Results 1 to 7 of 7

Thread: weekend commentary - what the hell is REALLY going wrong with the world economy ?

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default weekend commentary - what the hell is REALLY going wrong with the world economy ?

    it seems that nobody really wants to talk about it, but a few whispers are coming through anyhow ...

    (snip)"From The Times
    August 11, 2007
    In retrospect the crisis was inevitable
    Siobhan Kennedy: Analysis


    (snip)"the fear is that the worst may yet be to come.

    In retrospect, the crisis was inevitable. American families on low incomes were lent money way beyond their means with interest payments that were ratcheted up after the initial “teaser” rate expired.

    For Felipe Deluna, a native Mexican who moved to America when he was 19, it meant that the 1 per cent interest he was paying on his mortgage quickly became 7.7 per cent. And Mr Deluna, who earned $2,000 a month, was facing mortgage repayments of $4,500. Like thousands of other homeowners in similar circumstances, it didn’t take long before Mr Deluna ran into severe trouble and was forced into a distressed sale of his home.

    The problem was that the banks who had lent him the money had packaged up the debt and sold it on to hundreds of other investors, who got stuck with the bad loans when people such as Mr Deluna could not make their repayments. Many of those funds, most famously two run by Bear Stearns, the US bank, went bust as a result of the crisis.

    Making matters worse, the packages of debt, so-called collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs), did not just stay in America. They were sold globally, with billions of dollars ending up in Europe’s biggest banks and CLO funds. Now several of those banks, including IKB in Germany and BNP of France, have caused widespread panic by admitting their sub-prime exposure and freezing funds.

    Unfortunately, those same banks and CLO funds had been fuelling the boom in the private equity sector. So it did not take long for the fear about sub-prime to spill into the buyout world. The result has been that the big banks, such as JPMorgan, Deutsche Bank and Citigroup, who had lent billions of dollars for these highly leveraged acquisitions – such as the £11 billion deal to acquire Alliance Boots – have got stuck holding on to the debt as the CLOs, still reeling from sub-prime losses, refused to take it off their books.

    The spill-over into the equity markets was also inevitable, in retrospect, given that the valuations of companies on the stock markets had been buoyed by the prospect of private equity takeover approaches. With no one lending to private equity the buyout market has dried up.

    In this environment of confusion and panic selling, with rumours of hedge funds going bust and banks sitting on billions of dollars in sub-prime losses, it is not surprising that the European Central Bank intervened this week, pumping more than €150 billion (£100 billion) of cash into the banking system to ward off fears of a global credit crisis.

    But the reaction has been surprising. Rather than the markets being calmer, investors have become even more spooked, fearing that the ECB and the US Federal Reserve, which followed suit, would intervene in this way only if it knew something that the rest of us didn’t.

    As one City source put it yesterday: “It’s like there’s some sort of black box in the middle, some sort of nervousness that the banks have yet to come clean on what the problems are. To be honest, no one is quite sure who’s lost what.”(snip) from


    to get deeper insight into the nature of that 'black box', one has to go to less trustworthy sources ...

    (snip)"August 9, 2007 (LPAC)--A senior European banking source reports that the interbank money market closed down this morning for two to three hours, for the first time ever. Rumors had spread that the German Bundesbank was holding an emergency meeting because of a collapse of a major German bank, believed to be Westdeutsches Landesbank, one of the largest in Germany. The Bundesbank then released a statement saying that the meeting was to discuss the IKB banking crisis.

    The source said that a Westdeutsches Landesbank failure would have collapsed the entire global financial system. The source underlined that this ongoing crisis is far worse then anything he has witnessed.

    The next threat to the banking system in Germany, which will have obvious global ramifications, is what is called Asset Backed Commissioned Paper. Banks issue these to customers such as hedge funds and other banks, which, theoretically, can draw on them in case of emergency. The problem is that banks have been issuing far more then they should have. The deadline for the hedge funds and other customers to draw on these ABC-Ps is between August 13 and 15. If their customers rush to draw on them, this will be unsustainable for the banks.

    The source said that these ABC-Ps were involved in the IKB bank crisis, because its Rhineland Funding unit had drawn on one of these, forcing IKB to cover it. Then IKB requested to draw on one of these ABC-Ps it had with Deutsche Bank, but the latter refused to honor it, and IKB collapsed.

    Another senior banking source told EIR that he too had heard that the interbank money market had closed, and it had been closed under orders of the European Central Bank (ECB), so that the latter could funnel emergency credit to selected, troubled banks.

    Meanwhile Bloomberg News reported that the ECB, in an "unprecedented" response to banks in desperate need of cash, loaned 94.8 billion euros to these banks. This followed a jump in overnight lending rates the banks charge each other, to the highest level in six years."(snip) from


    trustworthy source or not, if the above speculation is even partially true re European bank issued Asset Backed Commission Paper ( equivalent to US Bank Letters of Credit ?? ) being exercised by troubled hedge funds on a grand scale, quickly followed by banks not actually having the cash to honor these Paper commitments due to CDO / CLO losses, all hell could break loose in the world financial markets next week !

    Also, from a standpoint of 'scale', in order to avert major market crashes in the last two days the 'Western world's' central banks injected something like $400 billion dollars out of their collective reserves. These injections were TEMPORARY. However, it would appear to be a practical impossibility for the central banks to withdraw these temporary funds without precipitating the very crash that they managed to 'postpone'. $400 billion represents something like 10% of the combined reserves of the 'Western world's' central banks - meaning that they could theoretically run out of reserves to keep making such injections in a matter of a couple of weeks.

    If that scenario were to materialize, then the 'Western world's' financial system would then be at the mercy of the Chinese, the Russians, the Arabs etc. as Chinese and Russian and Arab central banks (as well as the central banks of other small countries with no great love for the Western world) would be the only ones left standing ! An alternate scenario was hinted at by yesterday's US FED announcement that they were prepared to keep providing UNLIMITED funds to stabilize the economy. However, by itself, the US FED has about $800 billion in reserves which represents two whole days worth of worldwide injections at the same pace as last thursday and friday. Thus to make good on this promise the FED would have to start printing $400 billion brand new US dollars every day ... which would translate into something like a 100% inflation rate in terms of the US dollar = US dollar prices for EVERYTHING doubling once a year.

    ~
    Last edited by Melonie; 08-11-2007 at 03:58 AM.

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - what the hell is REALLY going wrong with the world economy ?

    ^^^ however this all shakes out eventually, Peter Schiff pretty well sums up the probable end result for Americans ...

    (snip)"For years, Americans have been able to pay for enormous trade deficits by exchanging IOU's for imported consumer goods. Unfortunately for foreign creditors, a substantial percentage of those IOU’s have recently taken the form of mortgaged backed securities.

    Sporting higher yields than Treasury bonds, investment grade ratings from reputable agencies, and juicy commissions for the investment banks that packaged them, these structured mortgage bonds have quickly become America’s greatest export. Ironically, amid all the recent hoopla about defective Chinese exports, America has proved that when it comes to flooding the world with shoddy merchandise, nobody beats the good old USA.

    This week, several of Wall Street’s best foreign customers announced staggering losses on the American mortgaged backed securities they had been sold. The fundamental issue underlying these losses is that Americans borrowed more money than they can afford to repay. As initially low teaser rates expire and mortgage defaults increase, foreign lenders are discovering that the residential properties that collateralize the mortgage bonds are not worth anywhere near the loan amounts.

    It will not be long before American borrowers come to a similar realization. When they do they will be faced with the shocking reality that all of their home equity is gone -- having disappeared just as quickly as did the paper profits of the Internet stock mania. However, this time around the situation is more dire. Although paper profits have vanished much as they did in 2001, all the mortgage debt, much of it about to get much more expensive to service, still remains.

    When American homeowners come to grips with their diminished net worth, the excess consumption that has been the rule over much of the past decade will grind to a halt. If any money is left after making higher ARM payments, homeowners may actually decide to save some to repair their personal balance sheets. As consumer spending collapses, the U.S. economy will plunge into a severe recession, compounding the problems in the housing market and exacerbating the recession.

    The last straw will be the value of the U.S. dollar. Already teetering on a precipice, a recession will push it over the edge. As the dollar falls, interest rates and consumer prices will rise even more sharply, compounding the problems for both housing and the economy. In fact, the fear of further dollar declines has been the most important factor in restraining the Fed's ability to cut interest rates. Rather than admit its concern over the dollar, the Fed justifies current policy with assurances that the economy is strong and is not in need of stimulative rate cuts. In Jack Nicholson fashion, since Bernanke feels investors can not handle the truth he feeds them a lie instead.

    As more of our nation’s [foreign - sic] creditors finally realize that they have been duped, the credit well fueling American consumption will run dry. Foreign lenders will simply refuse to accept our IOU’s as payment for their merchandise. Lacking in savings and productive capacity, we will be forced to accept dramatic reductions in our standard of living as a result.

    Though our creditors will finally be forced to realize some losses on their prior investments, they will no longer bear the burden of subsidizing the U.S. economy. With diminished competition from Americans, foreign consumers will finally gain the upper hand. Goods previously too expensive for citizens of non-dollar economies will suddenly become affordable. Savings currently squandered on American consumption will be freed up to finance productive investment at home.

    Though these positive aspects may be lost in the recent synchronized sell off in global stocks, foreign markets will soon diverge from ours. As the American caboose is decoupled from the global economic gravy train, the rest of the cars will move that much faster without all that dead weight slowing them down."(snip) from

  3. #3
    God/dess
    Joined
    Sep 2006
    Posts
    7,964
    Thanks
    6,155
    Thanked 10,183 Times in 4,602 Posts

    Default Re: weekend commentary - what the hell is REALLY going wrong with the world economy ?

    Hi Melonie,

    I saw this article by Ben Stein. Was wondering what your thoughts are.

    http://finance.yahoo.com/expert/article/yourlife/41148

    How Speculators Exploit Market Fears

    Here's a fact: The speculators and hedge fund managers who run today's stock market need market volatility in order to make money.

    They can't make enough money if the market stays flat or moves only a bit, so they like extreme and unexpected price movements. They especially like sudden, surprise movements down, when they can make money off stocks they borrow and sell -- or, as they say, "sell short."

    Money Lust Satisfied

    That's what's been happening the past couple of weeks. But it's not interesting to say that the speculators are whipping the market around to satisfy their money lust. So the speculators themselves make up reasons for why the market is fluctuating, flog those reasons to the media, and then profit if some other speculators believe the jive reasons and jump in the way the manipulators want them to.

    Supposedly, the market is "correcting" because of worries about the housing slowdown, and also because of fears that the debt markets that support mergers and acquisitions is drying up.

    These are interesting theories, and people who don't know a lot about the stock market or the economy might find them beguiling. What follows are a few truths that show how shallow these "reasons" for the stock market moves are.

    Housing a Theory

    Yes, the housing market has slowed from a spectacular bubble level to a simply pretty good level. Housing sales and starts are now about what they were in 2002, and no one thought we were in a housing depression then.

    In any event, housing is only about 5 percent of the economy. If it falls by 15 percent, that would represent a fall-off of about .75 percent. That's not trivial, but it's also not the stuff of which recessions are made.

    The fact is that there is no recession. The economy is suffering from a labor shortage, not a surplus of unemployment. The Fed is worried about excess demand, not slack demand.

    Corporate profits set new records every day. Whatever's happening in residential sales and building is simply not slowing down the economy. Why should a Boeing or a Merck or a Pfizer have any reaction to housing at all? Because the speculators sell everything they can when nervousness sets in -- and for no other reason.

    A Minor Major Mess

    Subprime is a mess. But it's a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages.

    Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market -- a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it's nothing.

    And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.

    There's simply no connection between subprime and developed or developing nations' stocks. This by itself shows the thin context of the selling wave late last month.

    Money's Still Cheap

    What about the supposed drying up of loans for mergers and acquisitions by private equity firms? Well, here's a good, simple test of just how valid that explanation is for stock market moves: The majority of private equity takeovers are financed with junk debt.

    If there really were a major shortage of funds for these deals, the interest rate on the junk would skyrocket. Instead, while the rate has risen by about 150 basis points in the past month, the spread between junk and investment grade is now about 290 basis points, according to leading junk analyst Martin Fridson.

    This is a lot lower than the year-end average of the spread from 2002 to 2006, and far below the almost 800 basis point spread during a true interest-rate crunch like the one after the tech meltdown in 2000-2002.

    So that's phony, too. Interest rates have risen, but not anything like what they've done in real crises. And besides, the Dow fell by about 550 points the week before last, yet not one of the Dow stocks is involved as either acquiror or acquiree in a private equity deal.

    In short, money is no longer virtually free the way it was for private equity deals in the past year. But it's not expensive by historical standards, either.

    Spreading the Fear

    In other words, it's all the speculators trying to panic us so their sell programs will make money. And they'll make money as long as they can spread their panic. When they can't do that any longer, they'll work the long side -- and make up reasons for that, too.

    In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don't sell. With all the shrieking about the market, it only fell to what it was about five weeks ago -- and we didn't think we were poor then.

    So let the speculators shout "fire." As of right now, they're not blowing anything but smoke.

  4. #4
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - what the hell is REALLY going wrong with the world economy ?

    I agree with some of Ben Stein's points, but I disagree with others ...

    As to speculators exploiting market volatility ... arguably the programmed trading by speculators is adding volatility. However, there is now a significant new phenomena i.e. the Sovereign Wealth funds - where for example heavy Chinese investment in US hedge funds can potentially add volatility for reasons other than just greed.

    As to the limited scope of the housing market, I disagree for two reasons. First is that Ben's 5% of the economy figure does NOT include all sorts of secondary economic activities related to housing. I'm talking about mortgage lending, home furnishings manufacturers, appliance manufacturers, insurance, etc. Arguably if you add up all of these secondary economic activities you get a figure that is three times higher than Ben's 5%. In bubble areas like California, the percentage is even higher because of the higher real estate prices.

    The second reason is that the financial impact of mortgage lending is not at all confined to the housing industry. It has now infiltrated both US and foreign investment banks, pension funds, state and local gov't coffers, private equity and hedge funds etc. Ben Stein does not acknowledge the 'house of cards' magnitude of interdependent credit guarantees that all gravitate back to the soundness of housing backed bonds and derivatives. If this were as trifling as Ben implies, there is no way that the western world's central banks would have ponied up 200 BILLION DOLLARS in the past two days to stop a domino effect of interdependent credit guarantee defaults !!!!!

    I also disagree with Ben's conclusion that interest rates have not moved much therefore a problem doesn't exist. The fact that interest rates have not moved is arguably much more indicative of a credit crunch. After all, if the loan can't / doesn't close then no interest rate change is booked. I would argue that this is the flip side analogy of bubble housing prices, in the sense that if overpriced homes are not selling then there aren't any actual sales booked at lower price levels - which is analogous to higher priced new loans that aren't closing. As further proof I would point to all of this week's announcements by mortgage lenders to their own employees that the vast majority of new loans written from here on out must be FNM / FRE compliant (with FNM/FRE subsidizing continued 'low' intererst rates).

    The true test on the 'real' price of competitive interest rates, as well as the true test on the 'real' price of housing, will occur when distressed would-be borrowers or distressed home sellers are finally forced to actually close the transaction under 'real' market terms.

    As to corporate profits being 'great', this was true into the first and second quarters of this year. However, the true reasons that profits are 'great' encompasses a lot of factors besides the health of the domestic US economy. Ben Stein does not address the facts that significant contributors to 'great' profit levels of some US corporations came as a result of A. shutting down US operations and outsourcing, B. a falling US dollar boosting stagnant foreign profits when converted back to US dollars for corporate accounting, C. stiff-arming remaining US employees i.e. tiny pay raises and/or benefit cuts, D. booking massive profit margins as new 'partner' plants in China / India / SE Asia have come online.

    In the final analysis, Ben Stein is a financier. I suspect that his vision is too focused on recent corporate profits and broker bonuses in the financial sector, and very myopic in regard to the state of the US operations of US corporations outside of the financial industry. Arguably, where most large US based corporations are concerned, US operations is now a minority of their total worldwide activity. Thus Ben's conclusion that the financial health of large US based corporation balance sheets is somehow directly correlated with the financial health of the US domestic economy and/or US workers is dangerously incorrect.

    And please don't even let me get started about 'real' versus 'official' unemployment figures !!! All I can say is that the 'birth-death' model has essentially reduced 'official' US unemployment statistics to fictional status - that there are millions of Americans who are de-facto unemployed but not looking for jobs and thus not counted in the official statistics ( social welfare benefit recipients, prisoners, homeless etc. to name a few million) - that there are also millions of former software engineers / auto workers now waiting tables and flipping burgers but still technically employed ...

    Ben Stein probably needs to reread Bloomberg's interpretation of the same subject ...



    (snip)"he $2 trillion market for mortgages not backed by government- sponsored agencies is at a standstill. That's just the beginning. Other types of mortgages are suffering. So are firms and banks that package the debt for investors. The ripples were felt in Europe and Asia, where central banks offered cash to banks amid a credit crunch. And some corporations, from countertop makers to railroads, are blaming the mortgage meltdown and housing slump for earnings that fell short of analysts' estimates."(snip)

    (snip)" O'Neal on June 27 called subprime defaults ``reasonably well contained.'' Merrill spokeswoman Jessica Oppenheim said this week that the company is confident his words accurately reflected the market at the time. O'Neal declined to comment.

    Among the other executives joining the chorus was Bank of America Corp. CEO Kenneth Lewis, who said June 20 that the housing slump was just about over.

    ``We're seeing the worst of it,'' Lewis said.

    Within the week, he was contradicted by a team of Bank of America analysts, who called losses in the mortgage market the ``tip of the iceberg'' and predicted ``broader fallout'' from adjustable-rate loans resetting at higher interest rates.

    David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland, is blunt about his current outlook. He says a third of the U.S. home-loan industry will disappear. "(snip)

    (snip)" Demand for loans to bundle into mortgage-backed securities came to a halt, crippling the subprime and Alt-A lending businesses. The exception was prime loans conforming to rules set by the biggest government-chartered agencies, Fannie Mae in Washington and Freddie Mac in McLean, Virginia.

    Doug Duncan, the Mortgage Bankers Association's chief economist, says he's lowering the group's forecast on the total dollar value of new U.S. mortgages.

    The association said July 12 that the value of mortgages sold would decline 7 percent this year to $2.6 trillion and 18 percent in 2008 to $2.3 trillion, from $2.8 trillion last year.

    ``Most of the market has shut down,'' Duncan says. ``This is not a normal event.'' (snip)

    (snip)" For one self-employed borrower in Pennsylvania, with a 626 credit score, just above what's considered subprime, Hebert says he contacted three lenders. Last year, the borrower would have qualified for a 7.99 percent loan, Hebert says. This week, he received one offer for a 10.5 percent loan with a three-year prepayment penalty, meaning that if the borrower refinanced during that time he would be required to make six months of payments to the original lender.

    ``It would have been cheaper to use a credit card to pay for his house,'' Hebert says.

    When it came time to lock in the rate, the lender pulled out, Hebert says.

    ``It was a hard thing to do, an emotional thing, to tell my borrower he was turned down for a rate that was high to begin with,'' he says. "(snip)

    (snip)" Steak n Shake Co., an Indianapolis-based fast-food chain, blamed a 4.3 percent decline in same-store sales in the third quarter partly on credit markets. ``Some segments of Steak n Shake consumers continue to be sensitive to high gasoline prices and mortgage interest rates,'' the company said in a statement yesterday.

    Shares of MetroPCS, a prepaid mobile-phone service, fell 20 percent Aug. 3 after second-quarter sales missed analyst estimates. Chief Financial Officer J. Braxton Carter blamed customers' ``short-term economic disruptions,'' such as defaulting on their subprime loans.

    As for the faulty initial predictions by Bernanke and others, go easy on them, says Josh Rosner, managing director at the New York investment research firm Graham Fisher & Co.

    ``There's no model for what's happening now in the housing and mortgage industries,'' Rosner says. ``We have to give Bernanke a chance. He is a reasoned and traditional central banker. He knows how to manage crazies.'' (snip)

    ~
    Last edited by Melonie; 08-12-2007 at 09:10 AM.

  5. #5
    God/dess britneyireland's Avatar
    Joined
    Jan 2002
    Location
    Dallas
    Posts
    2,568
    Thanks
    283
    Thanked 602 Times in 340 Posts
    Blog Entries
    1
    My Mood
    Inspired

    Default Re: weekend commentary - what the hell is REALLY going wrong with the world economy ?

    Shoot me! I have contributed to "the short sqeeze"

    I'm guilty of profiting off of shorting XHB, BZH, GS, BSC, and Countrywide Financial (forget the ticker)
    Rebecca Avalon







  6. #6
    God/dess Deogol's Avatar
    Joined
    Dec 2003
    Posts
    5,493
    Thanks
    120
    Thanked 50 Times in 35 Posts

    Default Re: weekend commentary - what the hell is REALLY going wrong with the world economy ?

    I always make money when volumes are high. Velocity of money is a good thing in the market. There should be more day traders.

  7. #7
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - what the hell is REALLY going wrong with the world economy ?

    Well, I'm guilty of 'shorting' all of the investment banks at the same time via buying SDS shares !

    Betting the downside on the homebuilders, then the home mortgage originators, and now the investment banks, has been almost too easy. Keep an eye in the sky for Ben Bernakke's helicopters raining freshly printed money, though !!! What's the famous 'bear' investor quotation ?? " The markets can remain irrational longer than you can remain solvent " ??

Similar Threads

  1. weekend commentary ... the 'Frozen' Economy
    By Melonie in forum Member Boards
    Replies: 0
    Last Post: 07-28-2008, 12:55 AM
  2. Replies: 0
    Last Post: 11-18-2007, 07:19 AM
  3. weekend commentary - the 'Rentier' economy ...
    By Melonie in forum Dollar Den
    Replies: 0
    Last Post: 03-04-2007, 09:57 AM
  4. Replies: 0
    Last Post: 12-03-2006, 08:10 AM
  5. Yet more weekend commentary on US economy ...
    By Melonie in forum Dollar Den
    Replies: 1
    Last Post: 01-08-2006, 06:31 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •