Bottom Pickers Anonymous

[stevieo]

I'm afraid that the only way to prevent a complete liquidation of the monetary system is to have a complete breakdown right here and now. Maybe they put it off until after the election, now only four weeks away. When half the governments of the world are telling people not to panic... People aren't that stupid, they know that means it's time to panic. Let it fall apart completely, and then everyone can move on to cleaning up the mess.

 

Spent the evening reading Mises on credit and clearing sytems. It's a little clearer now what Bernanke and Paulson are up to. My thinking is this is a run on the monetary system, which is now a completely global system. A run means people look to exchange deposits and loans for cash. Think of cash as a 0-duration note. In order to avoid hyperinflation, i.e. money printing, which on this scale is hyperinflationary, they're using bank-note-like substitutes of near 0 duration, mostly the US Treasury note. This is not inflationary the way cash would be. (According to Mises, there are some arguable conditions on this. I think the conditions are that the notes not exceed savings.)

 

The idea fits nicely with his theory on real economic matters in a crack-up boom, where he describes a shortening of the chain of manufacturing processes. In strict money terms, it's duration. In economic terms, it means you can't have a long chain of companies participating and specializing to take a long roundabout way of manufacturing things, but you end up with companies that do it all and can finance it at one time from one souce. One consequence is that people and companies prefer to lend directly to others that directly manufacturer things. Financial intermediaries are left out of the chain as it shortens. But back to the point...

 

If this is a run, people and companies are looking to shorten their duration, ideally in cash. This increase in the demand for cash and short term notes means a higher exchange value (vis things) and lower interest rates for short duration notes. (It should have the opposite effect on longer term rates, if it affects them at all. It leaves me wondering where short term rates would be without all this note supply.) The same reasoning leads to guaranteeing bank deposits and money market funds. It's meant to keep from hyperinflating--money printing. To keep people inside the system.

 

Almost everyone's seen It's a Wonderful Life, so we all know that even in good times, banks are illiquid. Today, the system is insolvent. The difference between being liquid and solvent is the duration of assets. (This doesn't hold for being *in*solvent.) A liquid bank can meet all of its obligations immediately (or nearly so.) This is impossible if they hold mortgages or other long term debt because they can't liquidate it immediately. A solvent bank can liquidate all obligation eventually. No bank is liquid, even in the best of times--at best they are illiquid exactly by the amount of deposits (but not equity) they lend out. They can, and probably should, always be solvent, and this is what the regulators aim at. Today's problem is that the system has lost so much money the system as a whole is insolvent. Bernanke and everyone else knows this. But, as we've seen, they have some plans.

 

The first important part of the plan requires keeping the insolvent banks open. The trick is, they need to make sure Aunt Millie only removes the $15 she needs to get through the week. They need to keep people in the system. Otherwise, they have no choice but to hyperinflate or collapse the system into bankruptcy through a run. (Which wouldn't happen if the system were solvent.)

 

Meanwhile, the plan surreptitiously adds capital to the banks by swapping their bad debt and long term debt for short term debt of better quality--treasury notes. Aside from capitalizing the banks, this provide them with more liquid assets (shorter duration) with which to deal with the fantastic shifts of money happening today that can't be settled without exchange through the clearing system. (In normal times, very little money is exchanged because for any bank, transfers out roughly equal transfers in over time.)

 

This isn't all that much different from what's been discussed here, just a slightly different perspective. The one thing that sticks out here is how important duration is. If this is right, I'd make some guesses. There's liquidation going on, causing the dollar and short duration quality notes to increase in value. Long term debt, stocks, and other financial assets should decline, although long term treasuries may be stuck due to their tie to mortgages. When the liquidation reverses, short term rates rise, the stock market stops tanking, and the dollar starts going down again. Where will the dollar end up? My guess is that Bernanke is trying hard to avoid hyperinflation by providing legitimate bank substitutes. (Nevermind that the sheeple eat the bank losses that exceed banker's equity.) I do believe, he'll inflate to such a degree that prices don't collapse. Whether he (and maybe his successor) can accomplish this depends on whether or not there's a full fledged run out of the system, and what other parties do.

[Yaryman]

Citi gives up on buying/stealing WB.

 

What bank will the FDIC give them instead this weekend?

[Phil Late Show]

FCBs DUMPING GSEs!!!!

 

More in tomorrow's Fed report!

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Of course... isn't that what that big bailout package hullabaloo was all about? It passed last Friday, right?

[Pretzel Logic]

(Wall of Text)

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Nice analysis. Thanks for taking the time to share that.

[Ageka]

A bank being solvent long term may well depend on the short term / long term strategy even in the most stable of times

 

Some banks lent out mortgages for 30 years to people that will pay like 6% fixed

or 5% changeable every 3 years let's say

 

Now one bank has got threasure notes for 30 years at 5.75 % meaning zero risk and only 0.25 % gain . Solvent

 

Anothr bank has got 30 day rollovers at 3 % so starts with 3% gain

What if they cannot rollover anymore ? Game over ?

What if the rollover costs them 7% ? Loss and errosion of base of capital

[ChicagoBear]

Theory question:

 

If there's no gold readily available,

 

but no one has anything of value available to trade for it,

 

will the price rise anyway?

I'm starting to wonder about this.

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This is the perfect set-up, IMO.

 

No supply/Low supplies and high demand = prices go up. Microecon 101.

 

No money to buy it? With everybody selling everything, there is a mountain of cash out there that is just looking for somewhere safe. Trashuries have been the haven du jour, but that nonesense will ultimately wear-out. I think precious metals are about to replace debt instruments very soon as the preferred safe haven. As this crisis escalates, the light bulbs will start going on.

[Jimbo]

THE LAST BAGHOLDER STANDING

 

Doc

 

The last bagholder is whoever is buying the trasheries.

 

Its the FCB's Doc and the panic flyers from the money market funds.

 

The Taxpayer is just passing the bag along.

 

He's not holding onto it.

 

I think the $ has gone up due to PHYSICAL demand for dollars - the sought you hide under your matress.

[Jimbo]

ABOUT TIME FOR GM AND FORD TO BITE THE CHAPTER

 

I know i have been saying this since 2003.

 

But its just so inevitable.

[phatbubble]

Well I'm going to be honest, I am a 20 year old college student studying finance. I have been in the market since I was 14. I traded LU DG and HLS for all gains. I save saved saved. I have about 10k saved. It was high as 18k. I can saycollege has been expensive, but I pay for everything considering my 3.7 gpa. (My father wants to preserve his capital) Now I sit in all cash. I trade in and out. I made most of my money in mutual funds from 06-08, which i sold in January 08. I'm sitting and waiting for the greatest opportunity for my age group. I tell my friends to save, and get ready for a bottom, but non listen. I save as much as I can 400/mnt after all expenses. I have learned alot from yall. I set my stops tight. and anything that works out I take profits on. I want to learn more, and more before this epic bottom. If it  is 7k 5k or 2k. I am ready for the bottom. I used to make lots of money in little stocks during the 2004-2007 run up. TRLG, CUP, RICK, LPSN, QLD, and much more. I am now at the point where I want to accumulate capital for this bottom. I am tired of trading in and out foe little gains or losses. I think for my age I have done great, and I am ready for things. I dont own a car, or a cell phone. I think economically in everything I do. i want to make it big on a moderate income. i work for a grocer, Publix we have in Florida. I plan to work and grow with them. They pay great, and have great opportunity to grow. A great company if they ever go public. I love this website and the stock market. I just have never found a greater group of investors to listen to. I am underestimated by my peers. I will be ready for the bottom. I know I post alot, but they are questions and opinions of what I am doing. I have stuck close with ROGER7485. He is a pall of mine, young and very smart. He  has made great investments. Also a member of this board, he trades large amounts of money on what he believes are great stocks. We made 500% between 2004-2007. I have been putting so much pressure on myself latley because of the money I have spent this last year in college. I want to follow the knowledge of capitalstool.com as i grow as an investor, and build massive capital as I grow. I do without everything to have capital, so that one day when I am young, I can do the things you guys do. I plan to grow and follow the market with you guys.. My #1 question is what t be looking for as the markets bottom? My roth IRA is all in cash and I have maxed it out for 2008. any advice i would love to hear. \

Dr. Correll

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Dr Correll - wall of text aside, congrats on being focused so early. You're miles ahead of where many of us were at 20. Best of luck.

[phatbubble]

I always wonder what folks look like and tend to have a mental picture, influenced heavily by their avatar selection.

Me too. I'm sorta hoping 4shzl doesn't resemble that unnerving avatar. It's like one of those paintings where the eyes follow you around the room.

[psyche doctor]

Dr.Correll:

 

 

I can offer a few suggestions to you. I think it is great that you are studying finance and that you have the discipline to not blow the money you earn on some of the ridiculous things that kids your age purchase, such as video games, obnoxious exhaust systems, strippers, or weed. As a result of this, you are far ahead of your pack. I am purely a trader, not investor. Altthough, I do hold some stock in a longer term acount. I day trade commodity and index futures and, on rare occasions, options. I get the impression that you think the mother-of-all buying opportunites is near. From a technical point of view, I think some kind of bottom is near. At the moment, it is hard to know if it is 30, 100, or 200 s & p points from here, though. This rally will be very tradable from the long side, but highly doubt that it will remain untested or unbroken. I dont think you will be able to buy and hold and ride off into the sunset, especially considering the wicked hyper inflation that is coming. May I suggest that you finish your education and start buying gold and silver mining stocks, dollar cost averaging. You are too young and inexperienced to trade this and don't have enough time to build up sufficient capital to survive what is coming, especially if you get wiped out. Before I forget, stay away from options. Sooner or later they will bite you! Once hyper inflation starts to set in you will want to convert your paper assetts to physical gold and silver to avoid the collapse of the dollar. Unfortunately, the government will probably take it though. They did it once!

 

I feel sorry for real young people getting started. Most don't have enough time to prepare mentally or financially for the apacolypse that is coming. This hyperinflationary depression will be devastating, unimaginable. Another option you may have is to just have fun and enjoy the good times that are left and start blowing some loot on girls, drink, and sport while you have the chance.