Great Depression Not Imminent, But Inevitable 80 comments
-
Font Size:
-
Print
- TweetThis
At the root of domestic and global growth in the previous decade lies the substantial expansion of the business of risk insurance. And, as the facts are now rapidly unfolding, the exponential rise in the provision of coverage mechanisms for corporate bond default risks, sovereign debt risks, trade credit risks and political risks became the single biggest contributor to the unprecedented levels of debt and leverage exposed this October.
Today, it is becoming evident that the “non-actuarial” segment of the insurance marketplace is in sustained decline; fast-retreating risk insurance underwriters are laying the basis for the next Great Depression, succinctly identified by a widespread and comprehensive collapse in asset valuations. And, since the numerous stimulus plans have not even started to identify the methodologies being applied, or to be applied, to such valuations, the near-term and medium-term case for the S&P 500 to consolidate somewhere below 700 in 2009 remains compelling. Here is a short list of the behaviour of certain lead indicators which need to be recognized, and which are prompting this writer to reiterate a short-equity-index (DIA, QQQQ, SPY) call regardless of Wall Street’s immediate response to the Fed rate cuts on Tuesday.
Credit default swap providers have already suffered significant losses due to sharply widening spreads on Russia, Argentina, Pakistan, Ecuador, Iceland and Hungary, to name just a few examples. And as CDS spreads for industrialized countries like Greece and Italy breach 270 and 200 basis points respectively this week, there is every reason to believe that those pricing sovereign risks have nowhere to go to hedge their positions. The problem is that, despite what some on Wall Street have been claiming, non-actuarial insurance classes (e.g. coverage of embedded risks in credit default swaps and collateral debt obligations transactions) cannot be hedged in any credible manner. The crisis at American International Group (AIG) can best be explained by the elite insurer’s decision to depart from its mainstream life and non-life businesses into sectors which do not lend themselves to any systematic mathematical and statistical risk assessments.
Precise information on which counterparty priced which corporate bond risk, and how much CDS-type risk (bought and sold), particularly in pricing terms, pervades the global corporate spectrum, is largely unavailable. But it is common knowledge that CDS price-makers have been using probability and option driven models which are increasingly proving to be divorced from reality. On whose books are the losses on widening CDS spreads being reflected?
The CDX investment-grade index (North America) has moved from 160 bps in early October to 245 bps, after touching a high of 285 bps in late November. During the same period, the high yield index rose from 925 bps to 1410 bps. This writer’s view is that, though there is broad array of quotes available from CDS and CDO brokers on a daily basis, actual deals are extremely limited; and, in a few short weeks, as more negative data on the global economy is published, debt default insurance providers will go into hiding.
As things stand, the reluctance of Lloyd’s syndicates to cover political risks is having a significant impact on investments in the third world. Calls to the Berne Group for export credit insurance are being met with “we’ll get back to you” messages. And forfaiting (discounting trade paper) companies in London and Europe have now priced themselves out of the market altogether. In fact, the diminishing trade credit insurance matrix is one of the primary reasons for this writer’s short call on the emerging markets (EEM).
It is difficult to predict when this strong “no-insurance” undercurrent will emerge, and be acknowledged, as a dominating factor in determining the status of the global economy. But, quite clearly, the ongoing dramatic reduction in the size of the risk insurance business will start to erode the quality of credit (higher yield spreads and higher upfront fees) within the first half of 2009; that erosion will, in turn, result in depressed asset values (even from this juncture), and in historical business contractions in the US and elsewhere. The basic ingredient (i.e. the end of non-actuarial risk underwriting) of another Great Depression is firmly in place.
Disclosure: Author holds short positions in EEM, SPY
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Philip Davis
-
3
Bill Gross
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 80 comments:
You have two forces battling it out: govt printing and pumping whilst deflationary/deleverag... forces are in full swing. The verdict is unkown whilst stocks are taking heart with each massive pumping action.
So i always welcome commentaries which appear to be honest and without an agenda.
When will they be held accountable?
When will Cox be arrested?
The author discloses short positions in SPY and EEM...might this not indicate some kind of agenda?
On Dec 17 09:10 AM Boubou wrote:
> One reason many of us have lost so much money is the reluctance on
> the part of government and finance spokesmen to tell the truth in
> bad times. So while voices out on the fringe were warning of the
> events of 07/08, most officials were saying stuff like ' best backdrop
> for world economy I've ever seen' to paraphrase Paulson and Bush
> among many others.
> So i always welcome commentaries which appear to be honest and without
> an agenda.
As Churchill remarked, "democracy is the worst form of government, except for all of the others". Corruption in the West is eventually exposed and is the exception, not the rule. Corruption and deceit in India, Russia, China and many like societies elsewhere is not only endemic, it is accepted.
Regardless, enjoyed reading your opinion.
Dream on.
The LBO of America.
No. That is not an agenda. That is just to substantiate his opinion.
On Dec 17 10:04 AM drbob66 wrote:
> "So i always welcome commentaries which appear to be honest and without
> an agenda"
>
> The author discloses short positions in SPY and EEM...might this
> not indicate some kind of agenda?
>
> On Dec 17 09:10 AM Boubou wrote:
> team to the next desperate company and create the same business model
> over again. Good money in this if you stay ahead of the nuclear winter
> left in your wake!
No. Good money is what the government is throwing after the bad. This sounds more like carpetbaggery. I agree with the author, "The basic ingredient (i.e. the end of non-actuarial risk underwriting) of another Great Depression is firmly in place."
There are two kinds (a good kind and a bad kind) of leverage and we are experienceing the results of the bad kind.
Good leverage is used to finance the means of production. This leverage, wisely used, is paid back with the increased productivity. Continuing production creates further wealth beyond the pay-back period.
Bad leverage is used to finance things with no utility. (Utility is the economic concept of providing for the needs and wants of society.) We have just gone through a period of expanding leverage to produce additional financial instruments. These financial instruments were treated as being means of production when they were not. Because of this treatment the newly created financial instruments were used as collateral assets to produce more financial paper.
This is the structure of the collapsing pyramid and has a relationship to Ponzi, alluded to by Equity Has No Clue. Others have said we are discovering that the Emperor has no clothes. Still others have said that we are discovering who has been swimming naked as the tide goes out.
The bottom line: Leverage without utility is doomed to failure.
On Dec 17 10:51 AM Equity Has No Clue wrote:
> Great article. Leverage is turning into one giant ponzi scheme. Right
> now the government is not letting the market take any more pain so
> the government is trying to inflate the market out of its problem
> and will lever up to transfer the problems to their balance sheet.
>
>
> The LBO of America.
On Dec 17 07:49 AM Maya_ wrote:
> Silly article. One has to acknowledge that derivatives have serious
> destructive potential. But policy response is likely to contain the
> damage. As far as whether "no insurance" will cause a great depression;
> I wonder why the great depression ever got over; after all derivatives
> in its present day form are a very recent phenomenon.
Simply dumb. What covers real risks is spreads, spreads are at epic levels, ergo even epic levels of risk can be objectively handled now. The silly and dangerous bit was the low spread world we just exited --- exiting it has destroyed so much capital taking credit risk for a living (which used to be known as "banking", duh) that spreads have reacted to the opposite, silly extreme. Someone will realize these epic spreads are buys when the narrow ones were sells, and be profitable as a banker again. Those who believed that it was possible to be a banker at spreads of zero were wrong, those who now believe it is impossible to be a banker at spreads of 10% over risk free rates are just as wrong.
Both are trend following idiots and not bankers.
Add more American military aggression, more CIA caused strife and meltdown overseas and more impotent fools trying to fix their mess by using the same tools that got us here in the first place.
In other words, like the author you are trying to divert attention form the real problem by assigning a fall guy that is convenient.
The US Wall Street Banksters and their Congressional lap dogs are at fault. No outside boogey man did this to us.
On Dec 17 08:47 PM PROXIMO wrote:
> ANOTHER GREAT DEPRESSION MAY OR MAY NOT BE INEVITABLE IN THE NEXT
> YEAR OR SO, BUT IT IS NOT IMPLAUSIBLE. AT THIS POINT IT IS NOT
> HARD TO THINK OF CATALYSTS FOR A CRISIS; A PANIC ON WALL STREET,
> ANOTHER 9-11, TOP LEVEL POLITICAL SCANDAL, MORE SOVIET MILITARY
> AGGRESSION, FURTHER MELTDOWN OVERSEAS, ETC. ANOTHER
> WELL-REASONED TERRIFIC ARTICLE AS USUAL BY SAXENA.
Contrast this with other countries where everyone and everything is corrupt and you can see why the US will still be on top when the business cycle finally turns around. In lots of places you must buy everyone off to get anything done.
I still see hyperinflation in our future eventually.
Take the Middle East: financiers in Dubai blame the "U.S. subprime crisis" for recent trading losses, as though their own lending practices weren't orders of magnitude MORE risky (granted, they do ask for higher down payments, they don't securitize the loans to get them off the books, and they almost never file a foreclosure action - instead, they just hide the bad debts, shifting them like hot potatoes from one set of books to another). Real estate brokerages in China, Russia, and several other countries are just as guilty.
The confluence of all these excesses in the emerging markets will have to come to light and work themselves out - and then the region will boom once more.
Watch the convulsions of world financial systems as Keynesian economics die. It will be a long and painful process.
So while we endure the 500% to 900% Hyper Inflation for the Government to try and get back all that excess money they are now shoveling into the Economy we can be happy that the wealthy will not have to suffer at all. Maybe they will give our children a job in a sweat shop somewhere.
On Dec 17 07:49 AM Maya_ wrote:
> Silly article. One has to acknowledge that derivatives have serious
> destructive potential. But policy response is likely to contain the
> damage. As far as whether "no insurance" will cause a great depression;
> I wonder why the great depression ever got over; after all derivatives
> in its present day form are a very recent phenomenon.
And WHY are these people not in Jail??
On Dec 18 07:56 AM smurphny wrote:
> The idea that failure of institutions who took unclear and extraordinary
> risks will cause a depression is questionable. The "bubble" has obviously
> been the level of risk, the assessments of which became pure fiction.
> Sound financial basics were ignored and no one from government (SEC)
> was even trying to watch. We are all waiting to hear just WHO was
> involved in the neglect of duty in this organization which is funded
> by tax dollars to do, well...nothing. If government should be involved
> at all right now, it should be to regulate the orderly dissolution
> of both sides of this CDS folly. Debt needs to be permanently lowered
> across the board, in all sectors of the financial world, from credit
> cards, corporate paper, to interbank loans. Debt needs to be strictly
> regulated by very clear rules and issued only with minimal risk,
> collateralized with sound assets. We need to go back to this old,
> sound mentality of debt and remove highly speculative bets from the
> debt world. Our government should be arranging the transitions/bankruptci...
> of the AIGs, FNMs, and future insolvent financial companies, complete
> with the firing of ALL persons involved in the policy-making decisions,
> not their refunding with my tax dollars. Entities like Moody's, Fitch,
> and S&P should be closed down immediately for malfeasance (since
> no credit is being issued at present anyway), cleaned of all people
> who willingly went along with or actively promoted fraud, and executive
> offices filled with some of the people who quit these companies because
> they saw the fraud going on. WHY ARE THE EXECS. OF THESE COMPANIES
> STILL WALKING THE STREETS??? Confidence is the issue right now and
> no confidence will be restored until the rot is thoroughly removed
> from the wood, perp walks highlighted during prime time, and a clear
> new direction adopted. This is NOT happening at present and if it
> does not happen, as more shoes start to drop, the BEST outcome may
> be a depression.
On Dec 17 08:32 PM CautiousInvestor wrote:
> The above is an interesting article, offering fresh insight into
> the role that CDS have had in spurring lending and growth and the
> implications of repriced credit insurance. To suggest, though, that
> the present price and/or availability of CDS is the singular reason
> for a prospective depression is grossly over simplifying the horrendously
> complex economic problems the world is facing. And while many developments
> have led us to where we are today, the significance of the housing
> bubble.....in all of its dimensions... and its ongoing aftermath
> must be included in any discussion of today's financial Armageddon.
Deluded optimism Works in America, Realism makes you a freak, and a target of the SEC (ie. shorts attacked for pointing out what turned out to be the truth)
On Dec 17 08:46 AM The Simple Accountant wrote:
> Inevitability of a great depression is a non sequitur, given the
> analysis in the article. The evidence is troubling, indeed, but inevitability
> is a extraordinary claim which should not be made lightly.
On Dec 17 03:37 PM JasonC wrote:
>
> Simply dumb. What covers real risks is spreads, spreads are at epic
> levels, ergo even epic levels of risk can be objectively handled
> now. The silly and dangerous bit was the low spread world we just
> exited --- exiting it has destroyed so much capital taking credit
> risk for a living (which used to be known as "banking", duh) that
> spreads have reacted to the opposite, silly extreme. Someone will
> realize these epic spreads are buys when the narrow ones were sells,
> and be profitable as a banker again. Those who believed that it
> was possible to be a banker at spreads of zero were wrong, those
> who now believe it is impossible to be a banker at spreads of 10%
> over risk free rates are just as wrong.
>
> Both are trend following idiots and not bankers.
Should we expect any different from our walking oxymoron of a President?
Be afraid. Be very afraid.
What part of "government-backed money and banking cartel (GBMBC) sounds like the "free market"?
M. B. Moon
The free market system doesn't need you to save it. AT WORST, all it needs is for you to leave it alone. Which reminds me:
'Don't fight the Fed.'
I've heard this till I'm sick.
If that's the 'free market',
then I've never heard of it.
The Fed thinks it's our savior
when all it has are tricks.
Soon it will be shown:
what is what
and which is which;
Mr. Market is no dog
but the Fed is just a tick.
A good downturn will help clean out the 'stupid economy' - wind power, solar panels, defense overspending, silly government spending, people who can't read and add getting expensive mortgages, e-zee corporate credit, etc...
Arguments against the likelihood of a Depression:
1) Kipling wrote recently that most households nowadays have two incomes, husband and wife, and would therefore be more robust to withstand a severe downturn compared to the Great Depression when most have a single bread winner.
2) The U.S. economy in the 1920s was primarily natural resource based and were more prone to manufacturing downturn particularly in the heavy-equipment sector. Today the U.S. economy is much more diversified and versatile to rebounding.
3) The financial authorities today have learned from the mistakes made by President Hoover and Prime Minister Bennett (Canada) who further tightened credit after the stock market crash.
4) During the Great Depression at the height of the crisis, quite a few destitute stock financiers chose to commit suicides further bringing down the domino effect. Nowadays fewer take those fatal acts.
Arguments for the Likelihood of a Depression:
1) While the 1929 Depression was attributed to excessive speculation in the stock market, the 2008 crisis was triggered by the housing bubble. Housing surplus would take longer to correct than paper stock overpricing.
2) The 1929 Depression hit America, Canada, and Europe hardest. The Soviet Union, Japan and the Far East were less impacted, for various reasons. This time around because of the intertwining of the global finances, worldwide recovery will take longer, and more difficult.
3) In the 1920-30s the U.S. was still a "young" nation up and coming. This time nations around the world compete fiercely with the U.S. in manufacturing. Competition will make it harder for the U.S. to bounce back in a robust manner.
4) Finally, let us remember it was WWII that finally lifts the U.S. out of the Great Depression. This time there would be hard to find that Nazi Germany and Imperial Japan to pull us out.
Several comments, and though i will focus on points of disagreement / over-generalization, i do agree that insurance (or assurance) is one (vs the only) ingredient.
1. Inevitability. Suggests certainty, though tht is one scenario...another scenario could be a long drawn out recession.
2. Depression. One government (USA) has stated they will do everything in its ability to prevent certain crises. Seems they will do just about anything to avoid the "D" word, even providing a credit guarantee.
3. Who is the insurer or guarantor of last resort? I asked this question at an industry meeting in 2005 as there was fast consolidation in the reinsurance market. Investment banks had stepped in for some aspects of risk. Really what is needed is an entity to cover all risks of an enterprise (Enterprise Risk Management). Well, not even a government is a guarantor, technically, but entities do put some faith in some governments. So, although market forces/risk pricing would suggest otherwise, governments will find a way...and defer the problem to future generations.
4. Discussion of "non-actuarial" risks. Actuaries (some) are quite versed in analyses/calculations of investment risks, particularly within the past 10 years. Actuaries may not be as prevalent within the investment banking / pricing market, but they do possess knowledge to be so.
5. Pricing of CDS's and other derivatives. These securities are rather illiquid., and with relatively few transactions, pricing may vary widely. Pricing based on a computer/statistical distribution model over several scenarios might be great in theory, but what we are dealing with here are events (and economies) beyond those 2 standard deviations or 95/99% confidence intervals. We have these 'extreme' events which are now moreso the norm (extremes vs norms in weather/climate patterns is an analogy). Pricing needs to be done on an extreme event/scenario basis.
6. Economies will not function without insurance? Yes, insurance is needed for international trade and for certain industries. But some industries in domestic economies may not have such requirement.
7. Credit economy vs Cash economy. Have you visited developing nations? Many of these nations work on a cash basis, and those economies function. Insurance (or assurance) is provided via substantial funding of actual cash/cash equivalents vs. trade credit/ credit derivatives. Yes, there would be a significant hit to economies transitioning to lower-leverage environments and significant change in standard of living, but it may not lead to a Great Depression.
Though i've focused more on points of disagreement, your article is informative, and therefore appreciated.
Always good to hear both sides, and with all these people on CNBC, etc saying, the market has bottomed (and repeating it seemingly several times per hour), there still are significant issues out there. Governments may continue to pump money at the problem, but they haven't resolved the underlying causes, and the problems will be passed to future generations.
I think Einhorn and other intelligent short-sellers are an important aspect of our market system. They maintain a relevant check on the managements service for their shareholders. Poor companies should be exposed and capitalism (something that is undergoing a metamorphosis) should create opportunities.
Einhorn, for example, exposed companies with poor financial position. They did not deserve the multiples bestowed on them by Mr. Market. Being a smart capitalist who is confident with his research, Einhorn placed a bet with the odds on his time. It was simply a matter of time until their financial inequities were exposed and multiples took a slide.
"One reason many of us have lost so much money is the reluctance on the part of government and finance spokesmen to tell the truth in bad times."
Right. I'm sure you would have lost a whole lot less money if the government had come up one day and said "ok, things are bad, you all should sell now before things get worse.".
"One reason many of us have lost so much money is the reluctance on the part of government and finance spokesmen to tell the truth in bad times."
Right. I'm sure you would have lost a whole lot less money if the government had come up one day and said "ok, things are bad, you all should sell now before things get worse.".
The factory pays 35-40% taxes for producing wealth. The casino finds ways to dodge taxes, and then only pays 15% for their cap gains, dividends, and interest for producing.... well... not much. In the US, we punish the factories and reward the contract flippers for houses, credit default swaps, stocks, etc.
In theory, the casino could go broke underwriting dumb bets (CDS's) or loans (mortgages) and the factory could continue to produce all the actual wealth. However, in reality, the factory needs the casino to loan it money to grow and to provide financing to its customers, so when the casino goes down due to gambling that is not even related to actual production of wealth, it takes the factory and our GDP with it.
Perhaps the people who work for a living actually producing something should request that "investment" banking and actual banking be re-separated by law so that they are not again the victims of bankers' foolish gambles. This was the case from the end of the depression until 1999, when the big banks lobbied to repeal the Glass-Stegal act as a way to promote growth.
How did that work out for the factory, the integrity of banking and investing, and our economy? Also, did the Bush tax cuts on non-productive earnings such as capital gains, interest, and dividends have anything to do with the gamblers running wild?
As the market prices of assets deflate, risk actually starts to evaporates. Now in emerging economies you can a $1 of value for 50 cents (some EM "A" rated bonds are yielding 18% + in USD - and the USD is likely to go down). People who still have cash will be enticed by such mouth watering bargains and slowly come into the market and the system will slowly start to correct itself.
Thus in my view your call for a great depression is unnecessary scare mongering. However anything is possible and even a broken clock in right once a day - so a a great depression as a "once a century event" is possible but not probable given the policy response by the US government and China.
On Dec 17 10:23 AM TAS wrote:
> Much like the old Soviet Union "we will bury you" period of history,
> those predicting the demise of the West accompanied with the implied
> rise of another system is interesting, but flawed.
>
> As Churchill remarked, "democracy is the worst form of government,
> except for all of the others". Corruption in the West is eventually
> exposed and is the exception, not the rule. Corruption and deceit
> in India, Russia, China and many like societies elsewhere is not
> only endemic, it is accepted.
>
> Regardless, enjoyed reading your opinion.
On Dec 17 10:23 AM TAS wrote:
> Much like the old Soviet Union "we will bury you" period of history,
> those predicting the demise of the West accompanied with the implied
> rise of another system is interesting, but flawed.
>
> As Churchill remarked, "democracy is the worst form of government,
> except for all of the others". Corruption in the West is eventually
> exposed and is the exception, not the rule. Corruption and deceit
> in India, Russia, China and many like societies elsewhere is not
> only endemic, it is accepted.
>
> Regardless, enjoyed reading your opinion.
On Dec 18 05:45 PM Chris B wrote:
> There is the casino and there is the factory. Only one of them produce
> wealth.
>
> The factory pays 35-40% taxes for producing wealth. The casino finds
> ways to dodge taxes, and then only pays 15% for their cap gains,
> dividends, and interest for producing.... well... not much. In the
> US, we punish the factories and reward the contract flippers for
> houses, credit default swaps, stocks, etc.
>
> In theory, the casino could go broke underwriting dumb bets (CDS's)
> or loans (mortgages) and the factory could continue to produce all
> the actual wealth. However, in reality, the factory needs the casino
> to loan it money to grow and to provide financing to its customers,
> so when the casino goes down due to gambling that is not even related
> to actual production of wealth, it takes the factory and our GDP
> with it.
>
> Perhaps the people who work for a living actually producing something
> should request that "investment" banking and actual banking be re-separated
> by law so that they are not again the victims of bankers' foolish
> gambles. This was the case from the end of the depression until
> 1999, when the big banks lobbied to repeal the Glass-Stegal act as
> a way to promote growth.
>
> How did that work out for the factory, the integrity of banking and
> investing, and our economy? Also, did the Bush tax cuts on non-productive
> earnings such as capital gains, interest, and dividends have anything
> to do with the gamblers running wild?
Too little to late? China has $600B stimulus package for an economy less vibrant than it used to be. The US will need $1.8T to match China's initiative to prop up an economy already in the dumps.
This is another inefficient wasteful government initiative with the purpose of trying to create unproductive jobs to replace lost productive jobs caused by company lay-offs spurred by the massive stock market meltdown when investors decided to withdraw their capital from the financial markets.
Restoring private capital is needed in order to reverse the spiralling downward trajectory of the stock markets that is pulling the economy down.
Restoring investor confidence is the key.
All this problems started with an estimated $200B to $400B total loss from the bloated
Subprime loans of $1.2T - until house prices return back to normal levels first time buyers will be able to afford. A necessary loss.
Small problem they said. Not enough reason for the whole country to go into recession.
Now, a series of events have shaken investor confidence starting with the banks doing its own self preservation credit crunch that led to Bear Stearns collapse followed by LEH collapse; then followed by the govt "nationalization" of Fannie and Freddie and AIG paying pennies for every share of such companies; then the blatant "land grab" by FDIC of Wamu and Wachobia Bank and selling them for pennies thus destroying private and public capital investments in the process.
Brilliant move by the government specially FDIC making a couple of billions of instant profit in the process. Basically trashing investors all over the world who have invested in LEH, FnF, AIG, WM, and WB treating them like they dont exist.
This was aggravated by the emergency "restore investor confidence" $700B TARP which Congress and Senate played like a ping-ping game and later decided half-heartedly with $350 TARP. Telling investors half restoration of confidence is better than nothing.
Too little too late. That only showed that investors are not going to get support not only from the Treasuries and FDIC but also from the Congress and Senate. All hope is gone.
What will investors do when they are being kicked around by all sectors of the US government?
Withdraw their investments from the financial markets.
Likewise, the precipitous fall of the stock markets forced corporations to start laying-off their employees en-masse knowing very well what happend during the tech meltdown of 2000 to 2003. They are not going to wait around until the economy goes down. They are going to do whatever it needs to preserve themselves from future economic recession.
That is exactly how they are destroying themselves. The banks in an effort to preserve their capital with credit crunch are destroying themselves by destroying small and big companies downstream reliant on bank credits.
Corporations in an effort to preserve themselves by cost cutting lay-offs are destroying themselves when the consumers that constitute 70% of the economy found themselves without jobs and will be forced to do nothing else but drastically cut their cost of living accordingly.
Now, the $200B-$400B estimated loss for the economy has balooned into trillions nobody can estimate anymore. Stock markets alone lost $12 Trillions as of Nov 28 with almost half of its value gone in 1 year starting Oct 2007.
Stimulus package again? Will it work? Will it not work?
Sure, the government will look like heroes again. The While Knight saving the people from unemployment and the economy from recession/depression. That is what they are for, are'nt they?
Meanwhile investor confidence is still zero - nada - nothing - caput.
Also, somewhere on Planet Earth a few more countries might start offering 10 to 20 years tax holidays in low cost manufacturing and technology "economic zones" with plenty more incentives to offer the cash-rich investors or whatever cash they can salvage from the stock markets meltdown. Governments that are going to support the investors instead of trashing them around. They needed more capital infusion for their countries' economy as this global recession/depression deepens.
Investors with surviving capital are still too reluctant to do anything other than stash their money into Treasuries and bank deposits waiting for the global economic storm to pass.
Stimulus package is only going to sink the government into the quagmire of dept.
Corporations will still keep on slashing jobs and other cost cutting measures as more investors withdraw their capital from the companies across all sectors of the economy.
The govt has to restore investor confidence.
Without business entrepreneurship that will generate stable jobs, the economy is not going to achieve sustainable growth much less reverse the trend.
Sure, the stimulus package is going to give some hope of economic reversal. But after all the money has been spent, what's next? It is only an spending stimulus after all, not the kind of growth that will keep on generating income for years to come such as business entrepreneurship.
Without private capital investment, how can capitalism prosper or survive for that matter.
Are we going to wait until the economy goes into deflation/depression? Will the govt wait until the tax revenue next year and the next years go down to levels that can threaten the viability or the very survivability of the government itself - before
they start acknowledging that private capital investment is the backbone of economic stability and the engine of jobs creation and economic growth?
Sure again, they can print as much money as they want until the US-A becomes the United States of Zimbabwe,
Might as well use that $775B as "cash reserve" to guarantee investor capital in the financial markets for 5 to 10 years - in order to restore investor confidence and have them deploy their trillions of cash stashed in Treasuries and bank deposits into the economy. $12 Trillions of cash that will go back to the economy and re-generate millions of stable jobs instead of the pittance $350B TARP and the $775B Stimulus package that is going to create only temporary jobs for 2 years.
The government has tried almost everything under the sun including buying company shares and guaranteeing savings, commercial papers, MBSs, etc with nothing to show for it while the stock markets are still in the free fall with fits and starts of failed relief rallies.
Hello,,,, anybody there?
Are we going to wait until prolonged grassroot civil unrests start to surface and may need Martial Law in order to restore democracy back to normal 3, 4, 5 years from now? The military is already preparing contingency civil-unrest curtailment training program to "off-duty" soldiers in case this scenario becomes a reality in the future.
Trust is the numero uno factor in a capitalistic democratic society.
When everything seems to be going wrong; we cannot have investor trust without compelling incentives or sufficient guarantee to their capital for that matter. We cannot have people trust unless they have stable and rewarding jobs.
Private capital deployment is much much more efficient and definitely less wasteful than government capital deployment such as the $TARP and Stimulus packages.
Govt stock markets guarantee is going to immediately halt and reverse the stock market plunge in a heartbeat; stop corporations from laying off workers as their coffers start filling up with additional capital; and provide incentive for the consumers to stop tightening their belts drastically when people stop losing their jobs en-masse.
Nobody else has the capacity to do it. The government will still end up as the White Knight of capitalism and prosperity so essential to a democratic country after all.
With 5 to 10 years stock market moratorium and trillions of private capital sloshing around the economy: Plenty of time to thaw the credit crunch - or will banks still try to preserve their capital when there are plenty of competition around offering cash for rewards? Lots of time for the global CDOs and CDSs participants to untangle their "what the right hand gives the left hand takes" merry-go-round-go-to-n... financial ingenuiety mess. Maybe enough time needed for the government to formulate more effective programs for a stable and sustainable economy instead of the ad-hod seat-in-the-pants fire-fighting pletoria of government ineffecive actions. Time needed to resolve CEO salaries, Mark to Market, govt bailout policies, etc.
Time mostly needed for the original source of this calamity - the housing bubble - to collapse "slowy" until prices become affordable to most first time buyers without destroying the existing home owners.
Once the economy returns back to normal. The government may not even have to spend a single cent as the guarantee to investor capital expires in 5 to 10 years.
They will still have the $775B or most of it intact and ready for the really important projects such as --- pork barrels?
Perhaps some kind of energy self-sufficiency economic zone/state program with 10 to 20 years tax holiday for investors to find enough reason to risk hard earned capital into an untested but promising business enterprise.
On Dec 17 03:37 PM JasonC wrote:
>
> Simply dumb. What covers real risks is spreads, spreads are at epic
> levels, ergo even epic levels of risk can be objectively handled
> now. The silly and dangerous bit was the low spread world we just
> exited --- exiting it has destroyed so much capital taking credit
> risk for a living (which used to be known as "banking", duh) that
> spreads have reacted to the opposite, silly extreme. Someone will
> realize these epic spreads are buys when the narrow ones were sells,
> and be profitable as a banker again. Those who believed that it was
> possible to be a banker at spreads of zero were wrong, those who
> now believe it is impossible to be a banker at spreads of 10% over
> risk free rates are just as wrong.
>
> Both are trend following idiots and not bankers.
On Dec 18 10:45 PM Jack K wrote:
> Although I agree with you in many areas of your comment, i don't
> think that the capital gains cut hurt. Any decrease in taxes are
> good. Taxes are already paid on capital gains by the company that
> made the profit.
On Dec 17 03:37 PM JasonC wrote:
>
> Simply dumb. What covers real risks is spreads, spreads are at epic
> levels, ergo even epic levels of risk can be objectively handled
> now. The silly and dangerous bit was the low spread world we just
> exited --- exiting it has destroyed so much capital taking credit
> risk for a living (which used to be known as "banking", duh) that
> spreads have reacted to the opposite, silly extreme. Someone will
> realize these epic spreads are buys when the narrow ones were sells,
> and be profitable as a banker again. Those who believed that it
> was possible to be a banker at spreads of zero were wrong, those
> who now believe it is impossible to be a banker at spreads of 10%
> over risk free rates are just as wrong.
>
> Both are trend following idiots and not bankers.
This is the same author that was telling us a month ago that the CDS market was the best indicator of future equity prices (GE).
I guess it all depends on what point you're trying to make.
"There is a casino and a factory, only one produces wealth." The other produces a wealth affect...LOL
Someone said earlier, "this will be contained." And implied shortly, I think. Imagine, a simple housing market down turn has brought the world to it's knees. This goes way beyond the sub prime mess, that was simply a catalyst to tumble the financial markets.
It goes to the core of our financial system, so much so folks are screaming, "abolish the Fed!" for crying out loud. It would take pages and pages (already written) to explain to someone who believes "this will be contained" why it is proving extremely difficult to do so.
The reason that insurers are moving into the shadows is that in the current environment there is a significantly diminished need for them.
The fewer insurance companies the better.
That's good news.
Good News Economist.
AAA ratings have been exposed to what they are: worth every bit of what they cost to investors, i.e. $0, and great value to those paying for them, the borrowers, or sellers of toxic waste repackaged as "AAA".
Left unchecked, this financial Chernobyl could trigger the nuclear winter the author wishes for. The Fed and US/China/others Gov'ts are busy burying it under a concrete blanket.
That short SPY position is 1 year past its sell by date.
however..
en.wikipedia.org/wiki/...
China and Brazil are different. I went to China in 2001 expecting to see poverty. This is not what I saw, by a long shot. Pollution is reducing their population. They are seeing the need to deal with that, and when they decide to deal with an issue, things happen.
After all, Chinese officials don't travel off-shore that much.
I watched a thousand, or however many it was, dance around all organized at the Olympics, and I thought to myself, "That couldn't happen here (in the U.S.), though it is POSSIBLE to orchestrate cats."
What's more, China has had massive class mobility. I think Bush may have wanted class mobility here (as in "I want more home ownership. Make it happen."), at least briefly, but everything he has done worked against it.
Some in China surely want to get off the fossil train. China has tested methodically to find the smartest and most hard-working students. She then sends them to the best universities all over the world. She uses wikipedia and probably MIT's open-university stuff to make good translations on good corporate websites that seduce the geeky potential customer.
China and Dubai (Masdar) are going to throw the world's proved brains into getting some of us ready for less fossil use.
Brazil forced the U.S. car companies to make better cars there, as did the Europeans. I don't know enough about Brazil to be invested there yet, but there are some investors who do. Brazil has also had some class mobility and some interesting progress with urban challenges, which isn't easy to do. I know big money is going in down there.
I own a Chinese renewable-energy stock.
What would really help is an estimate of the size of CDS secured projects with relations to the total number of projects. Is that size significant enough to cause a depression?
Wake up.
On Dec 17 09:10 AM Boubou wrote:
> One reason many of us have lost so much money is the reluctance on
> the part of government and finance spokesmen to tell the truth in
> bad times. So while voices out on the fringe were warning of the
> events of 07/08, most officials were saying stuff like ' best backdrop
> for world economy I've ever seen' to paraphrase Paulson and Bush
> among many others.
> So i always welcome commentaries which appear to be honest and without
> an agenda.
criminal and con artist Bernard Madoff, 50bio$,
and Marc Dreier, a milder criminal, just 380mio$?
they are Indian, Russian or Chinese, right?
Remind me where was the SEC by the way
On Dec 17 10:23 AM TAS wrote:
> Much like the old Soviet Union "we will bury you" period of history,
> those predicting the demise of the West accompanied with the implied
> rise of another system is interesting, but flawed.
>
> As Churchill remarked, "democracy is the worst form of government,
> except for all of the others". Corruption in the West is eventually
> exposed and is the exception, not the rule. Corruption and deceit
> in India, Russia, China and many like societies elsewhere is not
> only endemic, it is accepted.
>
> Regardless, enjoyed reading your opinion.
I agree with various posters on this article - it's not the demise of the derivatives that are at the heart of the problem, but the stupidity of those who traded them, those that placed zero value on the risk that ultimately proved to be much more than that, and those that leveraged this false assumption to the hilt.
the USSA has now been shown to be the most corrupt nation in Western history. With a lot more bad news to come. The Chinese would shoot HankPanky & BubbleBen tomorrow for what they have been up to. Using borrowed $$ to bailout their fraud riddled "Banks". (at mates rates no doubt)
regards.
On Dec 17 10:36 AM OldLimey wrote:
> TAS: "Corruption in the West is eventually exposed and is the exception,
> not the rule."
>
> Dream on.
On Dec 20 01:28 PM User 323351 wrote:
> Always investigate the author before making a judgement on someone's
> view. See link below and you will understand why the author has such
> a position. I'm not Marxist, I believe in capitalism, yes it's perfectible,
> but all the stimulus we see from our goverment and others will prove
> the Marxists how wrong they are.
>
> en.wikipedia.org/wiki/...
On Dec 21 12:54 PM Ricard wrote:
> This is the most complicated and non-user friendly article I've read
> about derivatives and the marketplace. Seems the author's premise
> is that the demise of the viability of these derivatives will "cause"
> the predicted depression. Given the wikipedia article posted earlier
> about this guy, I'd say that is one incredibly arrogant and hubric
> assumption by this author.
>
> I agree with various posters on this article - it's not the demise
> of the derivatives that are at the heart of the problem, but the
> stupidity of those who traded them, those that placed zero value
> on the risk that ultimately proved to be much more than that, and
> those that leveraged this false assumption to the hilt.