SA....This is an excellent, very thoughtful, and very accurate post.... ....................................................................................................... I can tell you that every Latin American country.....particularly those that have been through IMF assistance....are wondering just where the BIG IMF IS IN THE SKY....if the US deeply faulters.... Where is the BIG BIG IMF that will sign a vigilance card with the US....to watch the US....? The governments are actually thinking.....Hey.....we are not so bad afterall.... But what they are also thinking is that there is no longer anybody around that can help them out next time..... Thus it should be no surprise that those that have the money now....are treated with white velvet gloves.... And while the US is at it....give us some more of that US printed money....It's a lot less trouble than working for it..... Your article is 1000% point on.... ............................................................................................. Do you just not love it when the pundits that are appearing on TV are using the term.....well if one holds for another year or 6 months....or even three years one will make a lot of money.... WHEN THE REAL ANSWER IS .....GEE I REALLY DO NOT KNOW....I HOPE SO.....BECAUSE IF IT DOES, I WILL MAKE A LOT OF MONEY WITH OTHER PEOPLE'S MONEY..... ............................................................................................... And can you imagine how the richest family units who have long depended on the people in brokerage or ex-brokerage to guard their fortunes actually feel psychologically? It is a wonder that Tbills are not somewhat negative....although on an inflation basis ....they are already negative....
. July 15, 2008 SouthAmerica: If we did not have so much US government interference with the workings of the US financial markets in the United States in the last 6 months then, today the S & P 500 would be testing the 800 levels on that index. So far Ben Bernanke and his policies were able to hold the US financial markets artificially. But for how long can he keep interfering with the workings of the open market before the house of cards finally comes down? Without US government interference we will test the 800 levels in the S&P 500 - or even lower. .
I do not agree with a lot of things that you write, but totally agree with this one. Ben is trying to do whatever he can to avoid the massive meltdown. And we can not balme him, this is what he is supposed to do. Meanwhile every one is looking for a solution of how to dig out of this whole with least casualties. What I am mostly curious right now, what would be the next bubble and next big thing on wall street. Also, I read somewhere an interesting article a while back, that said since .com crash was partly slowed down and then inflated with cheap money we will break down pre .com levels. Not that it really matters for my style of trading since I day trade futures. However if such meltdown does happen, who knows what rules might be adapted, and we might be forbidden from trading all together, so let's hope for our sake that the meltdown will not happen.
. July 16, 2008 SouthAmerica: It is fun to read some articles that I wrote a few years ago and read again the reaction that people had at that time to the contents of the article. There are a lot of new members in this forum who never had the chance to read the following article that I wrote in December 2004/January 2005. Keep in mind the article was written from a point of view of November 2008 and what had been happening in the summer of 2008 right before the US presidential election. Donât forget to read the comments after the article. At that time I also received a lot of emails that people sent directly to me from people saying that I did not know what I was talking about, and others saying the article was a complete nonsense. Itâs 2008. The US Has Dragged the World into a Depression. Written by Ricardo C. Amaral Saturday, 12 February 2005 http://www.brazzilmag.com/content/view/1424/49/ ****** SouthAmerica: On this article I was a few years ahead of time, but what I wrote in November 2002 in the enclosed article it looks very current today. The Big American Lie By Ricardo C. Amaral Brazzil magazine â November 2002 â¦The U.S. Deflation Seems to me that the financial markets of the world lost any common sense, and they are driven only by hype and nothing else. In the new deflationary environment that we will be living in the future, God knows for how long, the US economy is in a position for a repeat performance of the great depression of the 1930's. It is like a recipe for big trouble to be in debt during deflationary times. The housing bubble is ready to be burst, just like the stock market bubble. From that point on, consumer confidence and everything else will go down hill. Companies lay off people, there is less buying power, they lay off even more people, we have a deflationary spiral and so on. People with no jobs can't pay the bills including credit cards and mortgages. People have to sell their houses, and the flood of new houses on the market depresses even further the market price for houses. After a while, if you have some money, you can buy what used to be a $100,000 house for about $ 15,000. The last time we had deflation on this large scale in the US was in the 1930's and very few adults remember those days. Recent experience in Japan and here in the US showed us how quickly asset values (in equities or real estate) can melt away. Remember, asset values decline very fast but the liabilities don't go away. If you just bought a house for $400,000 and have a mortgage for that amount, when housing values decline in the near future and that house is worth only $200,000 or less, you still owe the bank the $400,000. Your debt doesn't go away, as asset value is declining. I am not surprised that they are trying very hard in Washington to change the bankruptcy laws. The creditors know that massive losses are on the horizon related to the deflationary wave that will affect the US economy⦠Source: http://www.brazzil.com/p40nov02.htm ****** SouthAmerica: On this article I also mentioned that the housing bubble was ready to burst. Getting Ready for War By Ricardo C. Amaral Brazzil magazine â January 2003 â¦The housing bubble is ready to burst. So much hype for the American dream, but according to the Bureau of Labor Statistics out of 100 people that start working at age 25, by age 65â1 percent are wealthy, 4 percent have enough money to retire, 3 percent are still working (can't afford to quit), 63 percent depend on Social Security, friends or charity, 29 percent are dead. The reality is 95 percent of all Americans retire in poverty or are dead after working for 45 years. For the people who are unemployed, the economic depression is already here. For the people who still have jobs, they know that if they lose their jobs it will be almost impossible to find a new job. The difference between past recessions and the current job slump is that the people laid-off in the past, would be rehired when the economy recovered. This time around most people's jobs have gone forever. We are in the beginning stages of a worldwide depression. The Bush administration recognizes the realityâthe best days of the American economy are long gone, and today the system is running on borrowed money. The federal government, the states, the companies and the public are all surviving on credit. How far can this situation keep going on before the house of cards collapses? Source: http://www.brazzillog.com/pages/p101jan03.htm .
Excellent Commentary As Always ............................................................................................. There is one very important issue with regards to getting it right next time. Next time means that this time the US structure has failed. The US structure has failed because of greed in that 1% of the population controls 80% of the wealth. It is the underpinnings of this very issue that have caused the problems. So at this point , one can look towards Denmark as having the happiest society on earth in that European Style Socialism is the answer.... Or one can look towards a purely capitalist model whereby the society is deemed to be very happy.....which there are no examples.... ............................................................................................. I believe that the European model is not the solution, although there are no examples of a happy capitalist society. These are the main points of my solution..... Get rid of the Republican/Democrat system. This has led to paid/organized politicians directing tax money under the guise of democracy..... Replace the tax system with a consumption tax only....15%.... Each municipality will collect sales taxes and the people in each municipality will internet vote the uses of those taxes....... The people working for the local governments will be hired because they are the most qualified. The slightest form of corruption, and they no longer have a job..... Each town, city, state forms their objectives and accomplishes them..... .............................................................................................. This model would be somewhat opposite the Danish model, putting the responsibility of offering needed services to true capitalism...... Local banks, and an electronic stock exchange would be the financial backbone of the system..... Freedom does include financial freedom. Convert the White House and Congressional buildings into hotels and condos, as they will no longer be needed.....
. September 17, 2008 SouthAmerica: Last February I posted the following on this thread and since the meltdown is underway - here is some info about the derivatives market. ********* 02-19-08 07:52 AM . February 18, 2008 SouthAmerica: I have been writing in the last few years about the subject of economic depressions and that we are due for another major economic depression like in the 1930âs and also that one of the major triggers for this new depression would be the collapse of the global DERIVATIVES market. If I had to guess what the history books are going to say in the future when they try to figure out what was under the foundations that triggered the first great depression of the 21st Century â The headlines probably are going to say that the US financial markets were able to create the biggest financial scam in global financial history. The global financial system was taken for a ride when the US financial markets blew a super-bubble in the DERIVATIVES market that surpassed US$ 50 trillion dollars. After that market collapsed a close analysis showed that its structure looked more like a great scam than anything else; built with sophisticated mathematical equations that even the geniuses and the experts that created that mess had a hard time understanding it. That market started with financial instruments that made sense, then greed and pure stupidity took over and the market grew into a gigantic super-bubble that eventually started spinning completely out of control creating the biggest financial meltdown in global financial history. By the way, last Friday Paul Krugmanâs column on The New York Times âA Crisis of Faithâ raised many questions about the US financial system as well. And he said: âMore important, however, is the way the ever-widening financial crisis has shaken investorsâ faith in the whole system. People no longer trust assurances that fancy financial instruments will function the way theyâre supposed to â after all, they know what happened to people who thought their subprime-backed securities were safe, AAA-rated investmentsâ¦And loss of trust can be a self-fulfilling prophecy. He ended his column by saying: ââ¦And the financial contagion is still spreading. What market is next?" We donât have to look further than the DERIVATIVES market to get some clues to be able to answer his question. On Sunday The New York Times published a front page story that shows that another Economic Crash like in 1929 it is a very real possibility and the seeds for such an event might have been planted already. This time the economic meltdown can be even worse that in the Great Depression of the 1930âs. You can find some clues about a system that is at the edge of the abyss on the article: âArcane Market Is Next to Face Big Credit Testâ You can read the entire article at: âArcane Market Is Next to Face Big Credit Testâ By Gretchen Morgenson February 17, 2008 - Front Page Story The New York Times Source: http://www.nytimes.com/2008/02/17/b...enson"&st=nyt ********** Here I am quoting from that article, and I am also making some comments along the way: Before I start quoting from that article The New York Times â the article also had a chart with the following information: The chart said: âIn the Shadow of an Unregulated Marketâ â The value of the credit default insurance market is now much larger than the domestic stock market, mortgage securities market, and United States Treasuries market as follows: Credit Default Insurance Market = US$ 45.5 trillion. U.S. Stock Market = US$ 21.9 trillion. Mortgage Security Market = US$ 7.1 trillion. U.S. Treasuries Market = US$ 4.4 trillion. NYT: âFew Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term. Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companiesâ finances. Like a homeownerâs policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts. The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion â roughly twice the size of the entire United States stock market. No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.â ******** SouthAmerica: This is just another example of how incompetent the Bush administration has been since January 2001. A financial market grows from $ 1 trillion to $ 46 trillion US dollars over a period of 7 years and it did not raise a red flag that such a market might need some government regulation to keep it honest and from spinning out of control at some point in the future. ********* NYT: ââ¦Placing accurate values on these contracts is just one of the uncertainties facing the big banks, insurance companies and hedge funds that create and trade these instruments. In a credit default swap, two parties enter a private contract in which the buyer of protection agrees to pay the seller premiums over a set period of time; the seller pays only if a particular credit crisis occurs, like a default. These instruments can be sold, on either end of the contract, by the insurer or the insured. But during the credit market upheaval in August, 14 percent of trades in these contracts were unconfirmed, meaning one of the parties in the resale transaction was unidentified in trade documents and remained unknown 30 days later. In December, that number stood at 13 percent. Because these trades are unregulated, there is no requirement that all parties to a contract be told when it is sold. As investors who have purchased such swaps try to cash them in, they may have trouble tracking down who is supposed to pay their claims. âThis is just a giant insurance industry that is underregulated and not very well reserved for and does not have very good standards as a result,â said Michael A. J. Farrell, chief executive of Annaly Capital Management in New York. âI think unregulated markets that overshadow, in terms of size, the regulated ones are a real question mark.â Because these contracts are sold and resold among financial institutions, an original buyer may not know that a new, potentially weaker entity has taken over the obligation to pay a claim.â In late 2005, at the urging of the Federal Reserve Bank of New York, market participants agreed to advise their trading partners in a swap when they assigned contracts to others. But it is unclear how closely participants adhere to this practice. It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim. ********* SouthAmerica: And this is supposed to be the most sophisticated financial market in the world â Can you imagine what they would be doing if they were not so sophisticated? There is a book called: âGreat Financial Scandalsâ by Sam Jaffa, the book describes from the world's first notable financial debacle, the South Sea Bubble scandal of the seventeenth century, through to the Boesky, Guinness, BCCI, Barings and New Era scandals of more recent times, Sam Jaffa weaves a rich and startling web of the deceitful depths to which men and women will sink in search of fast - and big - bucks. Americans love sophisticated financial innovations, and here is another example an American financial innovation that took a lot of people for a ride. A Ponzi Scheme - Named after Carl Ponzi, who collected $9.8 million from 10,550 people ( including ¾ of the Boston Police Force ) and then paid out $7.8 million in just 8 months in 1920 Boston by offering profits of 50% every 45 days. A swindle of this nature, referred to as a "bubble" for the hundreds of years it has existed and now referred to as a "Ponzi scheme" is basically an investment fraud where investors are enticed with the promise of extremely high returns or dividends over a very short period of time. This shorter period between payouts and high rate of return is required to create the impetus for the frenzy that is to follow as word leaks out, and is soon verified, by numerous sources. The truly experienced con will balance these two factors (payout period and promised rate of return) against the expected duration of the operation so as to maximize his take while still maintaining some semblance of credibility. In the true sense of borrowing from Peter to pay Paul, ponzi schemes are a simple fraud whereby initial investors are paid exceptional dividends as interest cheques from the deposits of a growing number of new investors. "Profits" to investors are not created by the success of the underlying business venture but instead are derived fraudulently from the capital contributions of other investors. A few people invest in the scheme, then as news of the offer spreads, more investors are drawn in. Usually there is no actual investment involved, contrary to your understanding, just money being shipped in from new investors to the earlier ones. Source: http://www.elitetrader.com/vb/showthread.php?s=&postid=1797463&highlight=swaps#post1797463 .
. 02-19-08 07:55 AM . February 18, 2008 Continuation from above posting. Ponzi schemes eventually collapse because the underlying asset upon which the investment was based either never existed, or was grossly overvalued. And unlike pyramid schemes, where one's potential gain is measured by the active and conscious practice of participant recruitment, ponzi schemes attribute their moneymaking abilities on some elaborate and inventive investment or business process, with the influx of new depositors the result of word-of-mouth only. There are several distinctions between Ponzi schemes and pyramid selling schemes. A requirement of a Ponzi scheme is the promotion of what starts out to be, or appears to be, a real investment opportunity which investors may passively contribute to. The pyramid scheme involves a person making an investment for the right to receive compensation for finding and introducing other participants into the scheme. There is a clear understanding among the participants that the success of the opportunity is dependent upon attracting these additional participants. Pyramid schemes require active participants who will bring in more participants till reaching a finite end. Ponzi schemes can flourish even with passive investors without any responsibility to promote the opportunity. The similarities are uncanny but the draw of a ponzi scheme is that while most investors are either too lazy, sophisticated or introverted to consider a multilevel marketing program type of pyramid recruitment, even the most astute investor is drawn to a program which has proven itself to be highly successful over time, where the only requirement is providing funds for investment. ********** NYT: âCredit default swaps were invented by major banks in the mid-1990s as a way to offset risk in their lending or bond portfolios. At the outset, each contract was different, volume in the market was small and participants knew whom they were dealing with. Years of a healthy economy and few corporate defaults led many banks to write more credit insurance, finding it a low-risk way to earn income because failures were few. Speculators have also flooded into the credit insurance market recently because these securities make it easier to bet on the health of a company than using corporate bonds. Both factors have resulted in a market of credit swaps that now far exceeds the face value of corporate bonds underlying it. Commercial banks are among the biggest participants â at the end of the third quarter of 2007, the top 25 banks held credit default swaps, both as insurers and insured, worth $14 trillion, the currency office said, up $2 trillion from the previous quarter. JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively. ********** SouthAmerica: On Sunday, February 17, 2008 the British government nationalized a major British bank the struggling Northern Rock Bank. This bank lost billions of US dollars related to the subprime meltdown, and got the critical point that the only alternative left was for the British government to rescue this major financial institution and they had to nationalize it. The question that comes to mind is if the DERIVATIVES meltdown materializes in the near future how many American banks the US government also would need to nationalize? Is it possible that JP Morgan Chase, Citigroup, and Bank of America among other banks will end up being nationalized by the US government? How many trillions of US dollars it will cost the US government to clean up the mess left behind by the collapse of the derivatives market? ********** NYT: âBut many speculators, particularly hedge funds, have flocked to these instruments to bet on a company failure easily. Before the insurance was developed, such a bet would require selling short a corporationâs bond and going into the market to borrow it to supply to the buyer. The marketâs popularity raises the possibility that undercapitalized participants could have trouble paying their obligations. â¦But financial history is rife with examples of market breakdowns that followed the creation of complex securities. Financial innovation often gets ahead of the mechanics necessary to track trades or regulatorsâ ability to monitor the market for safety and soundness. The market for default insurance, like the subprime mortgage securities market, is a product of good economic times and has boomed in recent years. In 2000, $900 billion of credit insurance contracts changed hands. Since then, the face value of the contracts outstanding has doubled every year as new contracts have been written. In the first six months of 2007, the figure rose 75 percent; the market now dwarfs the value of United States Treasuries outstanding. Roughly one-third of the credit default swaps provided insurance against a default by a specific corporate debt issuer in 2006, according to the British Bankersâ Association. Around 30 percent of the contracts were written against indexes representing baskets of debt from numerous issuers. But 16 percent were created to protect holders of collateralized debt obligations, complex pools of bonds that have recently experienced problems because of mortgage holdings. There is no exchange where these insurance contracts trade, and their prices are not reported to the public. Because of this, institutions typically value them based on computer models rather than prices set by the market. Neither are the participants overseen by regulators verifying that the parties to the transactions can meet their obligations. The potential for problems in sizing up the financial health of buyers of these securities leads to questions about how these insurance contracts are being valued on banksâ books. A bank that has bought protection to cover its corporate bond exposure thinks it is hedged and therefore does not write off paper losses it may incur on those bond holdings. If the party who sold the insurance cannot pay on its claim in the event of a default, however, the bankâs losses would have to be reflected on its books. Investors are already reeling from the recognition that major banks inaccurately estimated losses from the mortgage debacle. If further write-downs emerge as a result of hedges that did not work, investor confidence could take another dive. To be sure, the $45 trillion in credit default swaps is not an exact reflection of what would be lost or won if all the underlying securities defaulted. That figure is impossible to pinpoint since the amounts that are recovered in default situations vary. But one of the challenges facing participants in the credit default swap market is that the market value amount of the contracts outstanding far exceeds the $5.7 trillion of the corporate bonds whose defaults the swaps were created to protect against.â ********* SouthAmerica: Only here in La La Land you create a super-bubble (Derivatives market) in the credit default swap market that the market value amount of the contracts outstanding of about $ 50 trillion US dollars far exceeds the $ 6 trillion of the corporate bonds whose defaults the swaps were created to protect against. The architects of this gigantic financial mess remind me of the financial wizards who are running the Zimbabwe economy today. ********** NYT: âTo the uninitiated trying to understand this complex market, its size might initially seem a comfort, as if there were far more insurance covering the bonds than could ever be needed. But because each contract must be settled between buyer and seller if a default occurs, this imbalance can present a problem. Typically, settling the agreements has required the delivery of defaulted bonds if the insurance buyer wants to be fully covered. If the insurance contracts exceed the bonds that are available for delivery, problems arise. For example, when Delphi, the auto parts maker, filed for bankruptcy in October 2005, the credit default swaps on the companyâs debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt. Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond. That is why the valuation of these contracts is of such concern to some participants. As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in.â ********** SouthAmerica: In a Nutshell: At any other time in passed history if I had created a similar market with similar financial instruments as the one described above I probably would end up in jail â and would be considered a scam artist. Just a Reminder: Washington Post, March 6, 2003, Warren Buffett: "derivatives are financial weapons of mass destruction" â¦In the words of Warren Buffett: âDerivatives represent a ticking âNuclear Time Bombâ that could wreck havoc on the financial system and the economy.â Source: http://www.elitetrader.com/vb/showthread.php?s=&postid=1797463&highlight=swaps#post1797463 .
TED spread highest since '87 crash at 280bp 3 month treasury yield hit 0.02% Congress says there's not enough time to bring back the dead, the Resolution Trust Corp. Treasury is floating paper to fund the Fed to do just that. This weekend should be interesting. But remember what Magoo says, the economic fundamentals are strong. Goldman Sachs appears to have won the "Highlander" contest among the investment banks.
. October 21, 2008 SouthAmerica: In the latest issue of Fortune Magazine one of the feature articles is about the financial meltdown. And many magazines on the news stand right now have a headline about the current financial meltdown or the coming Great Depression. ****** âWorst slump since Great Depressionâ - Major industrialised economies will suffer the worst slump since the 1930s, according to new research from Deutsche Bank. By Edmund Conway Telegraph (UK) â October 21, 2008 The warning underlines the fact that policymakers have failed to prevent the financial crisis from turning into a full-blown economic slump. It comes as world leaders agreed to hold a summit in New York billed as the âBretton Woods meeting for the 21st centuryâ. In its major assessment of the global economyâs health, Deutsche Bank also warned that Britain is even more vulnerable than the US or the euro area, as it predicted that the powerhouses of India and China would fail to support the wider global economy through the downturn. The banksâ economists Thomas Mayer and Peter Hooper said: âWe now expect a major recession for the world economy over the year ahead, with growth in the industrial countries falling to its lowest level since the Great Depression and global growth falling to 1.2 pc, its lowest level since the severe downturn of the early 1980s.â According to the International Monetary Fund, global growth of anything less than 3 pc constitutes a world recession. The warning was echoed by Richard Berner of Morgan Stanley, who said: âA global recession is now under way, and risks are still pointed to the downside for commodity prices and earnings.â The forecasts came as President George W Bush called a summit of the Group of Eight leading economies for the weeks after the US Presidential Election in order to organise a concerted response to the economic downturn. Together with French President Nicolas Sarkozy and European Commission President José Barroso, Mr Bush slated a meeting which many think echoes the historic Bretton Woods summit which laid down a structure for the post-war financial system. However, within minutes of the announcement, significant differences had opened up between Mr Bush, who has insisted that the new deal should not undermine free markets, and Mr Sarkozy, who said: âWe cannot continue along the same lines because the same problems will trigger the same disasters. This sort of capitalism is a betrayal of the sort of capitalism we believe in.â The meeting may take place in the UN headquarters in New York, and the G8, which consists of the US, Japan, Germany, Russia, the UK, France, Italy and Canada, will be joined by others including India and China. But while politicians are fast turning their attention to the economic side-effects of the financial turmoil, having ordered unprecedented banking system bail-outs worth a combined £2trillion, the credit crisis claims new victims. South Korea has pledged to guarantee $100bn (£58bn) of bank debts and to pump $30bn into its financial markets. The rescue plan may frighten investors who had assumed that many Asian markets would be largely insulated from the financial crisis. Instead, many emerging markets have suffered in recent months as foreign investors have pulled out, and have been ineligible for key central bank dollar swaps arranged by the Federal Reserves for developed countries. Meanwhile, Iceland, Ukraine and Hungary are poised to receive support from the IMF. Pakistan may also soon seek $6bn of IMF support, Prime Ministerial adviser Shaukat Tarin believes. The United Arab Emirates is reportedly close to injecting a sizable amount of currency into its banks and is considering guaranteeing bank deposits. Source: http://www.telegraph.co.uk/finance/...27454/Worst-slump-since-Great-Depression.html .