Over 75 years ago Wall Street Crashed; but today the New Crash is already underway...

Discussion in 'Chit Chat' started by SouthAmerica, Feb 7, 2008.

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    February 10, 2008

    SouthAmerica: Reply to Ausdaiki


    You wrote: “I agree with SA in the perspective that a depression is due; as it is my belief that a depression is a part of the economic cycle and it serves a purpose [it gets fat out of the system].”


    Here is in a nutshell the list of reasons why Depressions are part of the long-term business cycles.

    I quoting once again from my book:

    "Unrealistic Expectations.

    There is much evidence that human expectations tend to be linear. Most of the time, most people expect current conditions to continue for the indefinite future. It is almost an unnatural act for a man to leave home with an umbrella on a sunny day. Call it optimism, faith in the future, or just reluctance to see the party end, there is a presumption that the environment is stable. This is why cities are built on floodplains and fault lines. A similar presumption makes the gambler double his bet or the farmer plant additional crops on reclaimed land the year after a good harvest. Whenever prosperity exists, it is natural for people to expect prosperity to continue. For this reason, much of the history of human society is a record of astonishment. Time and again, people have marginalized their affairs, rendering themselves increasingly crisis-prone.

    They have gone into debt, extending claims on resources to an extreme that could be supported only if current conditions were sustained uninterrupted into the future. Time and again these hopes have been disappointed. Whenever prosperity has seemed permanent, some apparently minute change could produce astonishingly large nonlinear shifts in the organization of human society. The failure to recognize or anticipate these nonlinear transformations has been a common characteristic of almost all societies.

    …When the dynamic and nonlinear world adjusts itself to the linear thinking used daily by governments and other institutions such as corporations, banks, insurance companies, the church, and so on, the result can be sometimes catastrophic and can translate into unemployment, inflation, monetary devaluations, market crashes, world wars, civil wars, depressions, and even chaos.

    …Change is a fact of life, yet many people don't want to think about it because they feel threatened by it. So when change comes, it takes them by surprise. By then they can only react to it, and unless they're lucky, they suffer losses."


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    Since the end of the last depression many things happened along the way, WW II, the Korean War, Vietnam War, dozens of civil wars around the world, stock market ups and downs, major financial scandals such as the savings and loans mess of the 1980’s, Enron, Worldcom, dot.com meltdown, Citigroup scandal, hedge funds scandal, sub prime scandal, people invested in real estate and inflated it like a bubble such as in Japan in the late 1980’s, or the United States in the last few years, various international monetary crisis in the United States, Russia, Asia, and Latin America to mention just a few, we also had major natural disasters such as earthquakes, at least 20 major hurricanes including some major ones as Katrina, most major corporations usually they play around with their numbers (they carry as assets stuff that they know are garbage and eventually they have to right them off, or they keep giving misinformation to people to keep investors interested on their corporations) basically the list can go on and on, and that is why Depressions are necessary for the entire system to be able to deflate and adjust itself, and find a new equilibrium – and the value of most things come down to a more realistic price.

    People lost trillions of US dollars during the dot.com fiasco, in the first 3 weeks of 2008 about $ 5 trillion US dollars went up in smoke around the world in the stock markets, eventually these losses have to catch up with the real world.

    That is when things that are completely out of balance collapse and everything is readjusted accordingly to a new level that reflect the changes of a dynamic system that has changed things around over time. For example: The United States had a good run in the last 50 years and it was able to monopolized the international monetary system with the US dollar – resulting in a system that today is becoming a major mess – and you don’t need to be a rocket scientist to figure out that we are very close to the end of this US dollar advantage.

    Today, the entire international monetary system is on the edge of the biggest international monetary crisis the world has ever seen. The fuse has been lit.

    Besides all the things that I mentioned above this time around the fuse that has been lit it is called DERIVATIVES and eventually they are going to go off just like a nuclear weapon and it will be a devastating event for the entire global financial system.

    A nuclear explosion on the DERIVATIVES market it will be the trigger for the entire house of cards to come down – resulting on the first great depression of the new millennium.


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    #31     Feb 10, 2008
  2. .
    February 11, 2008

    SouthAmerica: Yesterday I was reading the last issue of Fortune Magazine (February 18, 2008) on Pg. 50 they had an article that caught my attention: “ Bear Markets and Recessions, Oh My.”

    And they had an interesting chart with the following information:

    YEAR-----% DECLINE----------Peak and Trough-----------DURATION.

    1957---------21%------------7/10/57 to 10/22/57-----------104 days.
    1961-62-----28%-----------12/12/61 to 6/26/62------------196 days.
    1966---------22%--------------2/9/66 to 10/7/66------------240 days.
    1968-70-----36%-----------11/29/68 to 5/26/70------------543 days.
    1973-74-----48%-------------1/11/73 to 10/3/74------------630 days.
    1980-82-----27%------------11/28/80 to 8/12/82-----------622 days.
    1987---------34%-------------8/25/87 to 12/4/87------------101 days.
    1990---------20%-------------7/16/90 to 10/11/90------------87 days.
    2000-02-----49%--------------3/24/00 to 10/9/02-----------929 days.

    Note: Above info for the S & P 500


    I would not be surprised if the next item on this chart it will be a decline of over 50 percent on the S & P 500 from the latest high reached just a few months ago.

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    #32     Feb 11, 2008
  3. Excellent Commentary As Usual

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    Another interesting item on the list is the quantity of dollars that are in circulation around the world...in relation to the stock indices...watched in 5 year segments on a historical basis....

    Next one would want to compare the stock indices valuations in relation to the world´s dollar supply...

    Now consider where dollars have to go...and the impact on stock indices by default...noting that interest rates may be negligible in debt instruments...
     
    #33     Feb 11, 2008
  4. .

    February 11, 2008

    SouthAmerica: Corrections to my above posting.

    …most major corporations usually they play around with their numbers (they carry as assets stuff that they know are garbage and eventually they have to write them off, or they keep giving misinformation to people to keep investors interested on their corporations)

    …Besides all the things that I mentioned above this time around the fuse that has been lit it is called DERIVATIVES and eventually they are going to blow up just like an atomic bomb and it will be a devastating event for the entire global financial system.

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    #34     Feb 11, 2008
  5. .
    February 11, 2008

    SouthAmerica: To expand a little further on my above comment: “I would not be surprised if the next item on this chart it will be a decline of over 50 percent on the S & P 500 from the latest high reached just a few months ago.”

    Fact: S & P 500 last high in October 2007 = 1,576 level

    That would mean that the S & P 500 would Decline below the 800 level in the near future. And I don’t know how many US dollars it will go up in smoke during the process of this coming US market decline – we are probably talking about trillions of US dollars.

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    #35     Feb 11, 2008
  6. Mvic

    Mvic

    As you know derivatives are a zero sum proposition, some will lose and others will gain equally so the money is not lost to the system as a whole as it is in a stock market route for example.

    Did you also see the article that the Chinese SWF is allocating $30B to western Mutual funds this year with more to follow? By western they mean US as they have found a very frosty reception in Europe.

    Saw a CNBC news show last month focusing on Dubai and the reporter was talking to SWF mangers from teh reagion and they all were bullish on the US despite the credit market problems and were actively investing in large projects in the US (ala ports deal and sought to do smaller deals in less sensitive areas to establish a track record for credibility sake).

    So far we have seen about $100B in writedowns and most estimates I have seen from credible sources suggest that we have at most another $150B in additional potential losses. hardley enough to cause the consequences that you suggest.

    We already have most economist saying that the economy will be growing at a normal pace by the time of the next inauguration in Jan of 2009. I suggest that you are not seeing in the big picture. Either because doomsday scenarios get better press than rational examination of the problems or you are simply a believe that at somepoint global growth will come to an end (and for the cscenario you paint make no mistake it would be GLOBAL Growth endding with no country beging spared, certainly no Brazil with its commodity laden GDP and relatively low productivity vs. the 1st world economies). Not surprsingly I will go with the evidence that with population growth and global economic growth still strong such a cataclysmic event as a depression is unlikely. As far as i can see the only event that could precipitate a depression is a global pandemic with significant mortality.

    As I have said before, short term I am not feeling bullish about the US but and even less bullish about EM. Mid to long term I am very bullish on the global economy and that includes the US.
     
    #36     Feb 11, 2008
  7. .

    You said: “So far we have seen about $100B in writedowns and most estimates I have seen from credible sources suggest that we have at most another $150B in additional potential losses. hardly enough to cause the consequences that you suggest.”

    If you check The Financial Times (UK) of today, they have more than one article about the G7 meeting that they had in Japan over the weekend – and the Central Bankers of the G7 countries are estimating that they will have writedowns related to the subprime mess of at least $ 400 billion US dollars.

    You also said: “As you know derivatives are a zero sum proposition, some will lose and others will gain equally so the money is not lost to the system as a whole…”

    What happens if some of the people involved on this zero sum proposition incur massive losses and they go bankrupt along the way and they can’t honor their side of the deal?

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    #37     Feb 11, 2008
  8. May I be permitted to say that we should all be looking at this situation in it´s broadest of terms ... namely the "commodities wars" of which the opening shots have been fired and we are all onboard and underway.

    The Pentagon has just asked Congress for 515B plus a topup 70B for the Iraq war.

    Make no mistake, this vast sum has nothing to do with the so called "war on terror" Assuming you believe in such a thing it can be easily fought with last generation-but-one weapons systems.

    No, the bulk of these funds will be allocated to "peer competitor" weapon systems. The only people who could be regarded as peer competitors to the US are Russia and/or China.

    Let us assume for one moment that the inhabitants of these two nations are intellectually the equal of the US. Dont even assume that they may be ahead,.. simply equal.

    Assume also that my enemies enemy is temporarily my enemy. Simply because it suits.

    Now, if in anyway these meager comments have expanded your thoughts beyond the confines of Wall street then my few minutes of scribbling have been justified.

    regards
    f9
     
    #38     Feb 11, 2008
  9. Mvic

    Mvic

    Fair points, but even at $400B I don't think we see anything near your scenario of a global depression.

    This article illustrates well the dangers of counterparty risk, the Phillipine development example in particular.

    http://www.minyanville.com/articles/CS-C-db-MBI-WB-bcs/index/a/15847
     
    #39     Feb 11, 2008
  10. Excellent Commentary All
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    It is possible to be extremely objective in that one could
    define what is available in terms of currency..the state of the currency...and the likely positioning of the currency....which could apply to any country...

    What does one have...and what are the choices ?

    If a country has $10 trillion in physical currency...where is it? Who has it ? And what are they going to do with it?

    In terms of valuation....let us use the simple condominium example versus past and current appraisals....
    There are 100 apartments....Two years ago one sold for $200,000...and one sold last week for $100,000....

    Adams invisible hand took 100 x $100,000 as the result of one transaction...

    However the next year...a condominium sold for $200,000...and thus the valuation improved 100x$100,000...

    Did the condominium change ? No

    Did money change hands? 2 times

    The Fed in the meanwhile printed 10% more money..10% dilution...and incurred 10% more debt that paid for nonproductive foreign projects....
    ........................................................................................

    Thus ...the next time around that a condominium sells, there are 20% more dollars floating around both in dilution and debt...
    .........................................................................................

    Thus as dollars increase in the physical...they are invested in something...

    If one were to look at the Dow Jones, SP 500 indices over the last few decades....and then examine the increase in physical money, and debt....then what would be the contribution by dilution by money and debt....and what would be the portion of the valuation due to current appraisal...in terms of the numerical changes in the index...
    ........................................................................................

    Now one can bring in a derivative that could be bought for $1.00 per $100 but represents the legal obligation for the full value...

    Now let´s say the holder receives a valuation when the apartment prices are high...and pledges the company value for loans...
    ..........................................................................................

    Thus derivatives represent an explosive valuation issue when debt has been incurred, pledged, and received....As the valuation of the apartment project has the potential of being highly volatile...
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    Also...if bonds pay 2%, then earnings are assigned a higher valuation....If bonds pay a higher interest rate, then earnings are assigned a lower valuation....

    ................................................................................................

    What can quickly change valuation ?....regulation...

    However at the end of the day...the apartments are the same as they were the day before..same wood...same concrete..etc..
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    If anything ....more and more regulaton will take place....which gives more logic for more secure valuation supposedly....and will happen quickly...

    In terms of US currency valuation improvements....the US just has to be better than its peers.....If its peers are no better off ..then the currency valuation will reflect this comparison...

    ................................................................................................

    Debt, dilution, and derivatives need to be addressed....and once they are...confidence will come forward....

    Also favorable mandates regarding energy, education, and investment in infrastructure will enhance valuation....

    The list goes on....
    .................................................................................................

    However one must note how quick valuation can go up as it went down....

    One may note this by noting how a 10 year bond changes in value when the par value is 4%...and interest rates move from 2 to 6%.....This can happen very quickly....
    .............................................................................................

    What is of particular interest this time around....is that the supposed most sophisticated players do not understand the instruments that are traded in the marketplace....much less government employees or college professors in general...

    However make no mistake....most governments have a military for defense.....Derivatives can create an economic malaise of the worst kind....far worse than the negative economics of war...

    Now more than ever....the US needs brilliant leadership....and although it is late in the day....derivatives need to be put in check...
     
    #40     Feb 11, 2008