Mr. Jean »

Great charts Gummy, thanks. I had forgotten that 1987 only had 50 weeks though. :wink:
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Post by bob90245 »

jeffyscott wrote:
bob90245 wrote: With frozen credit markets and threat of global recession, sales will likely fall and so will earnings.
These problems are not likely to persist forever.
Correct. Recessions and bear markets end. Eventually.
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Post by wab »

bob90245 wrote:Unfortunately, these companies don't operate in a vacuum. With frozen credit markets and threat of global recession, sales will likely fall and so will earnings. And economic fair value.
That's why Shiller looks at a 10-year average of earnings.

About 18 months ago, I took a guess at fair value of the S&P 500 using a slightly different methodolgy.

I got a value of 864. We're there!

http://www.early-retirement.org/forums/ ... stcount=10

That's pretty close to Shiller, and it's also close to the new "adjusted" Tobin's Q definition of fair value.

So any price compression we get from here means stocks are on sale. Who's backing up the truck!? :)
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Post by schwarm »

bob90245 wrote:
Buckeye wrote:No one at the time could have forseen the massive tech bubble to come and then the massive housing bubble to come which seemingly both combined to delay what seems to have been inevitable.

(unless of course another kind of bubble is given birth soon)
Right. We're now seeing the unwinding of the commodites/oil bubble. I believe that will take care of all the bubbles. Then we can start anew. :wink:
With a collapse in demand, oil is still $80/bbl, and gas $3+/gallon at the pump. JMO, but this is the real longer term problem that has temporarily faded with the financial crisis. Once the economy starts to turn around, the pressure from commodities and energy will resume.
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Post by JohnDoe2004 »

If the Dow goes down to 4000 I will go 100% equities, perhaps even 150 - 200%.
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Post by daryll40 »

schwarm wrote:
bob90245 wrote:
Buckeye wrote:No one at the time could have forseen the massive tech bubble to come and then the massive housing bubble to come which seemingly both combined to delay what seems to have been inevitable.

(unless of course another kind of bubble is given birth soon)
Right. We're now seeing the unwinding of the commodites/oil bubble. I believe that will take care of all the bubbles. Then we can start anew. :wink:
With a collapse in demand, oil is still $80/bbl, and gas $3+/gallon at the pump. JMO, but this is the real longer term problem that has temporarily faded with the financial crisis. Once the economy starts to turn around, the pressure from commodities and energy will resume.
I think this latest oil shock was severe enough that people will continue to make changes. In my own case, it doesn't make sense to replace my wife's Explorer with a Prius or even Corolla. The Explorer is worth bupkis so it makes sense to drive it into the ground. But we used to get a new Explorer every 2-3 years. The current vehicle is 6 years old and we will keep it until it starts costing me big money and aggravation. That being said, WHEN THE TIME COMES, the next vehicle will get better mileage. Probably not small as a Corolla, but certainly something in the 18-20 city MPG range versus the current 13 MPG.
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Post by wab »

daryll40 wrote:That being said, WHEN THE TIME COMES, the next vehicle will get better mileage. Probably not small as a Corolla, but certainly something in the 18-20 city MPG range versus the current 13 MPG.
Why? If you believe in efficient markets, the price of a new Ford Explorer should be discounted sufficiently to offset the poor gas mileage. :)
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Post by Buckeye »

The long term trendline has the DOW at 7000 for fair value.

But I think some are saying we will see the DOW far below 7000 because past history shows bottoms of major bears have stocks being undervalued....not fair value.

I share Roubini's view on this. I don't see the DOW dropping much below 7000 next year. The question is will it rise in an orderly fashion afterwards....or will it rise via another bubble.

The sharp INCREASES in 1933 and in other cases were from a very undervalued point....NOT a fair value point.
Last edited by Buckeye on Sun Oct 12, 2008 3:32 pm, edited 1 time in total.
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Post by jsnbrnd »

Rick Ferri wrote: The media likes to use the word 'possible' because it sensationalizes a story when the probability is remote.
Indeed.

"If it bleeds, it leads."

If it doesn't bleed, slice it open to make it start.
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Post by Buckeye »

Rick Ferri wrote:Possibility is not probability. The media likes to use the word 'possible' because it sensationalizes a story when the probability is remote.
"That's a serious possibility, because it's done it before," says Prof. Shiller.
Which media does Prof. Shiller work for?
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Post by daryll40 »

wab wrote:
daryll40 wrote:That being said, WHEN THE TIME COMES, the next vehicle will get better mileage. Probably not small as a Corolla, but certainly something in the 18-20 city MPG range versus the current 13 MPG.
Why? If you believe in efficient markets, the price of a new Ford Explorer should be discounted sufficiently to offset the poor gas mileage. :)
You can get a 1-2 year old used Explorer cheaply. So you are right. I chose a similar but different path. Keep my 6 year old Explorer....put $2000 into maintenance and repairs....and cross that bridge in a few years.
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Post by dothemontecarlo »

bullie1976 wrote:I think it's possible for the DOW to go to zero. I need to write a book or something. When there is fear on the street, you will hear all kinds of possibilities.
I'll make sure I keep $1 set aside in cash, so when the DOW goes down to zero, I can buy it and own all the publicly traded companies.
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Post by Rick Ferri »

[deleted dupe post]
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Post by Rick Ferri »

Rick Ferri wrote:Possibility is not probability. The media likes to use the word 'possible' because it sensationalizes a story when the probability is remote.
Buckeye wrote:"That's a serious possibility, because it's done it before," says Prof. Shiller.
And how does an educated statistician like Shiller define 'serious' in 'serious possibility?' That is akin to saying something is 'slim chance' or a 'fat chance', whatever those mean. Perhaps Shiller can be more specific so people do not go overboard with this attention grabbing news story.

.
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Post by superlight »

Rick Ferri wrote:And how does a educated statistician like Shiller define 'serious' in serious possibility? Is it a 'slim chance' or a 'fat chance'?
Given the great sea of uncertainty, we cling to precedent as the only raft we have. We do it by back testing, or by pointing out what past crashes or crises have done ... not because we believe it will happen just that way again, but because it's all we have.

Personally, I think it's fair to say any past precedent is a serious possibility ... in the sense that it isn't an escape to fantasy or fiction.

If anyone has past examples of crashes "rejected" by the market and turned into longterm bulls ... I'd love to hear about them, and treat them also as serious possibilities ...
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Post by Grt2bOutdoors »

Time to buy! Let's see, now that all the prognosticators are coming out of the woodwork preaching financial armegeddon, my question is, where was Shiller in January, still talking about real estate? Now he's hopped on this bandwagon. Things are bad, may become worse, anything is possible, but I'd like to hear what his next prediction is before it "hits the fan", not after.
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Post by Buckeye »

The markets rallied about 9% when the House first announced they had an agreement (before the first vote which failed.)

I wonder if we see something similar with the G7/European announcements.
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