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Reinko
328 Comments
Speculating on the Future
Indeed the worst has yet to come;
The entire US financial sector picked up 1500 billion US$ new debt in the period Aug 2007 - July 2008. That is the largest year over year new debt increase in the entire period since we left the golden standard.
The new debt of the first year of this credit crisis will be the toxic debt of a few years from now, just like large parts of the mortgages from 2005 are growing toxic now.
Today we had new Case Schiller index; 17.5% YoY decline in the 10 city statistic and 16.3% in the 20 city thing.
The house price decline is still accelerating and thus house decline is not even halfway.
Only when another 7 trillion equity in US family homes has gone, long term house affordabillity is restored again.
Hard to see how stocks can rally two years from now.
That does not take away it is funny to read such sunny side of life articles!
The Credit Hostage Crisis
For me as a European it is often weird to see all that US partisan bickering; the youtube vid you post is only a pro conservative advertisement.
Don't get me wrong; I am not a Democrat!
But facts are facts and your conservative president once gave a speech before the Colombian university where he proposed that at the end of his presidency there would be 5.5 million new home owners from the low income classes.
Even if they had a bad credit rate it was not needed not to live in a beautiful house. The guy got a big applause.
And what about that republican Alan Greenspan; astronomical money growth was always the river where the weird mortgages came from.
You see Grandpa: American partisan bickering might be your local folklore but it does not help much...
The Deal's Getting Done, But Will It Work?
The most funny thing from your article:
Why not use the $700 billion to capitalize 10 new banks with $70 billion of capital each? Let them lever up 10:1 — you have $7 trillion of buying power.
Unquote.
This banking sytem with fiat money is very funny:
When I bring 100 US$ to the bank (a clear future liability for the bank), the bank considers this an 'asset' and can borrow about 1000 US$ because they have some 'asset'.
Fiat money could work perfectly as long as you understand it is fiat money, interchanging 'assets' and 'liabilities' was always a handicap of the present system...
McCain's Economics
He is often praised for being so wise on the military stuff, the guy is in fact a war hero. I will not attack McCain on that Vietnam detail, he showed leadership while he was a POW.
But the recent surge in Iraq was only 40 thousand more US military folks, McCain always asked fore a large multiple of that what was realistic in applied boots on the ground.
Even the chiefs of staff were against a horrible 40 thousand increase because 'that leaves all military emergencies naked'.
In the end Dubya got his way, 40 thousand extra troops were deployed and for reasons the Americans do not fully understand, some kind of peace was there in Iraq.
In short: McCain never understood what numbers deployed were inside the realm of reality and now he is constantly portrayed as the 'big military wizard'.
He isn't, this is no endorsment of Obama but on the military stuff McCain was a fool for a long time in the Iraqi equation.
Time Not for a Bailout, But for Nationalization
Do you think 700 billion US$ is enough?
It is peanuts; simply the combined value of family homes will contract about 6,5 trillion US$ before long term affordability is restored again.
If house owners take 80% of that damage and the banks 20% then we are looking at 1.3 trillion in future damage stuff.
This 700 billion joke is just a joke.
With numbers like that it does not make much difference what model you choose to fight the problems...
Golden Arches Safer Than Uncle Sam?
All I remember is that I advised the European pension funds to buy this insurance now it is so cheap (a few weeks ago the 5 year stuff was only 18 pips or 1.80 US$ for every 1000 US$ insured a year).
At that time of that advice the 10 year was already 30 pips and you did not mention in your article if 5 year CDF McDonalds was weighted against 5 year US government bond stuff...
You can also turn this model upside down and ask yourself the next question:
Is there anything, is there just one detail that will prevent a future collapse of US government finances?
Is there just one detail that will prevent collapse???
Entering the Endgame for Monetary Policy
So all I can say: very good graphic above but if this is not the 'end game spike' in a relatively short future bigger spikes will be there.
It will take some spikes before the US population understands that beside body fat you can also save real money... (Or better; real value.)
__________
To razorfangius I can say:
Log makes only sense on long term graphs, David publishes a one decade graph. I have no problem with that...
Could the Uptick Rule Save the U.S. from Financial Terrorism?
Consumer spending = 70% of GDP
US financial sector = 20% of GDP
The rest = 10% of GDP.
And that country thinks they are on top of the economical pyramid???
When It Rains, It Pours
Needless to say; the bailout package was for toxic debt done in 2005 and so. This new 1500 billion US$ will grow toxic in the future.
And once you start picking up toxic debt, where will it end?
The US financial sector has far over 100% of GDP as her debt size (about 120% of GDP) and the interest obligation only are above the combined profits of that sector.
__________
But lest wait; may be the deal is still not off the hook...
In Defense of Capitalism
You give what you can to society and you take what you need.
Now a few decades later, we see that the entire US financial sector has done exactly that; they gave what they could and they took what they needed...
Wisdom comes with the years, David only forgets to mention what Wall Street has to do with capitalism.
Nightmares on ETN Street: When Issuers Go Bust
Rather likely they are only Extra Terrestial Nono's.
Just one of those risk pumping around things and after that not expect the whole planet to blow up because 'we have world reserve status'.
Why does the article not explain what a ETN is and why it should be a valuable contribution to world finance?
Has Buffet also ETN stuff and if so, why does he?
Is the $700 Billion Really for Bailing Out the Fed?
I have a degree in math and statistics and for over 4 years I am studying the US financial complex.
And so often I have observed weird market behavior while the SEC did her own thing that all in all I can say:
PPT for real?
Statistical proof = 100%
Courthouse proof = 0%
__________
In the article it is mentioned that the 700 billion size could be explained by the fact that the US FED is almost at the end of her US Treasuries (builded up since 1913 or so).
After my humble opnion it has more to do with accountancy rule 157 now we are just before the end of the fiscal year.
That also explains why there is so much hurry to shove this through Congress & the likes.
I am not an accountant but rather likely there are vast quantities of assets that are only marked once a year to market value.
So for the time being I only look in amazement at the 700 billion US$ thing; why the size and why the speed?
And PPT theories are rather likely true, but all they do is plunge protection and have not infiltrated the money and Treasuries auctions...
But you never know; sometimes I am wrong too...
Don't Worry About the FDIC
It is not wise to stop writing about the FDIC, I only investigated one small bank failure until now but the FDIC takes over when bank reserves have declined to 3%.
So it is not that they come into action when the 8% threshold is broken.
And what about that list of 'troubled banks', what are the criteria for making it to that list?
Is it 5% of reserves threshold breached?
We don't know...
Don't Worry About the FDIC
This is rediculous, but Drudge is a well known populist.
In fact it is only an accountancy funds, it measures what the banks have layed in and what went out. There are no '42 billion in reserves', that money is long ago spend.
With every (small) bank that fails, the US government borrows more money. Every cent every dollar in failure can only be borrowed because the US government herself has no real reserves.
Just like AIG, when that company started to apply 'modern finance' they too thought they could always issue more bonds or equity.
CDS Market Remains Biggest Issue Facing Monetary Authorities
Total worldwide nominal value in CDS contracts is 62 trillion.
That is about 10% of all OTC contracts worldwide.
If CDS contracts are in line with the other OTC contracts (and why not, after all the Black Sholes model only needs two parameters known as average and volitility) then total contract value was about 1.4 trillion.
Rumors are that mortgage backed CDS stuff goes for 22 cents on the dollar but for other CDS stuff I miss info.
So all I can say is that on the CDS market in total we are looking at a few hundreds of billions in US$ losses but since most of that stuff is nicely parked in the Level 3 assets or are on the 'off balance' balances it is every body's guess how much that market has declined...