As you probably know I think that 95% of the difficulties experienced recently in the markets is hokum based on the psychology of panic.
The recent panic among the ill educated but greed consumed trader class started with well intentioned mandates which directed the US banks to make mortgages to "red lined" populations. That might have been harmless in a tightly regulated banking and investment system of systems, but the Bush Administration and their committed anti-regulation friends (in both parties) dumped the regulatory ballast over the side and freed the traders of any restraint. The result was an orgy of speculative and trading excess in mortgages and mortgage derivatives that rode on a myriad of mortgages in the hands of many who could not possibly pay them off or even pay them at all for very long.
The bubble, like all bubbles, eventually burst, wiping out trillions in paper profits and some peoples’ real money. Confidence in the value of the banks declined following the realization of the potential worthlessness of the paper they were sitting on. The contraction in credit between banks followed.
The panic in the trader class has been impressive. It has been pumped up a lot by the trader fringe group employed by the financial media.
But, I think the bottom of the panicky slide is approaching. A fire only burns so long as there is fuel. The hedge fund managers and other such riff-raff have been busy de-leveraging themselves. That means that they have been divesting assets in order to acquire cash with which to stabilize the companies that they run. After all, the life style that enables them to stand at the bar in Ben Benson’s and bellow boorishly to each other depends on money in the till.
We are nearing the bottom of the pile of fuel available. The governments have done everything they could for the restoration of trading confidence. The stage is set for the moment when investors and traders look around and see that huge, confidence devouring swings in the markets have eased. At that moment it will be noticed that money is to be made at these prices and the game will resume. pl
One would hope. I’m still waiting for at least one more freaky move from out of left field. Maybe Iceland declaring bankruptcy.
The red line loans you speak of only comprise app. 3% of the pile of bad mortgages and debts – (that’s assuming every such loan under this mandate failed, as that was how many Fannie and Freddie handed out compared to the rest of their loans). 97% are the flipper class who took ARMs, borrowed on equity they presumed would be there when they sold the house in a few years. The few years then flip crowd, an economy based on raising market value beyond reason was the “bubble” that burst. ABC News has been profiling people who defaulted and they are yet to produce anyone scammed into this problem. Every person has been middle to upper middle class house flippers who got caught with an ARM raise they knew they could never afford when they entered the deal. Accuracy is important.
Respectfully disagree. Domestically within US markets yes, but foreign markets have plenty of fuel left to burn which in turn may heavily impact domestic markets. If regulation domestically is almost unknowable as to its management and secondary and tertiary impacts, imagine that even more so with respect to foreign governments and entities.
Lawyer Smith
Ok. A lot of yups piled on.
The new myth is that this was a Freddie/Fannie created crisis. They are neither the sole nor the major cause. The hedge funds and multiple financial derivatives are far more complicit in this than Freddie/Fannie.
On a humoursous note, you could see the handwriting on the wall 3 weeks ago:
http://208.7.160.123/money/2008/09/17/2008-09-17_hard_economic_times_hits_the_high_end_gi.html
My prediction for the DOW was 9,000 a few days ago.
A little more to go.
But I think the stock market will basically bounce around for a year while the housing bubble finally deflates completely and Wall Street toxins are flushed out of the system.
My WAGROM (Wild Ass Guess Rough Order of Magnitude) is DOW bouncing between 8500 and 10500 for all of 2010.
You all heard it here first. Invest accordingly!
95% of it hasn’t got here yet.
I agree that panic is being spoon fed to the public from Cramer screaming “sell stocks now” on tevee to frozen LIBor rates scrolled on CNBC non-stop, Paulson/Bernanke at the helm making ad hoc decisions regarding markets, etc. Now the G20 to meet over the weekend (currency crises?).
You rightly point out that insolvent banks indeed got into trouble because of greedy leverage during the speculative bubble. But our citizenry also displayed greedy overleveraged behavior as did the old U.S. of A. (compounding on our natl debt is staggering)
We in Charlotte are seeing Wachovia carved up and Bank of America-Countrywide-MerrillLynch in trouble. It does mean lost jobs, falling real estate, loss of tax revenue etc. for those outside the banking industry, so it’s not just the yuppies hurting.
I see many federal schemes to inject more and more credit into the system – loan rates dropping and attempts to revive credit markets. “They” seem desperate to keep this credit bubble going while countries, consumers, etc. are choking on peak debt. Is the solution to the cash starved, over-leveraged more debt? Is it in the interests of Main Street to work to prevent a bottom in various asset groups — equities, housing? I don’t know, but without a true housing bottom, will there be a real recovery? So I believe at best we get a short-term bottom.
With regard to the game resuming, what game that will be is the question? Many I know in banking and hedge funds are moving to private equity companies — they’ve got cash and they’re hiring. I know, no one crying for the yuppies, but many in finance are repositioning themselves for a different economic landscape than we currently have – will it be better or worse? Our current global economic system is changing — maybe helped along through a bit of economic creative destruction. Yes, eventually, things will normalize, but what will this new “normal” be. I do agree that those (companies, countries, individuals, whatever) with cash will set the terms.
Dave of Maryland,
“95% of it hasn’t got here yet.”
Does that mean the Dow will go below zero?
My thought: The general market is irrational.
But smaller markets with primarily intelligent players are far more rational. The key I believe (as do many others) is the TED spread: the rate at which banks will lend to each other for a 3 month term, minus the 3 month treasury rate.
I’ve been ignoring the panic on the stock market. But the panic AMONGST the banks is palpable: NO bank trusts any other bank. And as long as that remains, the credit market will remain troubled.
Disagree with you Colonel.
This is far from over.
With the real economy now tanking profits and profit expectations will be cut. The result is lower fair value which is not yet reflected in the stock markets.
In the unregulated “shadow” financial markets there are still trillions of “insurances” CDS that need to be solved (declared null and void by the authorities) or will explode.
The bond market is under extreme stress and could dislocate pushing interest rates significant higher (the treasury yesterday had a bad auction paying 0.4% more than was thought).
Higher interest rates would again put any more homeowners into foreclosure.
There are so many things now that can go wrong that some will go wrong.
This is far from over.
“Red lining” based on the CRA was really a tiny portion of the total mortgages issued. When one looks at the relative sizes – sub-prime of which CRA loans were again a very low percentage was much less than Alt-A which was less then near prime and Jumbo. Additionally delinquency rates of CRA loans are much less than the rest of the pile. CRA had nothing to do with Fannie/Freddie buying private label MBS & CDOs in the market and ballooning their balance sheet post the dotcom equity bubble unwind. Personally I think CRA is a convenient political excuse that some are using to justify the why financial institutions were “forced” to make such economically misguided loans.
IMO, the root of the problem was the easy money policies of the Greenspan Fed along with a Pavlovian conditioning that the Fed will always bailout market participants with the “Greenspan Put” as well as the elimination of the capital adequacy rules for Wall St pushed by the likes of Hank Paulson and acquiesced to by the SEC in 2004. This then needs to be put in the context of the prevailing Wall St culture of earnings growth beating quarterly expectations and executive compensation that focused on the goosing of stock prices in the short term. Wall St transformed itself from being an intermediary of capital to a “profit machine” on the back of securitization and the proprietary trading of securities all based on increasing leverage. In many ways the train left the station in the Reagan 80s. But it was in the 90s and the Clinton era with Bob Rubin & Greenspan tag teaming for the administration and Phil Gramm, Barney Frank and other Wall St water-carriers on both sides of the aisle in Congress that we really set the stage for the bubbles. The corporate media is finally getting to the edges of the story IMO.
Simplistically speaking, Wall St took $1 of a mortgage written on the basis of lax lending standards (meaning broke every common sense rule) packaged several of them into a MBS, then levered it up 20 times and made a CDO, then packaged several of these CDOs and levered that up 20 times into a CDO Squared, packaged several of these together and levered that up another 20 times into a CDO Cubed. Each of these securities were then traded back and forth with even more leverage by hedge funds on the basis of securities credit from the very same Wall St firms. The ratings agencies were “bought” into this so that pension funds and insurance companies could buy into these leveraged securities. And then add to all this leverage Wall St came up with insurance called CDS that would pay out in the event any of thse securities defaulted. Folks like AIG happily wrote plenty of it with no capital reserved. And why did they call it a swap not insurance because then it could be traded unregulated (meaning no capital adequacy rules) over the counter. None of this had anything to do with CRA. This was pure speculation and a gigantic Ponzi scheme aided and abetted by politicians from both parties and the regulators. The winners were Wall St executives who paid themselves hundreds of billions in bonuses each year and hedge fund managers who became billionaires by the boatload. Today middle class Americans are holding the bag. Yet there are no calls for grand jury investigations, clawbacks from these guys and how was our political and regulatory system corrupted.
This bubble was the most well publicized financial bubble in recent memory and the nature of the current debacle was also predicted by many. No one should be surprised.
No doubt this will also pass. But if we don’t any learn any lessons as we have not over the past 30 years then we will continually get even worse outcomes. We will now have to face the outcome of the unwind of the credit bubble that will include the loss of confidence in the US central role in global finance and the pain that middle class America will feel. Tragic!
http://www.nakedcapitalism.com/2008/10/money-markets-still-frozen-dollar-libor.html
Money Markets Still Frozen, Dollar Libor Reaches New High
Over the last two weeks, we have said that central bank liquidity measures had become counterproductive. Throwing more liqiudity at banks made it more viable for them to depend on monetary authorities and not rely on private sources for funding, and in turn extend credit to them.
The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day.
The London interbank offered rate, or Libor, for three-month loans rose 23 basis points to 4.75 percent today, the British Bankers’ Association said. That’s the highest level since Dec. 28. The Libor-OIS spread, a measure of cash scarcity, widened to a record 350 basis points. The overnight rate fell 29 basis points to 5.09 percent. That’s still 359 basis points more than the Federal Reserve’s target rate of 1.5 percent.
(Must listen radio show. basically explaining current crash)
http://audio.thisamericanlife.org/player/CPRadio_player.php?podcast=http://www.thisamericanlife.org/xmlfeeds/365.xml&proxyloc=http://audio.thisamericanlife.org/player/customproxy.php
Colonel Lang
in my opinion the panic in the markets is NOT 95% hokum
rather the sell-off reflects the termite ridden underpinnings of an economy that has increasing become divorced from necessity.
the vast majority of Americans do not save…and quite the opposite more than half of all wage earners have a negative net worth
corporations that used to be the bulwark of the us economic system have insufficient cash flow to manage payrolls and inventory without floating short term paper (debt) the in CP and repo market.
on average in the last 7 years the federal government has spent nearly half a trillion, dollars per year more than it takes in from taxes / revenues
our balance of trade is entirely out of wack, we buy more than half a trillion dollars more goods and services from the rest of the world than we sell them, and nearly half of that is energy.
finaly most of the highest paid, richest people in America, hedge fund managers and Investment Bank top management don’t produce anything of value, they play numbers games with financial paper, creating SIVs (structured investment vehicles) that spread sub investment grade debt mixed in with triple A ,infecting the financial markets.
These same people have created a derivatives market, essentially a casino, (pozi scheme built upon the toxic securities), which has a notional value of 750 trillion dollars, more than 10 times the worlds GDP.
we are in serious serious financial and economic crisis, and it is likely that we will see 10s of millions of Americans loose their jobs and their houses in the next few years.
the vast sum of observations and opinion you present on your blog are very incitefull and i have learned much from you, i am in your debt.
on this matter Colonel Lang you are wrong.
you can prove to yourself that subprime has little to do with the crisis…how? the 700 billion bailout is enough money to buy all the foreclosed subprime houses outright lock stock and barrel leaving half a trillion dollars left over !!!
a strong economy and financial system could and should handle a problem like this with barely a whimper
the real problem is the cascading default of the casino derivative bets like credit default swaps the investment banks created and bet on, to make outrageous paper profits…and now loses.
If this and this becomes a trend then the marginal buyer of Treasuries may not lift a bid. The unintended consequence of this deleveraging could be the toppling of the TBond edifice.
Over the past twelve months or so we’ve gotten news that shakes the underpinnings of ones life.
We learned that cholesterol has less, if anything, to do with heart problems than we’d thought. So a lifetime of avoiding fatty foods was built on a lie. We also learned that the myth of drinking eight glasses of water a day was founded on nothing and that put the lie to the 1990’s utterance that “the important thing is to stay hydrated” . And so it went. One by one the pillars of life have fallen.
Some other events that have shaken the philosophical foundation of some lives were this pair regarding the Communists party in the USA:
“Two international events of 1956 brought new chaos to the Party: the Soviet suppression of the Hungarian Revolution and revelations of Stalin’s misdeeds at the Twentieth Soviet Congress. Individuals long faithful to the Party now felt betrayed and wondered privately and openly if their political lives had been built upon self-delusion.”
http://www.marxists.org/history/usa/parties/cpusa/encyclopedia-american-left.htm
And now the underpinnings of many Republicans, deregulation and the free market system have been exposed via the current market situation and subsequent credit freeze.
So just as it has been hard for me to begin eating fatty foods because I just can’t believe that a lifetime of self denial has been for naught I imagine that Old Commies found some sort of rationalization to help cope with such a devastating revelation.
I’m not surprised that the free market/deregulation true believers have come up with something to blame for the apparent failure of their core beliefs. I believe that you are referring to the Community Reinvestment Act when you mention redlined areas and that argument is being thrashed out now.
I’ve read several postings by Barry Ritholtz of “The Big Picture” such as this one ( http://bigpicture.typepad.com/comments/2008/10/federal-reserve.html ) and it seems pretty hard to build a case for that assertion.
I may be incorrect that you refer to the CRA and if so apologize in advance.
These are the logical things that needs to be done. But it means massive haircut in part of the bankers. (ie. not going to happen)
Therefore: market will keep selling and continue the credit collapse.
http://www.forbes.com/home/2008/10/08/recession-depression-keynes-oped-cx_nr_1009roubini.html
Policy rate cuts will have a limited effect as they don’t resolve the fundamental problem in markets–massive counter-party risk–that is keeping money-market spreads relative to safe rates so high. Yesterday’s plan to support the commercial paper market is a step in the right direction, but other, more radical policy actions are also needed now. Here are four suggestions for such additional policy action.
–To reduce the counter-party risk in the money markets, a triage between insolvent banks that need to be shut down and a recapitalization of solvent banks is necessary, together with massive injections of liquidity in non-banks and the corporate sector. Direct lending by the government to small businesses–via the Small Business Administration–is also necessary to avoid the implosion of smaller businesses.
–A generalized temporary blanket guarantee of all deposits is now necessary, both in the U.S. and in Europe, followed by a triage between insolvent banks to be closed rapidly and illiquid-but-solvent banks that deserve to be rescued to avoid the moral hazard of such blanket guarantee.
–The flawed $700 billion Troubled Asset Relief Program (TARP) legislation will have to be modified in three ways to: a) allow for direct government injection of public capital in banks in the form of preferred shares, matched by private capital contributions by current shareholders (via suspension of all dividend payments and matching Tier 1 capital provided by private shareholders); b) implement a clear plan to reduce the face value of mortgages for distressed homeowners and avoid a tsunami of foreclosures; c) do a rapid and radical triage between solvent banks and insolvent banks that need to be rapidly closed.
–Given the collapse of private aggregate demand–consumption, residential investment and non-residential investment in structures are falling, and capital expenditure by the corporate sector was falling already before the latest financial and confidence shock and will now be plunging at an even faster rate. You need to give a boost to aggregate demand to ensure that an unavoidable two-year recession does not become a decade-long stagnation.
Colonel:
I must protest your use of a picture of a Longhorn as the lead image in this post.
Given the importance to the college football world of the Oklahoma-Texas game in Dallas this weekend, it would seem that your neutrality in this matter has been compromised via this ostentatious display of Bevo, the UT/Austin mascot.
Or is this your subliminal manner of making yet-another prognostication? Are you engaging in some form of speculation yourself regarding the outcome of the Red River Shootout?
I predict the Sooners win this by 14, that oil continues its downward price slide, and that the stock market has not yet reached its true bottom.
But I’ll settle for just getting the first prediction right…
Over the past twelve months or so we’ve gotten news that shakes the underpinnings of ones life.
We learned that cholesterol has less, if anything, to do with heart problems than we’d thought. So a lifetime of avoiding fatty foods was built on a lie. We also learned that the myth of drinking eight glasses of water a day was founded on nothing and that put the lie to the 1990’s utterance that “the important thing is to stay hydrated” . And so it went. One by one the pillars of life have fallen.
Some other events that have shaken the philosophical foundation of some lives were this pair regarding the Communists party in the USA:
“Two international events of 1956 brought new chaos to the Party: the Soviet suppression of the Hungarian Revolution and revelations of Stalin’s misdeeds at the Twentieth Soviet Congress. Individuals long faithful to the Party now felt betrayed and wondered privately and openly if their political lives had been built upon self-delusion.”
http://www.marxists.org/history/usa/parties/cpusa/encyclopedia-american-left.htm
And now the underpinnings of many Republicans, deregulation and the free market system have been exposed via the current market situation and subsequent credit freeze.
So just as it has been hard for me to begin eating fatty foods because I just can’t believe that a lifetime of self denial has been for naught I imagine that Old Commies found some sort of rationalization to help cope with such a devastating revelation.
I’m not surprised that the free market/deregulation true believers have come up with something to blame for the apparent failure of their core beliefs. I believe that you are referring to the Community Reinvestment Act when you mention redlined areas and that argument is being thrashed out now.
I’ve read several postings by Barry Ritholtz of “The Big Picture” such as this one ( http://bigpicture.typepad.com/comments/2008/10/federal-reserve.html ) and it seems pretty hard to build a case for that assertion.
I may be incorrect that you refer to the CRA and if so apologize in advance.
A friend of mine allowed his company to be controlled by a venture capitalist who had taken a majority position on the promise of the company’s underlying technology. The technology did not pan out so after a couple of years, the VC put the company up for grabs. When my friend had the opportunity to buy back his former company, he asked me to have a look at the purchase agreement. That agreement was a three page document that treated the sale of the company, the underlying technology, and the entire purchase in terms equivalent to the sale of a carload of potatoes. No due diligence, no intellectual property (and rights) questions, no NOTHING. The simplicity and irrelevance of the proposed sales agreement astounded me. It came from a Wall Street investment bank, and the guy handling the transaction could not and would respond to any question nor would he provide any information beyond that within the four corers of the document. He was just the “processor”!
That experience foretells – at least for me – what is in store.
IMHO, the bottom of the credit crunch and the Wall Street mess will not soon pass. It is 10 to 15 years away from resolution. The laws and regulations of every state distinguish between the sale of chattels (stuff) and real property. Though Wall Street sold these basic instruments and the “swaps” harmonics as commodities, unwinding and reselling individual mortgages (and real property) will be complicated, time consuming and expensive. An army of bankers, lawyers, escrow agents, appraisers, lenders, loan processors and bill collectors will make fortunes, and none of them will be inclined to speed things up. Kiss the $700 Billion goodbye!
Want my advice?
You might buy carrots instead of carats.
Bottom? DJIA closed down 678 points today. You also wrote in this space that Hillary would be the next president and that you’d be glad to see the adults in charge again. Building castles in the sky, are we?
S&S
Come on!! You know better than that. The bigger the final fall the better. There probably will be some more big falls.
Now, don’y jump. It isn’t that bad. pl
S&S
I don’t think I ever predicted that HC would be president. What I said was that I wanted her to be president. I still do.
You still don’t get the difference between wanting and predicting? pl
you are right PL. The key is to buy up companies with little to no debt and a mountain of cash.
That’s the play.
As for stuff out of left field — GM will cease to exist in its current form. they have $20B in cash and losing $1B/Month and have $40B of debt and in this market nobody is going to loan them anymore.
“A fire only burns so long as there is fuel. The hedge fund managers and other such riff-raff have been busy de-leveraging themselves. That means that they have been divesting assets in order to acquire cash with which to stabilize the companies that they run. After all, the life style that enables them to stand at the bar in Ben Benson’s and bellow boorishly to each other depends on money in the till.”
Poetry.
Hey, sir. Indeed I do get the difference. But when I read your prediction that Hillary would be president, I remembered it because it surprised me. Your words sir: http://turcopolier.typepad.com/sic_semper_tyrannis/2008/01/a-clinton—mcc.html
“Hillary Clinton will be president. I look forward to adult leadership in this country.”
(Photographic memory has its upsides. By no means consider my posts adversarial, as I don’t. Writers should own what they write, especially when it orbits the Planet of Hillary.) Again, I have no market exposure. Got beans?
S&S
You are right. That WAS analysis and I was wrong. I did not forsee the Obama phenomenon.
If she were the candidate there would be no doubt over the outcome. pl
Col. Lang:
Thank you for the evenhanded presentation of the credit crisis. I believe that the facts are pretty much as you stated them. I would only add one thing: The underlying dynamic driving the financial system into the ground was human greed. It’s as if everybody whether in the government or in the market place kept telling themselves that no one with any sense would ever lend money unless there was some level of certainty that it would be paid back. After all, isn’t that what risk is all about? How could such an obvious maxim be ignored?
Despite its obviousness, however, few in the MSM or elsewhere are willing to accept that it was this failure to create safeguards to ensure that this basic human frailty would not intrude on the system in a harmful way that was at the core of the problem. No one remembered the apocryphal statement of the bank robber, Willie Sutton, who, when asked by the Feds why he robbed banks, replied, “That’s where the money is.” Or even, more recently, the still pertinent advice of Deep Throat to ‘follow the money.’
Churchill also defined it nicely when he allegedly asked an actress if she would go to bed with him for a million pounds. When she said ‘Yes,’ he asked how about 5?’ She replied, ‘No. What do you think I am?’ Churchill then said, ‘Madam, we’ve already established that. All we’re concerned about now is the price.’
Joseph Stiglietz, a Nobel Prize winning economist, on October 3rd of this year discussed the issue of our economy and how it got this way at a faculty seminar at the University of Vienna. In addition to the usual suspects, Stiglietz very carefully and with some cogency makes the case that much of the blame for the disaster rests on economists themselves.
Not unlike religious zealots, (or Churchill’s whore), economists, he said, are caught up in defending their own version of economics regardless of how congruent the data are that must necessarily define it. Stiglietz is not shy about naming names and in sharing his beliefs about the effectiveness of our currently proposed remedies. Moreover, he is critical of academic settings where economics is taught because many of them selectively leave out entire points of view and associated research in their teaching of the science of the subject.
There is an hour long video of his presentation at the following link:
http://yetanothersheep.blogspot.com/2008/10/are-economists-to-blame-for-crisis.html
The one who is panicking right now are “master of the universes” the people who run the financial systems, the bankers, the investment managers, traders, etc.
These are people who knows how the “underground”, unregulated and “shadow” banking system works.
They know the alternate system has collapse yet they don’t know which banks are walking zombie and won’t be able to pay in the next few days, and who will be ok.
Because cash is so tight, a bank can die just by single little mistake. Thus, why nobody wants to lend money.
The system has frozen.
And now it starts to creep into “people” in the know. The super rich are pulling money out of funds, hedges, dollar portofolio. They are just putting it in treasury or gold.
again, the problem is not resolved.That’s why the crash continues.
On top of that. tomorrow will be the selling of Lehman Brother obligation. The first big test if those underground debt swap is any good.
I got the feeling GM will be gone after this is over. They have to much debt and needing even more cash loan to compete. They are a walking zombie basically. (market cap is only $3B. During depression era, their market cap is $4B !)
GM is over without mega bailout.
Anyway, crunch time. Every mistake now counts. Every mistake and delayed action will be punished massively by the global market. Every bluff and empty move will be called out by the market.
And the basic trend at the moment, bet on Bush administration incompetency. It’s among the few things that still make money. (that’s why you see 9200 floor, before short selling continues on)
———–
anyway, gotta start making calculation how all this will play against military budget. (including Iraq, and afghanistan . Plus pakistan)
Say goodbye to cheap walmart chinese crap.
http://www.nakedcapitalism.com/2008/10/international-trade-seizing-up-due-to.html
Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks. From the above-mentioned reader:
At the end of the day, if every counterparty is bad then you don’t have a market and you don’t have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won’t give it to him. That means he can’t ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up. THE CENTRAL BANKS CAN’T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM.
We spoke later in the evening and said he had heard of another instance of a trade transaction failing, different parties entirely, this a shipment of coal, again due to the unwillingness of the seller’s bank to accept an LC from the buyer.
things are moving really fast now. Minute by minutes… around the clock from one big market to another.
http://www.bloomberg.com/apps/news?pid=20601087&sid=agQOfNHp6gCs&refer=home
Asian Stocks, U.S. Futures Slump as Credit Crisis Deepens; Treasuries Gain
Asian stocks tumbled, driving Japan’s Nikkei 225 Stock Average down 11 percent, and U.S. futures slumped on concern the deepening credit crisis will push the global economy into recession. Treasuries and the yen gained.
Mitsubishi UFJ Financial Group Inc. plunged 8.5 percent after Moody’s Investors Service said it may cut Morgan Stanley’s credit rating. Neptune Orient Lines Ltd., Southeast Asia’s largest container-shipping company, declined 12 percent on concern the region’s exports will slow. BHP Billiton Ltd., the world’s biggest mining company, lost 7 percent after crude oil fell to the lowest level in a year. Indonesia’s stock exchange delayed the resumption of trading, extending a two-day halt.
`It’s pure panic,” said Ivan Tham, Singapore-based head of funds management at Kuwait Finance House, which has about $24 billion in assets. “You’re seeing companies start to fail because they can’t refinance. Good companies are being sold down aggressively with the bad.”
After quiet, sober contemplation, I have decided the best action forward is to…
PANIC! PANIC! PANIC!
BTW – here’s a new axiom. WAGROMs invoke Murphy’s Law.
Curious:
You point to Nouriel Roubini’s programme, which has at its centre injection of public capital into banks in return for preferred shares with matching contributions from private shareholders, with insolvent banks being identified and closed down asap.
This is the direction in which the U.K. government has been moving very rapidly. This signals an extraordinary transformation in establishment thinking here over a few weeks.
The model both for Roubini and for the British government package announced on Tuesday is the drastic socialisation of the banking system carried out (very successfully) by the Swedes when their financial system was collapsing back in the early Nineties. One only does this if one believes that one’s banking system is largely insolvent or in grave danger of becoming so — and that this threatens a Thirties-style depression.
The possibility that the circle by which ever-increasing house prices have funded ever-increasing indebtedness and debt-financed consumption may go into very sharp reverse, leading to a major slump, is now terrifying people across the political spectrum here. Greatly exacerbating the worry is the fear that the sudden collapse of financial security may cause people simply to stop spending.
It was indicative that in this morning’s FT Sam Brittan, who in the Seventies laid much of the intellectual groundwork for the Thatcher revolution, both endorsed the government programme to recapitalise banks, and called for extensive monetary and fiscal stimulus to offset a likely collapse in private sector demand.
Also indicative is the unquestioning support for a Swedish-style solution from the Tory leader, David Cameron. This extraordinary volte-face in his thinking followed a meeting with the Bank of England Governor, Mervyn King — who I suspect told him that the British banking system was on the verge of total disintegration.
(See http://www.ft.com/cms/s/0/a0b384ea-9612-11dd-9dce-000077b07658.html; and http://www.ft.com/cms/s/0/7ddd9e02-92fb-11dd-98b5-0000779fd18c.html.)
The biggest change in the intellectual climate since the late Seventies and early Eighties is underway here. The difference is that then attitudes shifted over a period of years. They are now shifting dramatically over a period of weeks.
Interesting article in today’s WAPO that Treasury modified a regulation thereby allowing Wells Fargo to use the Wachovia bad debt to offset its taxable income. Perhaps similiar regulation changes could be used to assist the man and woman on the street and not just the financial barons. Or I know just a fuzzy headed liberal thinking out loud. Still does give insights that Paulson and his minions first choice is always to bail out those who caused the problem. And by the way I don’t see the housing bubble holding up as the leading culprit for this current financial meltdown in the long run. True many people were investors not long-term owners hoping to flip ownership in a period of rising value but many were in that business because they distrusted the stock market. Imagine if we had privatized Social Security. Actually I think hitting $147 a barrel and over $4 a gallon woke up the American consumer in a way that they knew the free ride of cheap energy was over. Note that the big oil companies and their executives are not now having reductions in their income as per barrel prices drop and prices drop at the pump. Does seem to raise a question? Is there really a free market in gas and petroleum or a MADE MARKET just like the financial sector. We now know for sure that down deep they did NOT believe in free markets.
Mexico Peso is cratering.
http://www.bloomberg.com/apps/news?pid=20601086&sid=advjRqKLeHyA&refer=news
Mexico Sells $6.4 Billion, Stepping Up Its Efforts to Stem Peso’s Collapse Mexico’s central bank dumped $6.4 billion into the foreign exchange market, stepping up its push to quell a rout that sent the peso to a record low this week.
The possibility that the circle by which ever-increasing house prices have funded ever-increasing indebtedness and debt-financed consumption may go into very sharp reverse, leading to a major slump, is now terrifying people across the political spectrum here. Greatly exacerbating the worry is the fear that the sudden collapse of financial security may cause people simply to stop spending.
Posted by: David Habakkuk | 10 October 2008 at 07:14 AM
the biggest problem right now. The banking system simply stop working. It doesn’t let money flow. The global banking system is having a heart attack. so at this particular moment, saving the value of houses is the least of worries.
factories and global trade can’t get cash to do business.
If this happens in major “roll over date” we gonna see a lot of big guys start defaulting.
interesting. So I wonder what type of information is being read. And if it relates to high stake global investment.
But a good number of people will be partying hard shorting dow. (notice the resistance line. that is classic short cover.)
http://it.slashdot.org/it/08/10/10/1539246.shtml
World Bank Under Cybersiege In “Unprecedented Crisis”
“The World Bank Group’s computer network — one of the largest repositories of sensitive data about the economies of every nation — has been raided repeatedly by outsiders for more than a year, FOX News has learned. It is still not known how much information was stolen. But sources inside the bank confirm that servers in the institution’s highly-restricted treasury unit were deeply penetrated with spy software last April. Invaders also had full access to the rest of the bank’s network for nearly a month in June and July. In total, at least six major intrusions — two of them using the same group of IP addresses originating from China — have been detected at the World Bank since the summer of 2007, with the most recent breach occurring just last month. In a frantic midnight e-mail to colleagues, the bank’s senior technology manager referred to the situation as an ‘unprecedented crisis.’ In fact, it may be the worst security breach ever at a global financial institution. And it has left bank officials scrambling to try to understand the nature of the year-long cyber-assault, while also trying to keep the news from leaking to the public.”
Curious,
You are right about the heart attack. But for precisely this reason, I think it distinctly likely that not only the British but the European banking systems will be effectively nationalised within a matter of weeks.
As to the U.S., I do not know whether a reflexive dislike of ‘socialism’ will stop them following down this road. There are many fools on Wall Street, but also a lot of genuinely bright people (also, not all of them are crooks.)
Perhaps Americans can find a new, less offensive name, to avoid the stigma.
Thereafter, I expect that attention will refocus on how to avoid debt deflation through an escalating housing price collapse.
The whole situation has become completely unpredictable. For instance, the recent reversal in the decline of the dollar has been taken by many as an indication that this is still regarded as a ‘safe haven’.
But Bernanke is on the record as suggesting 1. that debt deflation must at all costs be avoided, and 2. that this can be done through printing money.
If I was a Chinese central banker, I would have contingeny plans to liquidate: to make sure that if there was a rush for the exit among holders of dollars, I got there first rather than last.
The whole situation has now become utterly unpredictable. I can see all kinds of different ways in which it might develop, with no rational means of adjudicating between them. And it will probably develop in ways that my imagination is quite inadequate to envisage.
I am going downstairs to open a bottle of wine, and drink a toast to the memory of Frank Delano Roosevelt.
And — your good health, with thanks for much interesting comment, in particular on Georgia.
It’s over. take a look at this chart. various calculation how long it takes for a country to pay back all those “nationalized banks”
US number is unknown yet. but it seems the amount of debt will be about 3-6 times GDP. It will take at least 30 yrs to pay with modest growth.
http://www.atimes.com/atimes/Global_Economy/JJ11Dj01.html
With this information, it becomes easy to adopt an International Monetary Fund-style framework wherein the governments are required to show budget surpluses in order to repay debt. Most of the European sovereigns mentioned above currently have a budget deficit, which suggests the need for bigger moves in government expenses than appears superficially.
For example, countries like France, the UK and Italy all currently post budget deficits of around 3% of GDP; therefore a swing to 1% surplus actually means a 4% move in the ratio of government expenses to incomes. The table below shows the number of years that governments would need to repay debt while running the surpluses mentioned – for example, Switzerland would take 170 years to repay its gross government debt if it ran a surplus of 2.5% of GDP annually.
This will not be over until the US President, the Secretary of the Treasury and the Chaiman of the Fed resign and are replaced. Congress will have to pass a very restrictive, repressive regulatory regime for people to believe in and trust the markets as a store of wealth again. Throw away your Milton Friedman textbooks and dust off the old John Maynard Keynes books.
I noticed today on Yahoo how December contracts for delivery of light, sweet crude fell to $78bl, on the Merc. Some predicted that contracts in coming months could fall to the $50-55bl range.
I don’t think any of this is over by a long shot: in US financial markets; world markets; or oil markets.
And I think it will be painful for all the world’s denizens, before it’s over.
Hope to hell I’m wrong.
But I don’t think so.
mustache
Explain to me how it hurts Americans (other than those who own oil company stock)for crude prices to continue to fall.
When you answer consider the additional money that Americans will have for spending in the economy when oil is at 65 dollars a barrel. pl
US oil dependency on foreign oil for once has been proven fatal during the period of 2005-2008.
It is OBVIOUS, that Saudi/OPEC shut the supply to bring the price up from $50 to $146.
This is the trigger event that lead to slowing economy which lead to the collapse of everything. Starting with the weakest, subprime.
Saudi & OPEC let the oil flow again starting last week, after data shows considerable global economy collapse.
The US economy, the source of super power status, runs on a) cheap source of capital (Yen carry trade, dollar as reserve currency) and b) cheap source of oil.
This era is about to end rather abruptly.
consider this:
Fears of dollar collapse as Saudis take fright
http://www.telegraph.co.uk/finance/economics/2816034/Fears-of-dollar-collapse-as-Saudis-take-fright.html
Japan and China lead flight from the dollar
http://www.telegraph.co.uk/finance/markets/2817747/Japan-and-China-lead-flight-from-the-dollar.html
——
These are the beginning of international dollar run.
China, Japan, Middle east are the biggest source of cheap capital and cheap oil.
——-
Imagine these scenario:
1. China keeps the dollar peg. And yet reflow the dollar recycling to europe and asia.
2. Saudi unpeg real.
3. Yen floats up to Y50~80/$
4. US GDP represent >18% of world GDP, while china climb to 10%. BRIC represents some 20%.
5. Bretton Wood/IMF is destroyed.
——-
Suddenly, even the price uranium/electricity will go up, let alone price of oil due to currency float.
Imagine for eg. the price of Iron or copper !
China alone can make us bleed competing market price.
Suddenly, that armored vehicles junkyard in Iraq doesn’t look so smart of an investment anymore.
The world is about to do margin call on us.
Pat
Your oil price call was so on the money!!
Congratulations.
very nice. How about a trade war with china to solve currency crisis?
Does Bush realize the entire shipping and marine merchant network is owned by Korean, Chinese or swedish? (ie. in trade war, they control the gloabl trade and goods flow.)
Why is it Bush solution to everything is effing up even further?
http://www.telegraph.co.uk/finance/markets/2813630/China-threatens-%27nuclear-option%27-of-dollar-sales.html
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Shifts in Chinese policy are often announced through key think tanks and academies.
Watch this folks. This is history in the making. Map and future direction being charted.
Neocon could very well have lost europe now.
Once europe set up continent wide banking rule. It is de facto biggest financial power in the world.
http://marketoracle.co.uk/Article6704.html
Events as they are now unfolding in the EU tend to confirm that. As one senior European banker put it to me in private discussion, ‘There is an all-out war going on between the United States and the EU to define the future face of European banking.’
In this banker’s view, the ongoing attempt of Italian Prime Minister Silvio Berlusconi and France’s Nicholas Sarkosy to get an EU common ‘fund’, with perhaps upwards of $300 billion to rescue troubled banks, would de facto play directly into Paulson and the US establishment’s long-term strategy, by in effect weakening the banks and repaying US-originated Asset Backed Securities held by EU banks.
Dow futures up around 3.5% and S&P 500 around 4.5% as I speak.
Come on Betsy – you can do it!