[DrStool]

Key Credit Series Collapse

Credit Bubble Ending, Money Supply Downticks

Fed Releases update is now posted! Once a week Doc fills you in on the all important Fed releases. Take a subscribatory and download your Fed Turdsday Releases RIGHT NOW!

30 Day Intro Subscribatory. Just $16.99! Get In RIGHT NOW!


Please post your reactions and comments.

[martialcomp]

I think that we are seeing the end of a 22 year bull market in bonds.

This will cause:

End of the Housing Bubble
Pop the Consumer Debt Bubble
Will eventually pop the Stock Market Bubble
Pop the Corporate Debt Bubble

Greeny and friends (Bernanke included) are terrified of raising interest rates. I am not so sure they are going to raise them in June. Yet, if they don't raise rates, the dollar will fall while gold and OIL will go up. The bubbles are now so large that even hints at raising rates cause mayhem in the bond markets.

It is the end of an Era of Easy Money. And, if these goof balls don't raise rates soon, they will have no liquidity to throw at the next recession.

The only thing they will have is word altering FOMC statements about "measured growth" and "measured pace".

The foreclosures on homes will be devastating to people in the next few years. People taking ARM's when interest rates are at or near their lowest historically are sure to be in trouble in the next year or so.

[Political anal cyst]

Martial comp said:


"I think that we are seeing the end of a 22 year bull market in bonds.

This will cause:

End of the Housing Bubble
Pop the Consumer Debt Bubble
Will eventually pop the Stock Market Bubble
Pop the Corporate Debt Bubble

Greeny and friends (Bernanke included) are terrified of raising interest rates. I am not so sure they are going to raise them in June. Yet, if they don't raise rates, the dollar will fall while gold and OIL will go up. The bubbles are now so large that even hints at raising rates cause mayhem in the bond markets.

It is the end of an Era of Easy Money. And, if these goof balls don't raise rates soon, they will have no liquidity to throw at the next recession.

The only thing they will have is word altering FOMC statements about "measured growth" and "measured pace".

The foreclosures on homes will be devastating to people in the next few years. People taking ARM's when interest rates are at or near their lowest historically are sure to be in trouble in the next year or so."


Martial... my sentiments exactly... rather than me blab on.. I just though I would re-post your original writings, because I think they are 100% accurate.
...No sense in me re-inventing the wheel!

[Jorma]

DrStool, on May 22 2004, 10:47 AM, said:

Key Credit Series Collapse

Credit Bubble Ending, Money Supply Downticks

Fed Releases update is now posted! Once a week Doc fills you in on the all important Fed releases. Take a subscribatory and download your Fed Turdsday Releases RIGHT NOW!

30 Day Intro Subscribatory. Just $16.99! Get In RIGHT NOW!

Nothing else needs be said.

Saying anything else besides that the end of the liquidity expansion on a long term secular basis means that asset prices are fated to fall is either tangetal, muddled or confusing.

[DrStool]

I have moved several posts not related to discussion of the Stool Fed report to a separate thread. http://www.capitalst...?showtopic=5624

I'd like to limit this thread to thoughts and reactions related to the content of this article.

Many tanks!

[EddieBear]

Any idea what the crisis in the system could be? What should we be looking for?

[EddieBear]

Off Topic, throw it out if you wish.

I previously reported my company's 401K at Fidelity had eliminated the money market option. My money was placed in the "Stable Value Fund".

The latest news is that we are now prohibited from moving money around the different funds too frequently. Stated reason was to prevent "market timing".

[NWD]

EddieBear, on May 24 2004, 04:43 PM, said:

Any idea what the crisis in the system could be? What should we be looking for?

EddieBear;

I don't know exactly what form the crisis will take. I'll only say I've got a pretty good idea one is coming and sooner, rather than later.

Some folks around here seem to be saying, either directly, or by implication, that rising yields will smash the bond market.

If you get panic selling in bonds, there goes the whole interest-sensitive sector.

That includes real estate mortgages.

Mortgage rates go up, prices come down, no more home equity loans for maintaining current consumption level and we could be talking about riot time.

Some folks think the Big Shots will try to get through a bond market crisis by buying up the bonds with fresh Greenspan bucks and thereby set off a hyperinflationary crisis.

[Drano]

A comment on the projected wave of foreclosures:

Banks DO NOT WANT to foreclose on huge amounts of property. Where will the buyers for these properties be? Expect there to be major re-negotiations of mortgage rates and terms -- i.e., the banks may have huge unrecoverable bad debts if enough people get in trouble with mortgages.

I recall hearing stories from people who lived through the Depression, about landlords who could not get paid the rent they were owed, so people ended up living rent-free in return for maintenance services, etc. And banks similarly who didn't bother to foreclose because they knew they weren't going to be able to sell the property anyway. Where will all the buyers for the McMansions come from?

[martialcomp]

I have heard the same thing. My grandparents are still alive and told me that banks didn't foreclose because there was no one to buy.

As a result, they asked the mortgage holder to pay anything they could.

[Political anal cyst]

Drano said:

"Banks DO NOT WANT to foreclose on huge amounts of property. Where will the buyers for these properties be? Expect there to be major re-negotiations of mortgage rates and terms -- i.e., the banks may have huge unrecoverable bad debts if enough people get in trouble with mortgages."

I think you are 100% spot on with that prediction... period!!

During the real estate price deflationary process, there will be many stories about the "annual meeting with the bank" where, once again the bank will either lower payments and equity owed, or get the keys to a house they don't want shoved up their nasal cavity.
Of course this won't stop prices from crashing, it will simply show the desperation of the situation.

[stevieo]

I'd like to skip the demand side and go with the hypothesis that demand for money and credit is insatiable. The supply side comes from structured financing. The question is how are the creators of credit to get rid of the risk. In other words, who buys the high risk tranches, or who gets left holding the bag, or put another way, who gets bailed out. Or is there a way to forever offload it off balance sheet? Seems to me the money still needs to come in to cover the creation of the high risk percentage of the original credit, so it seems like someone has to take the risk, even if it's in the form of a fed or other government guarantee or if it's stuck in pension funds or something. Or FNM blows up and everyone hides their junk in there somewhere, maybe through pork barrel portions of the bailout. Meanwhile, it might be possible to move the jello around the plate. Create a new credit card company that can start without any default loans. Start it as a buy out of the old good credits and maybe play around with the numbers to make both companies look good. I still don't see how it keeps going without a sucker.

After reading last night's m2m, I'd like to add who's holding the junk now? That's a lot of junk.

[Jorma]

The missing looses have been an onging question for a long time. Todays M2M, 5/25, has Mark discussing some WSJ article about the wonders of structured exotica and how nobody seems to have any of the risky stuff. Marks old joke about the risk being offloaded into outerspace isn't really such a joke evidently.

The article even quoted Noland and he talked about the 'moneyness' of the derivatives, and it's risk.

While I find it impossible to refute the logic of Docs liquidity analysis I wonder if somehow there is something missing among all that data. The M's and bank holdings and loans etc. etc. might not be telling the whole tale. That's all old money for the most part but there is this new kind of 'money' as well.

I don't really understand it or how it may interact with the markets and the economy but somewhere in there is a possible wild card which will make the liquidity arguement not quite what it seems.

I couldn't be more vauge on this but my point is that I'm keeping an open mind. I'd still be more surpised by some sort of market collpase than a significant rally and my gut says the most likely path for the rest of the year is a managable downward bias in stocks, but no disaster. If we crater soon I'll understand it. If we hold or even rally we have to look for alternate ideas.

And getting back to the missing losses. In the end I think the missing losses are where the real tale of the management of the markets lies. If it is corruption on a massive scale which is sending the negative numbers into outerspace I do not know, but strongly suspect it. The nature of it I cannot fathom.

Some time ago I half jokingly I proposed totally bogus T Bond purchases, AND PAYMENTS at an auction. In that vein what is possible at Bahamian Banks vis a vis worthless derivative paper.? Almost anything I would think. A long as those trillions of paper on the books of entities we can identify hold their value then who would be the wiser if the risk was just papered over with a few bits in some computer?

[Hiding Bear]

Good point Jorma.

Since 9/11, I've tried to figure out where some of the bond market losses caused by the chaos of that disaster went. Since the Fed acted as a middleman on unmatched trades, and since few broker/dealers admitted to losses, I can only conclude that unmatched trades were absorbed by the Fed. And when the Fed buys something and adds it to its balance sheet, it stays on the balance sheet at cost and not at market value. Theoritically then Fed "assets" may not be liquid assets at all. We can not even be sure that the gold held by the Fed even exists.

But there is possibly even a bigger problem. Since each company values it derivitive position seperately, it is possible that the net mark to market position of all companies involved is a positive number. It's impossible to check that, since information on specific contarcts is not public information. So unrealized losses may be swelling the entire time companies are reporting overall net profits. When will it ever end?

[threadbare]

Risk offloaded into outer space or a parallel reality. One hundred trillion bucks worth.

From Tom Paine


"Partnoy: The way that I think about this is it's almost like a fa硤e to a building. There's activity that's going on inside and then there's what you need to show the rest of the world.

What you need to show the rest of the world is in two pieces. One is the financial statements and we as investors like to simplify our lives. So we like to think that just the financial statements, or the earnings number of the company, or how much debt it has on its balance sheets, [that] those are the key things to look at. That's the way that a lot of investors were raised. And so that's the fa硤e that companies show. But in reality, that fa硤e is -- and everyone recognizes this within the company -- is completely false and isn't even intended to describe what's happening inside the house.

The remarkable thing that's changed in the markets during the last decade is there's been a proliferation of rules that not only entitles companies to move debt off balance sheet or massage their income and losses, but that basically create incentives for them to do so. So you end up with companies like Enron, where the financial statements described one company and that company as it was understood had almost nothing to do with what was really generating profits.

The fa硤e that investors saw was an energy firm. And reality behind the scene was this was a derivatives trading firm with huge amounts of off-balance sheet debt. Maybe parallel universe is a nice metaphor, that basically what's been happening over the last decade is managers and Wall Street have been traveling in one universe and investors have been traveling in another one, and we can't even see or understand what it is that is happening in this other universe. But the other universe is what ultimately drives our returns and determines whether we can retire or not, or pay for our children's college or not. So it's really a very troubling state of affairs."

http://www.tompaine....ure.cfm/ID/7730