PhillyArena Forums
PhillyArena Community => NBA Discussion => Topic started by: rickortreat on August 29, 2007, 03:31:14 AM
-
I am sorry to post this here instead of in the appropriate room, but the decline at this juncture in the stock market is very serious. Yesterday was key, as the Indu's failed to break-out of their downtrend, and today the market fell quite a bit.
If you have money in IRA's and the like, try to move it out of stocks for the time being. I keep telling you to read jsmineset, since he is far more aware of these problems and issues than a piker like me!
I am now working, and unable to play the markets actively as I would- I owe it to my employer to do my best. But the truth is one could make a fortune buying puts on the bank stocks- Citi, JPM, Lehmen Bros. I can't advocate this for any of you since if you don't know what you're doing these things are dangerous to just play with.
One place where you can move your money would be BEARX- a fund that goes up when the market goes down- there are probably better funds to use in this situation, but I do know that one is situation for a downturn.
I am truly sorry to be the bearer of this news, this board is supposed to be about fun and entertainment. And I apologize for harping so much on these things I see coming, but I would feel worse if I didn't warn you.
-
Booyah! The boys really pumped the market up today! But all they did was square the market with the downdraft from the day before. The trend as yet is STILL DOWN.
I kinda hope they keep the market up. If they are smart they will push it higher to entice buyers back in. It would have been far less costly had they done this 2 days ago.
GS was still down for the day, however, Citi was up. Some think that Citi has more exposure to the bad derivatives than GS. I don't think even they know how bad it is!
-
Here is a another perspective
We have written repeatedly that the recent turbulence
in financial markets is part of the legacy of an overly
loose monetary policy, a mistake that led to over-leverage
in general with particular excesses in both residential real
estate and the price of financial instruments based on
housing-related cash flows.
Now that the hangover from monetary excess has
settled in, cries for one last drink can be heard up and
down Wall Street: one last drink of the same loose
policies that started the trouble to begin with. Not too
much or for too long, they say; only enough to let them
sober up gradually. That the extra tab for additional
monetary looseness has to be paid by everyone else in our
economy, through higher inflation risk, gives them little
concern.
But instead of giving in by cutting the target federal
funds rate (now 5.25%), Federal Chairman Ben Bernanke
has been orchestrating a protracted intervention, buying
time while firms sober up enough to realize that the Fed is
not coming to their rescue and that the real economy is
doing fine.
Despite all the stories about dysfunctional credit
markets, last week the amount of commercial paper
outstanding issued by domestic non-financial companies
was 38% higher than the same time last year. Meanwhile,
the Baa bond spread over 10-year Treasury Note yields
was 2.1 percentage points versus a ten-year average of
2.3.
In our view, Bernanke’s performance last week is in
the same league as former Fed Chairman Alan
Greenspan’s bold policy gestures to loosen policy in 1987,
1998, and the week after September 11, 2001. Wall Street
just isn’t sober enough yet to know it.
Just what did the Fed do last week? Exactly what it
should have done: almost nothing, except for a shrewd
token gesture.
On Friday the Fed issued two statements. The first
announced that the Fed was cutting the discount rate from
6.25% to 5.75% and extending discount window loans to
as long as 30 days. The discount rate is the interest rate
the Fed charges banks that borrow directly from it.
Meanwhile, the target federal funds rate, the rate banks
charge each other for overnight loans, remains at 5.25%
and the effective funds rate has traded even lower in
recent days.
With the funds rate target still at 5.25%, it is hard to
see any major bank on solid footing going to the Fed
instead of another bank. This despite the Fed convening a
conference call last week to tell major firms that there
should be no embarrassment in accessing credit directly
from the discount window. In this way, the Fed reasserted
its role as the lender of last resort, without having
to take any major action.
The second statement the Fed issued on Friday said
“tighter credit conditions and increased uncertainty have
the potential to restrain economic growth going forward.”
The statement also said “the downside risks to growth
have increased appreciably.”
We draw three conclusions from this latter statement.
First, notice the word “potential” regarding the restraint
on economic growth. In other words, the Fed has yet to
see any actual evidence that growth has slowed.
Second, the Fed will not act due to financial market
pain by itself; it’s focused on whether financial market
pain has a significant negative impact on real economic
growth.
And third, the Fed is ready to shift to a neutral bias at
the September 18 meeting, if a month from now the
markets are still being tossed around.
By that time, we think the markets will have safely
entered rehab, thankful the Fed never gave it that one last
drink.
-
The Fed’s Job
By BRIAN S. WESBURY
Blaming monetary policy for
economic and financial market
turmoil is a time honored tradition.
Maybe the most famous bashing was
in 1896 when William Jennings
Bryan, an original populist, ranted
against hard money and for inflation:
". . . we shall answer their demands
for a gold standard by saying to
them, you shall not press down upon
the brow of labor this crown of
thorns. You shall not crucify
mankind upon a cross of gold."
Monetary policy makes an easy
scapegoat because printing money
(like drinking a cup of coffee) is an
easy way to give an economy a
temporary boost. But if what ails the
economy or markets was not caused
by tight money in the first place, a
temporary boost will not help. It may
cover up the symptoms temporarily,
but in the end it does not solve the
underlying issue (a lack of sleep).
In fact, easy money always leads to
greater problems down the road --
either rising inflation, or a reduced
sensitivity to risk, as markets come
to expect rate cuts to bail them out.
Lately, modern-day William
Jennings Bryans have been loudly
calling on the Fed to cut interest rates
and inject cash into the banking
system. They believe more money
would stop financial markets from
seizing up any further.
This would make sense if money was
already tight -- or to put it another
way, if a lack of liquidity was the
real issue. But trades are clearing,
banks are well capitalized,
commercial and industrial loans are
growing, credit-worthy borrowers are
getting mortgages, and the economy
is still expanding.
This was not the case after 9/11,
when communication lines were cut
to the Bank of New York, a key
clearing house for bond trades. Then,
liquidity injections were clearly
needed. Trades failed and overdrafts
mounted, forcing the Fed to inject
hundreds of billions of dollars into
the banking system.
In contrast, the current turmoil in the
financial markets has nothing to do
with a lack of liquidity. More
importantly, there is little hope that
any liquidity the Fed would inject
into the banking system would
actually get to the sectors of the
market where only sporadic, fire-sale
pricing of securities is taking place.
Some are arguing that a sharp decline
in the three-month Treasury bill
yield, to 3.85% from roughly 5%
during the past few days, shows the
need for a huge infusion of cash that
would force the federal funds rate
down. But the drop in T-bill yields is
a reflection of three issues: a flight to
quality, a guess that the Fed will
lower rates at its next meeting and a
very liquid market.
First, fear and panic has increased
demand for rock-solid Treasury
debt, driving prices up and yields
down. Second, expectations of Fed
rate cuts always push short-term
rates down. But it's a circular
argument to say falling short-term
rates, due to an expectation of Fed
rate cuts, is any reason to cut rates.
Finally, the liquidity already
sloshing around in the banking
system must go somewhere and
right now it is going into the T-bill
market. Low T-bill rates are a
reflection of the liquidity already in
the system, not a clarion call for
more.
The real problem with the financial
markets is that extreme leverage
and extreme uncertainty have met
in the subprime loan market. No
one knows how many loans will go
bad, who owns these mortgages and
what leverage they have applied.
We do know that subprime lending
is just 9% of the $10.4 trillion
dollar mortgage market, and
delinquencies are running at about
18%. The Alt-A market is about 8%
of all mortgages and about 5% of
this debt is delinquent.
As an example, let's take a very low
probability event and assume that
losses triple from here. Let's
assume that 54% of all subprime
loans and 15% of all Alt-A loans
actually move to foreclosure. Then,
assume that lenders are able to
recover 50% of the value of their
loans. In this scenario, total losses
in the subprime market would be
27%, while total losses in Alt-A
would be 7.5%.
From this we can estimate a price for
the securitized pools of these assets.
Without doing any actual adjustment
for yields, or for different tranches of
this debt, the raw value of the
underlying assets would be 73 cents
on the dollar for subprime pools and
92.5 cents for the Alt-A pools.
Getting a bid on this stuff should be
easy, right? After all, the market
prices risky assets every day.
But this is the rub. A hedge fund, or
financial institution, that uses
leverage of 4:1 or more, would be
wiped out if it sold subprime bonds
at those levels. A 27% loss on Main
Street turns into a 100% loss on Wall
Street very easily. But because hedge
funds can slow down redemptions, at
least for awhile, and because they are
trying desperately not to implode,
they hold back from the market. At
the same time, those with cash smell
blood in the water, patiently wait,
and put low-ball bids on risky bonds.
The result: No market clearing price
in the leveraged, asset-backed
marketplace.
Additional Fed liquidity can't fix this
problem. An old phrase from the
1970s comes to mind -- "pushing on
a string." In the 1970s, no matter
how much money the Fed pushed
into the system, it could not create a
sustainable economic recovery that
did not include a surge in inflation
because high tax rates and significant
government interference in the
economy prevented true gains in
productivity.
There is a lesson here. Populism is in
the air these days, and the threat from
tax hikes, trade protectionism and
more government involvement in the
economy, is rising. This reduces the
desire to take risk. Congress is
working on a legislative response to
current mortgage market woes as
well. And as with the savings and
loan industry (forcing S&Ls to sell
junk bonds at fire-sale prices), and
Sarbanes-Oxley, the legislative
response almost always compounds
the problems.
The interaction of an uncertain
regulatory and tax environment with
a highly leveraged, illiquid market
for risky mortgage debt creates
conditions that look just like an
economy-wide liquidity crisis. But
it's not. A few rate cuts will not help.
What can help is more certainty. Tax
cuts, or at least a promise not to raise
taxes, and immunity - or at least a
safe harbor from criminal
prosecution for above-board
institutions in the mortgage business
- could help loosen up a rigid market
in a more permanent way than
sending out the helicopters to dump
cash in the marketplace.
The best the Fed can do is to stand at
the ready to contain the damage. In
this vein, their decision to cut the
discount rate and allow a broad list
of assets to be used as collateral for
loans to banks, was a brilliant
maneuver. It increases confidence
that the Fed has liquidity at the
ready, but does not create more
inflationary pressures. It was a
helping hand, not a bailout.
It also buys some time, which is what
the markets need. Every additional
month of payment information on
mortgage pools, and every mortgage
that is refinanced from an adjustable
rate to a fixed rate, will increase
certainty and provide more clarity on
pricing.
Even though many, including Alan
Greenspan, continue to argue that the
excessively easy monetary policy of
2001-2004 was necessary, it was this
policy stance that caused the
problems we face today. The current
financial market stress is a result of
absurdly low interest rates in the
past, not high interest rates today.
In fact, current interest rates are still
low on both a nominal and real
basis. Cutting them again causes a
further misallocation of resources,
and makes the Fed an enabler of the
highly leveraged.
What William Jennings Bryan was
really complaining about in 1896
was falling commodity prices,
especially falling farm prices. What
he and the other populists ignored
was that these prices were falling
because of productivity, not tight
money. His "Cross of Gold" speech
was a clear stepping stone to the
creation of the Fed in 1913. Since
then, inflation has been much
higher than it would have been
under the gold standard. But all that
inflation never did save the family
farm.
Similarly, even very easy money
today can't put off the day of
reckoning for subprime mortgage
holders who bought homes with no
money down and thought interest
rates would stay low forever. It
can't help overly leveraged
investors who thought they were
getting risk-free 20% annual
returns. Providing enough liquidity
to allow markets to function, while
keeping consumer prices as stable
as possible, is the best the Fed can
do. It should be all we really ask.
Mr. Wesbury is chief economist at
First Trust Advisors L.P. in Lisle, Ill.
Reprinted with permission of the
Wall Street Journal © 2007 Dow
Jones and Company, Inc. All
Rights Reserved.
-
A small little exercise to show how bad financial stocks are...
Wachovia 5.25% dividend yield
Citigroup 4.60%
Bank of Amer 5.05%
Chase/JP Morgan 3.45% - this is lower due to the high exposure of investment banking and brokerage
Most pure banking stocks are paying higher yields on dividends than they are for deposits. And all of these stocks generate free cash flow in excess of the dividend rate. So if you have excess cash it is better to buy bank stocks than invest in certificates of deposit or T-Bills. And a price decrease doesn't hurt unless you plan to sell the stocks...but holding them for 2-3 years should realize not only a steady higher return than treasury based investments but provide protection of capital if not a gain.
Then there is the entire tax aspect...dividends are taxed at a maximum rate of 15%. Interest is taxed at your marginal rate...most likely 25-30%. If you are below the 25% marginal rate then dividends are taxed at 5%.
-
It's easy to pay a dividend when you are a bank with an unlimited line of credit!
What no-one realizes is, IT IS NOT THE SUBPRIME MORTAGES that are the problem. The problem is far worse than anyone realizes because it involves unmarketed, untradeable, impossible to properly value derivative instruments based on interest rates.
These instruments are not regulated at all, they are side agreements between lenders and borrowers and third parties selling a type of insurance. They are only as good as the ability of the writer to pay off!
No amount of liquidity injected by the Fed can save these derivatives from causing severe distress to the Citi's, JPM's GS's etc. Mind you, while no one questioned them, they contributed greatly to the profits at these entities. But now, no one knows just how much they are on the hook for, and investors can't tolerate the uncertainty. GS stock price went from $230 down to below $160 in about 7 weeks. Citi went from $54 to $45. Sure you get a nice dividend, but the value of your portfolio has been decimated in the process.
Incidentally, it doesn't look like they're done going down either. Things could go from a minor correction to an all-out crash with a little more bad news.
Nothing the Fed can do can save these institutions from their derivative games, not without destroying the dollar. These banks are too big to fail, so they are inclined to take excessive risks, relying on the government and the taxpayer to bail them out. Save them, and they will be at it again tomorrow. Let them fall and the liquidity squeeze kills the economy. Between a rock and hard place, it's easy to blame the Fed, but the Fed doesn't set trade policy and it doesn't tell the banks not to write derivatives.
The Indu's went down again today, when they needed to go up to paint the charts. The uncertainty in the market can easily be replaced by fear and panic. Ben Bernake does not inspire great confidence.
-
I am truly sorry to be the bearer of this news, this board is supposed to be about fun and entertainment. And I apologize for harping so much on these things I see coming, but I would feel worse if I didn't warn you
;D You didn't say gold is a can't miss and buy it today so I'm good.
-
Gold is trendless right now. I guarantee you that if you buy now, 6 months from now you will be exstatic at the price increase, but it isn't time just yet. In fact, I am far more concerned about a market decline at this point, which will take gold stocks down to absurdly low levels, which will make for a much more profitable trade and make you very pissed off at me in the short-term!
Read this article from the street.com carefully, there's a lot of good info in there and a very strange options play going on: http://tinyurl.com/2moup7
And a couple of gems from: http://www.jsmineset.com/
-
It's easy to pay a dividend when you are a bank with an unlimited line of credit!
If you honestly believe this then there is no hope to educate you on the real way the world works. Banks do NOT have unlimited lines of credit. And all of those dividend yields are FULLY funded by free cash flow.
Here is a solid quote for you, Rick...you should reflect on it deeply.
Paranoia will destroy ya.
-
Lurker,
If you think banks don't have an unlimited supply of credit, and by Banks, I mean the JPM's. BOA. CITI and the others, then tell me where money comes from and how it is created.
I have worked with people in all sorts of Businesses. Accountants, Lawyers, Doctors, Insurance Company's, Pharmaceutical firms. And, no one I ever spoke with in any of those places knew anything about how money is created.
So answer me this:
How is money created and who makes it?
Who owns the entity that makes money in the US?
If the US Dollar is the world's currency, who benefits from that and why?
And, historically has money always been this way, or is the way that money is created in the 20th and 21st centuries after 1913, an entirely new thing?
-
Rick you should know by now Kareem produces all money.
-
Now is the time to buy Gold. Soon it will break-out above it's old peak of $730. It is currently at $682. This is an evaluation based on Technical Analysis- which is simply the study of price behavior, which is simply the study of the choices of players in the markets. It is always the same, because people are always the same.
Gold has been in a consolidation pattern ever since it hit $730, and that was May of 2006. Since that time, it hasn't gone any higher on a successive peak than $698.
In a bull market, whenever you see such a pattern, when it completes, the price rises at an extreme rate and it appears that we are now entering such a phase.
The root cause of this is Lurker's beloved banks with their derivatives. The following is copied from jsmineset.com which any of you who have any money at all should read daily. He does not spin and does not pull punches. He calls it the way he sees it, and he sees far more clearly than most.
Dear CIGAs,
It is not just coming - it is already here.
I am convinced that all that has been anticipated since 1968 has now occurred. I see the mountain of over-the-counter derivatives which, when including all types, exceeds USD$30 trillion. The mountain is shaking quite badly.
The situation now resembles the Weimar Republic (the term given to describe the German state from 1919-33) in the sense that the Weimar case study is predicated on planned currency destruction to avoid war reparations that got out of control.
The present situation is based on the ultimate sin of greed called over-the-counter derivatives. This mountain of unfunded special performance contracts is shaking and will, as a product of declining US business activity and profits, fall precipitously.
Before the fall of this unimaginably large mountain of garbage paper, ALL world central banks will in concert prime the pump any way they can. Priming for this purpose has no practical way of being drained. What is going to get out of control now is monetary inflation to offset the shaking mountain of over-the-counter derivatives. The beginning of this fall is in progress and will be history by 2012 or SOONER.
Simply stated this is it, today, now! Think the best but protect yourself under a worst case scenario.
There is no more "if this happens that will happen" scenario. It has already started to happen and the result will be a bull market for all commodities to a level that even the wildest (rational) bull cannot not even imagine. The dollar is headed below the estimates of the biggest (rational) bear.
I take what is said here very seriously. What I have just said, I have never uttered before.
The over-the-counter shaking mountain of derivatives can't be fixed by trying to hide it. The problems cannot be fixed by any interest rate action. The problem will not even be fixed by a monetary inflation of unprecedented scope. The problem is coming home by 2012 or much SOONER.
Keep in mind that the $20 trillion plus over-the-counter credit and default derivatives generally have the following characteristics.
They are:
1. Without regulation.
2. Without listing on public exchanges.
3. Without standards.
4. Not in the least bit transparent.
5. Without an open market of the bid/ask type.
6. Dealt in by private treaty negotiations.
7. Without a clearing house.
8. Unfunded without financial guarantee of any kind.
9. Functioning as contracts of specific performance.
10. Of a character or ability to perform that is totally dependent on the balance sheet of the loser in the arrangement.
11. Evaluated by computer assumptions made by geeks, non-market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
12. Now in the credit and default category and are considered by accepted authorities as totaling more than USD$20 trillion in notional value.
13. Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one sells it.
The reason people will run to physical gold is that it is a commodity and an element, which cannot be consumed. All it does is sit there, looking pretty. It cannot be manufactured, only mined and refined. All commodities will also rise, bringing inflation to everything and anything that people need and can pay for.
There is no protection from the derivative meltdown other than in commodities. Jim's reference to the Weimar Republic shows that this type of nonsense has happened before. The only reason it is happening again is that people fail to learn, and start to take risks that no financially well-grounded person would ever take.
You can speculate in Gold stocks to make money, as they will rise along with the metal. Silver will go higher on a percentage basis and is also worth holding. Holding physical is a pain, but it is the ultimate expression of safety. US Silver coins from before 1965 (do not pay a premium for coins in fine condition, only for the silver content) are going to be an exceptional investment since they contain specific amounts of silver in small enough denominations to be useful in trade and barter. Gold coins and bars will be too valuable and worth too much to be useful to buy gas or groceries.
If you want to blame someone for what is comming, blame the banks and the Fed. It was them that undermined money, and made people suckers for accepting paper instead of metal. It was they who invented these derivatives and lobbyed successfully to keep them unregulated. It's like the farmer who allows the fox to guard the henhouse.
If Jim's reading is correct, we are beyond the point of no-return. The proverbial Shit has hit the fan.
-
Rick,
I'll try one more time but I would bet that I could convince a brick wall that it was cardboard first.
The banks did not create the derivatives. They were created by the brokerage houses who in turn sold them to hedge funds and investors who were looking for larger returns than the market. And even though some banks own brokerage arms they are not the culprits. Here is a quick question: how many banks have reported operating losses since the mortgage meltdown? Short answer - none. In fact they are still generating positive cash flow - one of the best indicators of a viable business.
It is the hedge funds (large investment pools for highly qualified investors) and brokerage houses (your precious GS that you hold up as representing all banks; even though it is not a bank) that held derivatives directly that were effected. Banks by regulation cannot hold these type of investments.
A big part of your problem is that you are hung up on currency as being the medium of exchange. You can name whatever you want to be the medium of exchange...Sixer tickets, cow chips, or little electronic bytes stored on a mass computer...but the same result will happen if central governments don't work to stabilize the value. As far as creating more & more "currency" as needed that cannot work. It will destabilize the "currency" - just look back at the Peso devaluation and the Yaun crisis. And using gold as the medium of exchange won't solve the problem. It just changes the medium which still needs to be stabilized by the world governments.
At this point gold is just another commodity. Like oil, grains, pork bellies, etc. It only holds as much value as someone is willing to exchange it for. If the current monetary system were to collapse (then where would your precious gold be - it isn't like you actually have the bullion in your possession) and you actually did have gold what would it buy you? Do you think the grocery store down the street will take it? What if the grocer doesn't need gold but wants your car in order for him to give you food? Now you have gold & food but no car. And to get a ride back to your house the cab driver won't accept your gold either because he doesn't have a use for it. He wants you to give him a full gas can. Now you need to find someone with a full gas can that will accept your gold. Do you even glimpse the potential problem if governments allow the monewetary system to collapse around the world?
-
Lurker, the depression era regulations that separtated banks from brokerages and insurance companies has all but been swept away, largly by heavy lobbying by the banks.
You are right that they are separate entities, but they are owned by the same people, and have the same directors on their boards in many instances. Many banks are counterparties to these derivatives as you well know, which is why banks in Europe who invested in subprime US loans.
I am not hung up on currency as a means of exchange. I am well aware of the history of money, and gold's role. Gold solves some problems and creates others, but the thing about Gold is that no one can turn on a printing press and create more- so it is implicitly more honest than fiat currency.
Every major country involved in international trade is inflating their currency right now. And the expansion of money aggregates is extremely high- on the order of a 10% increase or more in some currencies. A gold standard would prevent that, and would have prevented China from expanding as rapidly as it has, undermining American business in the process.
The reason I am focused on Gold and Silver and the companies that mine these metals, is that they will rise exponentially in price as the inflation comming down the road starts to impact consumers. We have already experienced seriious inflation in home prices and gasoline, but it is now going to start to impact food prices- wheat is now trading at limit up on the futures exchange- the costs to produce wheat have gone up and the demand is much greater now that China has the money to buy the stuff.
The monetary system is in severe danger of a collapse- you probably understand that the difference between credit and money has been blurred to the point where one can't tell the difference- the fractional reserve system is designed to expand continuously or collapse. As debt gets paid- the credit dissapears and so does the money, so inflation is inherent in this type of system- which I suspect is rapidly approaching it's limits.
I look at Gold as a vehicle for speculation- not for spending. People should understand that keeping their savings in Dollars or any other fiat currency at this point is not safe. Gold or silver would be much better, and now is the time. They will of course have to reconvert back into dollars at least until no one is willing to take them!
-
I look at Gold as a vehicle for speculation- not for spending. People should understand that keeping their savings in Dollars or any other fiat currency at this point is not safe. Gold or silver would be much better, and now is the time. They will of course have to reconvert back into dollars at least until no one is willing to take them!
The first line contradicts the balance of the paragraph. Speculating in metals isn't any different than speculating in dollar based instruments like stocks or bonds. You are just betting that price as measured in dollars will increase faster than inflation. If you are just going to convert the investment in gold back to dollars then you haven't changed anything. You buy $200 of gold and sell it in six months for $220 which works out to a 20% gain. Congrats. I buy $200 of bank stock and receive $5 of dividends and sell in 6 months for $220. Who is ahead?
-
The first line contradicts the balance of the paragraph. Speculating in metals isn't any different than speculating in dollar based instruments like stocks or bonds. You are just betting that price as measured in dollars will increase faster than inflation. If you are just going to convert the investment in gold back to dollars then you haven't changed anything. You buy $200 of gold and sell it in six months for $220 which works out to a 20% gain. Congrats. I buy $200 of bank stock and receive $5 of dividends and sell in 6 months for $220. Who is ahead?
Under that example you would be ahead Lurker, that's basic math.
However, Gold went up from $682 to $696 today, and that's just for starters. GG, one of my favorite stocks was up 7.5% today alone. One could have gained better than a 100% increase on GG stock options today. GG also pays a dividend, although not yet on the order of your bank stocks.
There are two aspects to this that people need to understand. The first is that the derivative mess as was posted above, places Central Banks in a dilemma. Banks are holding loans that may not be paid, and they have insurance in the form of derivatives to protect them from the default. The problem is, the counterparties to these agreements may end up being able to fulfill their obligation which means the bank is stuck with the loss. So many banks are becoming so risk averse that the short term Capital Markets are locking up, for fear that if they loan that money they will never get it back!
Defaults on loans destroy money, as fractional reserve depends on expansion of the money supply. If there are defaults on the level of the notational value of these derivatives, instead of inflation we will have a deflationary collapse.
Without short-term financing many businesses will be unable to meet their obligations and will go under. The whole basis for the economy is being undermined by the fear over these OTC derivatives. CB's can lower rates through the discount window, but banks won't even borrow that money for fear of lending it to someone who may actually be insolvent.
If the CB's decide to cover the losses, the inflation from making good on all these loans will create a tsunami of inflation akin to the Weimar days. If they don't banks and broker firms will implode and so will the businesses that depend on them.
Gold is real money, because it cannot be counterfeited or printed into worthlessness. Every time in history that a country abandoned Gold, their currency failed and became worthless. We are in uncharted territory since all countries are now fiat based.
Then there is the question of what happens if your brokerage becomes insolvent. Getting your stocks back from them may be quite difficult if they go under. Having a few pieces of Gold may end up being the only thing one owns that is worth anything.
Ultimately, one has to put their savings into a vehicle which grows faster than inflation or are more secure than other vehicles. Fear for savings will force people into gold and silver and mining stocks, since they are time-honored hedges against perceived inflation, and even though Americans may be ignorant of financial history, the rest of the world isn't.
This is why China is buying gold from Europe's Central Banks. In the end, repudiation of fiat will demand alternatives, and the public will demand money that is not based on debt, as fiat is.
-
But Rick who do you think holds the majority of the gold reserves? Central banks.
It is great that your gold stocks jumped 7-8% yesterday. When they drop the same amount today will you be any further ahead? Since all you are doing is speculating that the price of gold as a commodity will rise faster than other dollar based instruments then you are nothing more than a market timer. And moving in and out of options is the same thing...you are trying to time a jump/drop in the price of an exchanged traded commodity. You are just using gold as your preferred target. Others use oil, others stocks, others currency exchange rates and still others pork bellies. There isn't any fundamental meltdown of the world markets that makes your preferred vehicle any better or worse than another. You buy gold stocks or even an EFT that holds bullion...but that in itself is relying on the world currency markets to maintain a stable environment so that you can cash in your bet. If the system collapses under the weight of the subprime mess who is going to buy those gold stocks that you hold? Because you are not actually buying gold itself and holding it. You are buying a piece of paper that is only as solid as the underlying markets on which that paper trades.
As an example...I have moved in & out of telecommunication stocks over the past few months. Specifically Verizon & ATT. I have seen 7-8% jumps in as little as 2-4 days. I also have seen them move sideways for extended periods of time. But this is still speculating and is as sure of a thing as betting on sporting events. Your betting on gold isn't any different.
Disclaimer: The money I "speculate" with is not serious money but just a small amount set aside for this purpose. To me this money is any different than the money I would walk into a casino with...or spend on extravagances.
-
Lurker, I am more than just a small time market player. When I say gold is going up, I mean any dope can buy and will make money. The current process that is taking place now is extremely serious. Gold is going up because the Dollar broke below 80 on it's DX index - which is based on a basket value of our other trading partners. This is significant, because it has held above 80 for about 20 years, and has now broken though support.
So while you are speculating in stocks that may go up a few percent- they got smashed today, didn't they? Gold stocks held their own, and some went up. Gold went from $670 to $700 this week, and it's just getting started. I would suggest people who don't have the time or inclination to play the markets, but USERX or UNWPX- two mutual funds that invest in gold stocks.
If anyone is interested in seeing my charts, go to cometgold.com and look for posts under my name in the forum section. There is an entry there called Gold up today, and I posted several charts from 4 years ago to present to show the long-term trend and the coiling consolidation pattern. The last time gold did this it went from $430 to $730 in 9 months. The current consolidation has lasted almost 16 months and on the current path will top $1000 before the end of this year.
The dollar will continue to drop and gold will continue to rise. It is inevitable,thanks to the CB's inflationary policies, and the asinine willingness of banks to finance no-money down mortgages. Either the CB's save the banks from the derivative defaults and revive the Commercial Paper market, or we fall into a depression like the 30's. I predict inflation, of course.
Before this process is over Gold will eventually reach $1600 or even higher, no later than 2012, and probably sooner.
Check out a chart of the $indu vs. $gold and you will understand why this is the no-brainer trade of this decade!
If it wasn't for central banks holding gold, it wouldn't be worth anything. They know in the end, that gold will come out on top. Now you all know it too!
-
If it wasn't for central banks holding gold, it wouldn't be worth anything. They know in the end, that gold will come out on top. Now you all know it too!
And if gold comes out on top AND per your earlier posts the entire banking system is tied to the central banks THEN holding banks stocks are a better bet. First they will naturally rise with the price of gold (because their asset values rise) and secondly they will profit off all the traders who think they can time and out maneuver the market. Brokerages love times of market turmoil when traders think they can move quickly in & out of sectors to get the best return. Every trade carries a commission and the financial institutions are the ones collecting the fees.
Rick, the basic difference is that you are looking at making a short, quick killing. I am looking for long term results. In the end history has shown that those positioned for long term prospects eventually come out on top. Gold may run up this month, oil next month and comsumer staples the month after that. But in the long run history has proved that researching your investments to buy quality, minimize expenses and diversify wins out over market timing or chasing the hot picks of the day.
And then there is the whole irony of the fact that you are using the system to try to profit off the collapse of that system. I still would like to know if the system collapses as you so fervently believe then how will you cash in your profits? Because you will not actually be holding gold. You will only being holding pieces of paper (actually electronic bytes) that WILL NOT BE REDEEMABLE IF THE ENTIRE WORLDWIDE BANKING SYSTEM COLLAPSES. If you truly feel the system will collapse then you should be running to your local gun shop...because gold will mean nothing if someone with a bigger gun comes along and takes it from you. Just check out your comments in the other thread to see where this conclusion comes from.
-
Lurker your post is very valid, and it does concern me very much how to protect myself. Some physical gold and silver is desirable to hold, and of course, you will have to think very carefully of how to protect it.
I don't think the rule of law will go out the window. The people at the top are very much tied to having paper currency remain worthwhile- if they had to pay wages in real gold, they would run out and end up out of power. There will be a concerted effort to maintain liquidity at all costs- which is what makes Gold a no-brainer, and why I recommend it even to people who are concerned about saving for their retirement.
At the same time, it is Central Banks that hold the gold, most of the Investment firms hold short of gold derivatives as do the bullion banks. Many gold companies hold these derivatives as well, and after this rise, those companies will go bankrupt as their derivatives will adversely affect their bottom line.
The problem with all of the OTC derivatives is that there is no transparency and no clearing house, your bank may hold mortgages and have purchased insurance against their defaults. You may find that your bank depends on the solvency of counter-parties who will owe your bank. You may find your bank out of business when the counter-party is unable to meet their obligations.
The entire OTC market is estimated at over 30 Trillion dollars. Considering the world's GNP is a fraction of that, we are living in an extremely precarious financial situation.
I am diversified, that is, I don't have all my eggs in one basket. I have funds that go up when the market goes down, and I have mutual funds that invest in Gold mining shares.
Buy and hold investing is for suckers! The age of investing and depending on regular dividend checks as in the old days is gone.
The only way to make real money in the market is to trade options on a short-term basis. I open and close trades on the same day and make well over 20% per trade including commissions. Options have a time component that works against you and by trading in and out, you avoid being hurt by that.
Most people are not able to trade that way- it took me a great deal of time, effort and thought to develop my strategy. The problem is where to put the money that I make- I always reserve some of what I make, since there is always the possibility of being on the wrong side of a trade, or being unable to cover quickly enough.
The point is, at this time there are very few "safe" places to keep your money, any brokerage or bank could become insolvent and lock up your funds. I think certain mining stocks will do very well. If we actually end up in a Weimar type situation, all stocks will rise very rapidly. If we have a crash- a distinct possibility at this time, I am concerned that gold stocks will go down with everything else at least at first.
As I make more, I will end up putting more of my money outside of the US to give myself a better shot at keeping some of it. It is good to be prepared for the worst, even if it doesn't happen.
Cycle analysis suggests the stock market should go up in the third year of a Presidency. The volatility and price movements in the general market indicate that there are other factors on traders minds. It won't take much to induce them to panic- Fridays, 250 pt. drop was exactly the type of movement that puts the current bull market in doubt. Today's minor recovery even at it's highest intraday point still didn't break out of the current downtrend. If any of you are still in the general market and it goes down from today's level, It would be wise to take profits and cash out.
-
Rick, I don't disagree with your facts in regard to how the system works and who ultimately controls it. However I just don't share your chicken little view of it. In fact I see the system as a great thing...it allows people like you & me to rise above the financial station that we were born into. No longer is the only path to wealth being lucky enough to be born into the right family. By taking the fruits of our labor and being able to use the investment tools available we are able to increase our wealth by more than just the "sweat of our brow". The system has evolved to allow this. It will continue to evolve and grow...the "money" in contol has a vested interest in the system remaining viable.
The entire OTC market is estimated at over 30 Trillion dollars. Considering the world's GNP is a fraction of that, we are living in an extremely precarious financial situation.
The only way to make real money in the market is to trade options on a short-term basis. I open and close trades on the same day and make well over 20% per trade including commissions. Options have a time component that works against you and by trading in and out, you avoid being hurt by that.
This again points out the irony of your stand. The derivative market, in your estimation, is pushing the world economy into precarious position. Then you claim the only way to get ahead is to use the granddaddy of all derivatives (options) to make your money. In short you are PART of the problem. If no one used derivatives then they would go away.
As far as making 20% on trades...more power to you. Assuming you make 20% a month then simple math would say that if you reinvest just half of those profits you would double your money every 7 months. Or in just 3 years you could turn $2,500 into $80,000. However over the years I have seen many sophisticated investors (and even some brokers) think that they can do the same. In the end they always seem to forget the 10-15 trades that resulted in small % losses that eat away at the 20% success stories.
Buy and hold investing is for suckers! The age of investing and depending on regular dividend checks as in the old days is gone.
Well, I agree & disagree with this comment. I would not advocate buy & hold...but a on going monitoring of one's positions. A stock may look great today (under whatever parameters that one uses - I have my own system as you obviously do) but things change. For example, a few years ago I bought Caterpillar when it was hammered down and yielding close to 4% dividend. Four years later the price caught up with the underlying principles of the company and I cashed out with a over 100% gain + 4 years worth of dividends.
So Rick, I think our difference is not in how the system works but whether it is good or evil. IMO the system works well and, if one has the inclination, can be studied, analyzed and put to work in one's favor. We do have different approaches on how to utilize the system to our benefit but we are both using it. You just rant about how horrible it is and that it will collapse under it's own excess.
BTW for those who are not financially inclined to be more involved than just automatically adding to your retirment savings I would suggest reading some of the articles on this site: http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2007/vitindex.html
(http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2007/vitindex.html)
Scott Burns is a financial writer for a Dallas newspaper. For anyone who is not interested in being deeply involved in managing their investments daily or weekly he has some sound ideas. Of course, if you believe that the entire system is poised for collapse in the next 2-3 years then you should be buying guns and gold jewelry because any "investment" that is only traded on a market will lose all value in a collapse.
-
Rick, I don't disagree with your facts in regard to how the system works and who ultimately controls it. However I just don't share your chicken little view of it. In fact I see the system as a great thing...it allows people like you & me to rise above the financial station that we were born into. No longer is the only path to wealth being lucky enough to be born into the right family. By taking the fruits of our labor and being able to use the investment tools available we are able to increase our wealth by more than just the "sweat of our brow". The system has evolved to allow this. It will continue to evolve and grow...the "money" in contol has a vested interest in the system remaining viable.
All you say is true. The computer age has really given the average joe a much better chance to learn "how to play the game" and win.
The entire OTC market is estimated at over 30 Trillion dollars. Considering the world's GNP is a fraction of that, we are living in an extremely precarious financial situation.
The only way to make real money in the market is to trade options on a short-term basis. I open and close trades on the same day and make well over 20% per trade including commissions. Options have a time component that works against you and by trading in and out, you avoid being hurt by that.
This again points out the irony of your stand. The derivative market, in your estimation, is pushing the world economy into precarious position. Then you claim the only way to get ahead is to use the granddaddy of all derivatives (options) to make your money. In short you are PART of the problem. If no one used derivatives then they would go away.
No Irony- remember the derivatives I'm talking about are private party ones, that no-one outside the two parties can bid on or value in the open market. There is no transparancy, they are highly complex and take a doctorate's degree in finance to have a hope of understanding. They have no clearing house and no regulation. By contrast the options I trade are regulated, do have a clearing house and are valued on an open market. They are also easy enough that anyone who takes a bit of time can understand. Even someone with only a high school education.
As far as making 20% on trades...more power to you. Assuming you make 20% a month then simple math would say that if you reinvest just half of those profits you would double your money every 7 months. Or in just 3 years you could turn $2,500 into $80,000. However over the years I have seen many sophisticated investors (and even some brokers) think that they can do the same. In the end they always seem to forget the 10-15 trades that resulted in small % losses that eat away at the 20% success stories.
Not 20% a month, more like 20% a day! Everyday there must be at least 20 different options that will net you at least a 20% gain, after you pay the commission fee and the fee for the options. As an example, I told my sister to buy GG 27.50 calls 3 days ago when they were available on the ask for $40 per contract. Yesterday at the close, they were $60 for the bid. That's a little less than 50% with the round-trip commissions, but you get the idea. If the people who owed me money, paid me, I'd have enough to not have to work. As it is, I was forced to take a job, but I like the work and it's good to get out of the house every once in a while. As soon as I build up a war-chest, I won't need to do anything but trade and work on my tan!
Buy and hold investing is for suckers! The age of investing and depending on regular dividend checks as in the old days is gone.
Well, I agree & disagree with this comment. I would not advocate buy & hold...but a on going monitoring of one's positions. A stock may look great today (under whatever parameters that one uses - I have my own system as you obviously do) but things change. For example, a few years ago I bought Caterpillar when it was hammered down and yielding close to 4% dividend. Four years later the price caught up with the underlying principles of the company and I cashed out with a over 100% gain + 4 years worth of dividends.
So Rick, I think our difference is not in how the system works but whether it is good or evil. IMO the system works well and, if one has the inclination, can be studied, analyzed and put to work in one's favor. We do have different approaches on how to utilize the system to our benefit but we are both using it. You just rant about how horrible it is and that it will collapse under it's own excess.
BTW for those who are not financially inclined to be more involved than just automatically adding to your retirment savings I would suggest reading some of the articles on this site: http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2007/vitindex.html
(http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2007/vitindex.html)
Scott Burns is a financial writer for a Dallas newspaper. For anyone who is not interested in being deeply involved in managing their investments daily or weekly he has some sound ideas. Of course, if you believe that the entire system is poised for collapse in the next 2-3 years then you should be buying guns and gold jewelry because any "investment" that is only traded on a market will lose all value in a collapse.
[/quote]
I'm very afraid that what is happening will be beyond anyone's control to manage and will ruin the whole game. The market's depend on liquidity- to help them go up, and without a regular infusion of cash-either by people making extra money that they can put into the market, or money lent by investment banks. The potential for the derivatives I'm concerned with creating a severe credit squeeze will hurt the stock market, and more importantly the businesses on Main street, who rely on the Commercial paper market to help with cash flow issues.
Currently the Indu's look ok after all, they did manage to make the charts turn up, at least for now. GS had a great day today as did a few other investment banks. Still the Dollar falling below 80 on it's index is quite ominous, and Gold over $700 should serve as a warning to everyone that things are not going well. In fact, the entire world's currencies are now loosing ground to gold, even though it's fallen back a few bucks the last few days. Expect gold to flirt with $700 for a bit longer, but after a few months, it will head towards and above $850.
Caterpillar was a great play a while back, and you were smart to buy it. I like the US companies that actually make things that they can sell to the world, Cat, 3M, a couple others. But the big story will be commodities, as China and India keep building out infrastructure, and spend money on food. Wheat going up limit is reflective of higher demand, and some supply problems.
Since the average investor doesn't play the short side, they will be at a severe disadvantage in a downturn. Just watch the housing market and US automakers, if they start faltering watch out. Economies either expand or contract- there is no steady-state.
-
Here is a projected chart for Gold from Jim Sinclair's site:
http://www.jsmineset.com/cwsimages/Miscfiles/5159_AngelChart.pdf
It projects the gold price for the next 4 years, based on whatever analysis Jim uses. He is right more often than not, but the chart will prove itself or fail to, as time progresses.
Gold going up means the value of the dollar is going lower. To protect your money, Gold is a good bet, but not necessarily the best. Good gold stocks will move up faster on a percentage basis than the metal, and are safe as long as your broker is solvent.
I won't guarantee the timing of the prices on Jim's chart, but the should be a good reference point as the Dollar keeps going down.
You can see the current contract for the dollar at http://quotes.ino.com under the quotes section. On the right you'll see a list of open futures, including the dollar, other currencies, gold and oil.
That helps with determining trends. You should put your money where these trends will make you a profit. And understand that all trends end sooner or later, so whatever you put money into, you need to learn when to sell for it to work for you.
-
This is the best perspective on the Feds decision I have seen. I agree wholeheartedly with this assessment. Chairman Bernanke has been put in a difficult spot because of Greenspan's mistakes, but in my opinion he swung and missed on this. His decision (in my opinion at least) was a major blunder.
This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a
solicitation or an offer to buy or sell any security.
They Actually Did It – Cut Rates That Is
Well, they actually did it. The Federal Reserve, and
Chairman Bernanke, cut the federal funds rate and the
discount rate by 50 bps. The Fed argued that their action
was meant to “help forestall some of the adverse effects
[from tightening credit conditions] on the broader economy.”
The stock market loved it with the Dow up more than 400
points over two days, and the NASDAQ up more than 80
points. The pundits loved it, too. But cash gold prices have
now moved above $730/oz. If prices stay at this level for a
month, gold will set a new monthly all-time record high.
Oil prices jumped to an all-time high, of $82/bbl., and the
dollar tanked, losing more than 1% of its value versus
foreign currencies. To top it off, the price of the 30-year
Treasury bond has fallen by more than three full points,
pushing the yield to 4.92%, which raises the cost of fixed
rate mortgages.
The rise in stocks was probably welcome by the Fed, but we
can’t imagine the Fed wanted to see inflation sensitive
markets behave this way. The Fed’s number one
responsibility is to protect the purchasing power of the
dollar. But this is not happening.
A Misunderstanding of the Problem
Some analysts thought a Fed rate cut would push the dollar
up and gold down. They argued the Fed was so tight that
markets were being squeezed, and this was causing demand
for the dollar to fall. They also argued that if the Fed cut
rates, and supplied new money, the markets would unlock,
demand for the dollar would rise, gold prices would fall and
the dollar would rise. Oops!
The idea that the Fed is too tight is based on a few different
arguments. First, that trouble in commercial paper markets
does not occur unless liquidity is scarce. Second that
housing is a leading indicator of Fed tightness. And finally,
that real GDP grew just 2% in the past year.
But none of this is proof of tight money. Every single
problem in the economy and credit markets emanates from
housing. And the housing market is clearly suffering
because interest rates were too low between 2001 and 2004,
which led to absurdly loose credit standards. So loose, that
even Alan Greenspan could not imagine how much lending
standards had deteriorated. In some ways we can’t blame
him. Who could imagine mortgages were being made to
people with no money down and no proof of income? And
who could imagine those loans were bought by the smartest
people in the room at major hedge funds?
But they did. And the reason this house of cards is falling
down is because interest rates did not stay absurdly low. But
that does not mean interest rates are too high or that the Fed
is too tight. In fact, interest rates today are significantly
below the levels of the late 1990s when things were so good
it was called a bubble – a false boom. Today’s problems
exist because interest rates were too low, not because they
are too high.
It is the excesses of the past that are causing problems in the
asset backed commercial paper market, not tight money, and
ditto for the housing market. In addition, non-housing real
GDP grew at a 3.1% annual rate in the first half of the year.
No evidence of tight money there.
Pushing on a String
To understand why the Fed’s policy stance is inflationary, it
is important to understand monetary policy. And the first
thing to understand is that the Fed does not control interest
rates directly. It controls the money supply. By injecting
more money in the system, the Fed drives interest rates
lower. If the Fed withdraws money, or slows its growth, it
pushes interest rates up.
Despite this truth, most people mistakenly view Fed policy
through the lens of interest rates and believe lower interest
rates are a catalyst for increased economic activity and
greater profits. But this is only a short-term phenomenon. If
the Fed is holding interest rates below their “neutral rate,” it
must inject more money than the economy actually needs.
This creates inflation.
That’s what commodity prices (including gold and oil) and
the weakening dollar, are telling us – the Fed is adding more
liquidity than the economy really needs. This is the danger
of trying to fight off credit market problems with easy
money. Lower interest rates can make things appear
profitable when they are not. Eventually, the piper must be
paid and that will come in the form of losses to investors and
higher interest rates in the future.
The End Game
The Fed is most likely aware of all these risks and took them
willingly because it is involved in a risk management
project. The Fed believes risks to the economy are greater
than the risks from inflation. It also believes any extra
inflation that results from Tuesday’s rate cuts can be offset at
some future date.
The problem with this thinking is that the Fed cut rates
before inflationary pressures had actually receded. When
Alan Greenspan cut rates (and the Greenspan Put was born)
dis-inflation was the story. This meant that the Fed could
risk easy money for a while without creating a situation it
could not control.
This time, inflation is still in an upward trend. Moreover,
this is the lowest real federal funds in over 40 years at which
the Fed reversed course and started cutting interest rates (see
chart). In other words, the Fed cut rates this time before it
ever got tight, unlike 2000 or 1989.
In its statement describing why it moved, the Fed tipped its
hat toward these risks, acknowledging “some inflation risks
remain.” But obviously it was willing to ignore this risk for
the time being because it foresees problems with the
economy that are not visible with the naked eye.
The Fed cut rates with the stock market still up on the year,
real GDP growth averaging around 3.5% between March
and September, very low initial unemployment claims, and
some clear improvement in commercial paper markets.
If the Fed can cut interest rates in this environment, when it
still sees risks of inflation, then no one can argue that it
won’t cut again. As a result, even though the economy and
equities markets will respond positively to the easy money in
the next six to nine months, inflation risks will remain.
That said, further rate cuts are unlikely if economic activity
remains robust. And that appears highly probable. The
housing market is only 5% of the economy, liquidity is
plentiful and free capital markets are perfectly able to absorb
losses. As a result, it is highly likely that in 2008 the Fed
will be forced to reverse its rate cut and push rates above
5.25%. At that point, just like after the rate cuts in 1987 and
1998, the economy will face its greatest risks.
-
The liquidity pump is on full blast, all to prevent the whole financial market system from imploding from all the derivatives going boom. AS long as everyone (for the most part) can pay the system will get by- but there will be a LOT OF INFLATION, as there already has been.
When I started this post, Gold was already at $685 well of the bottom at $640. Today it was back over $750 for a while, not too far from the $755 peak made at the beginning of October. Gold appears to be breaking out to the upside again.
Almost every stock will go up in this environment as a result of the inflation, But gold should start to take on a life of it's own. It isn't just the US that's expanding it's money supply ASIA and the old USSR are pumping out their currencies even faster. That means a lot more people will see gold and silver as a safe haven.
If inflation gets too out of hand, people will resort to barter to protect themselves and get the value they want. IMO, Silver will be the ideal token to trade in such and environment.
If you haven't gotten in yet, right now gold is heading down. The shorts are desperate to see the price lower so they can sell and cover at less of a loss. It appears as though they cannot. The best they have been able to do is hold gold below $755, but no lower than $730. I doubt we will get down to $730 at this point. But wherever the bottom to this little dive occurs, that's where you load up on the good stocks, the ones that have already been going up like GG.
-
Fed cut the discount rate and the OTC rate today both by 1/4 point, at the same time as we got 3rd qtr GDP coming in at better than analysts expected at 3.9%. In other words "WHAT THE FUCK?"
We have GDP exceeding analysts expectations, and hitting nearly 4%, with housing cutting that by 0.8%, so actually we had just shy of 5% GDP growth in the rest of the economy, and we cut rates?????? This is fricking stupid.
Cutting rates will do nothing for housing, because it is not high rates that is the problem, it is an unwillingness to lend because of a fear of not knowing how much bad debt you already hold, and a huge inventory of homes that are not selling. The market is awash in cash, and we do not need to add cash to the market, just look at commodities. Gold approaching $900 an ounce, oil nearly $100 a barrel, and the US$ is now a Banana Republic Currency, not much different than the Costa Rican Colon. The Canadian $ is heading towards $0.90, the Australian $ is moving towards par, the Euro is at $1.45, and heading to $1.50.
The last thing the Fed should have done is cut rates, because it is driving inflation not seen since Jimmy Carter. Soon inflation will become to great to ignore, and it will force rates up, at the same time as we begin an economic downturn, and we will officially reenter the Carter era again, of high inflation, high interest rates, and an economic recession that the Fed will not be able to effect with interest rates, because we have an inflation problem.
-
Ziggy,
They cut rates because of the derivative problem that prompted me to start this thread. If these things implode (and chances are high that they will) some banks will melt down to insolvency.
The first on my hit parade is MER - Merrill Lynch & Co. who just fired their President and Chairman. They fired him because the company just lost some billions of dollars. What the board doesn't know is that this is just the beggining and the President was trying to bring in some new blood to help keep them solvent. The blue-bloods on the board- people who have had money for generations, are about to get their heads handed to them.
Mind you, this problem is not contained to the US. Europe, Japan, even China - the whole frigggin world economy is so screwed up because of the lack of transparency- (who owes what to whom and how bad is it for us really?) That everyone is afraid to lend money for fear of not getting is back.
The Fed can't make people lend money, all they can do is make it cheaper- and the Fed in this situation can't really do anything else, because all the money people everywhere are in a panic- they've gotten themselves into a mess from which there is no rational escape. And the problem isn't going to go away- it's going to fester for a while. This move does help those with adjustible rate mortgages, and helps those who underwrote the insurance on those loans in case of default.
The rate cut was for them. You, me and everyone else on the board is getting screwed. This is why I told everyone to buy gold. We will probably top $800 tonight, thanks to the rate cut. The Dollar hasn't been this low in since Clinton was in his first term in office trying to overcome Bush 1's recession.
-
Rick,
These rates do not help adjustable rate mortgages, in fact they make them worse. When they cut rates in September by 50 basis points what happened? Mortgage rates went up. Why? Because the perception was that decision increased the probability of inflation so rates went up to compensate for the inflation risk inherent in lending long term, ie 30 year mortgages.
The best way out of the mortgage crisis are steps like those taken by Country Wide, which was simply "we are prepared to renegotiate your loan to keep from having a foreclosure". The last thing mortgage lenders need is excessive amounts of foreclosures, as that will cause the liquidity crunch. The last thing we need the gov't to do is bail a bunch of people out. What we need is a focus on making as many mortgages work as possible. Extend loans from 30 years to 50 years. That cuts peoples payments, and allows them the time necessary to get the finances in order, and then they can get out from underneath without them being foreclosed on, and the mortgage lenders from taking possession of more and more houses they can't sell.
Anyone interested in a good read, I recommend "When Genius Failed". It is about the collapse of LTCM. Absolutely fascinating, and the situation is very much like it is today, only the particulars are different.
-
The adjustable rate mortgages are attached to the prime rate, not the availability of new mortgages. It definitely saves these homeowners from seeing the cost of staying in their home rise ever higher, while the value of the home on the open market collapses.
Country-Wide is terrified of what is happening. There are 18 million homes that are vacant and are not on the market. They are non-performing loans and they are burying Wall Street investment banks to the point of insolvency. Anything they can do to keep people in their homes is a totally defensive move, brought on by the softness in the market.
Jim Sinclair is now advising his followers to close out bank accounts, and brokerage accounts- anywhere that there is a possibility the firm in question will fail as a result of the derivative implosion. If the firm goes bankrupt- good luck getting your money from them!
The Dollar is sick. The economy is extremely vulnerable. The World is becoming a more dangerous place. America is getting weaker, while other countries are growing very rapidly, like China, India and Brazil.
The LTCM is a good parallel for today, except that every hedge fund out there is just like LTCM, thinking they were smarter than everyone else, and being proven totally wrong by the market. Academicians have no place in the market or the Fed. They are about as clueless as can be when it comes to proper regulation of the economy. The unwillingness to provide oversight to the derivative market is akin to being asleep at the wheel of a car. The car is about to fall off the road and over the side of a cliff! This was something that is completely Alan Greenspan's fault.
What isn't his fault is the Trade Policies of the US, and the inability/unwillingness of the government to keep spending restrained. No matter what the Fed does, they cannot protect the rest of of us from this idiocy.
-
The adjustable rate mortgages are attached to the prime rate, not the availability of new mortgages. It definitely saves these homeowners from seeing the cost of staying in their home rise ever higher, while the value of the home on the open market collapses.
I mis-spoke, I meant to say that if people were going to move from an adjustable rate to a fixed rate, then these rates cuts won't help them. While they are in an ARM, you are correct, then when the Fed cuts rates the ARM adjusts down.
-
The adjustable rate mortgages are attached to the prime rate, not the availability of new mortgages. It definitely saves these homeowners from seeing the cost of staying in their home rise ever higher, while the value of the home on the open market collapses.
I mis-spoke, I meant to say that if people were going to move from an adjustable rate to a fixed rate, then these rates cuts won't help them. While they are in an ARM, you are correct, then when the Fed cuts rates the ARM adjusts down.
You're right about that Zig. Ironically lower interest rates will encourage the ARM mortgagees to not move out of the loan. The payments won't go any higher, and the lenders will be happy to see performing loans on their books, instead of non-performing assets.
But 18 million uninhabited homes!?!??! I am sooo happy I DON'T own a home. That's a huge amount of supply, and they HAVE to move it off of their books. Also, uninhabited homes deteriorate- it's very hard to sell a home that's rat or vermin infested.
Shouldn't be too much longer before some genius decides that it's better to RENT the homes than to leave them sitting empty.