His new book is excellent.
http://www.amazon.com/Traders-Guns-...9780708?ie=UTF8&s=books&qid=1190467733&sr=8-1
http://www.amazon.com/Traders-Guns-...9780708?ie=UTF8&s=books&qid=1190467733&sr=8-1
Satyajit Das:Bear Market of epic Proportions
- Thread starter Oz435
- Start date
Interesting point. However, (1) the only things they can do is jawbone and print money even faster... like trying to put out a fire with more gasoline, and (2) fiat money is vitally dependent upon confidence. When investors get the notion that the central banks have used up all of their cache and are now merely feckless counterfeiters, the markets will consider all the money pump as "the problem" rather than the solution... which of course, it is.
S. Das does not know if it will turn out like Japan from 1990 to 2003 or like the U.S. market from 1960 to 1975.
I think I would prefer a long grind like the above to a massive sudden collapse wiping out my accounts. At least it would allow me time to adjust and leave some capital to work with.
I think I would prefer a long grind like the above to a massive sudden collapse wiping out my accounts. At least it would allow me time to adjust and leave some capital to work with.
The later is more likely if the $ craters. This is one of the risks of playing a global contraction by shorting US Equities, you may be right in real terms but make nothing due to the $ falling and US equities staying flat or even rising but less than the % the $ declines as has already been happening.
If the subprime issue is going to resurface, then the best bet is that it will come back in another form, say, earliest, by end of this year.
There are several reasons I can think of why that is the likely scenario,
1. The end of those years before the election year are usually more volatile.
2. The latest rounds of fed actions, from the sudden discount rate drop, to the asset inflating fed fund rate drop, forced the market to accept the US government's standpoint to use asset inflation to bail the economy out from any form of recessions. Will take at least coupe of months before a new trend can emerge.
3. The real long term holders of the US equity and bond markets, will change their mind and start to unload their US holdings into the US equity rising market, as there is no more real value in holding stocks that go up in price, but actually lose money due to the USD devaluation. To someone living in US, make and spend in USD, they won't feel the difference. This kind of distribution takes several months before we can see the effect.
4. Long term short sellers are badly hurt in the latest rounds of government intervention - be that forex, equity, future, or bond traders. It will take them some time before they will act again.
So in coming 2 to 3 months, if we see continuous distribution in stock prices, no matter the indices are making new highs, then it is a sure sign of trouble.
There are several reasons I can think of why that is the likely scenario,
1. The end of those years before the election year are usually more volatile.
2. The latest rounds of fed actions, from the sudden discount rate drop, to the asset inflating fed fund rate drop, forced the market to accept the US government's standpoint to use asset inflation to bail the economy out from any form of recessions. Will take at least coupe of months before a new trend can emerge.
3. The real long term holders of the US equity and bond markets, will change their mind and start to unload their US holdings into the US equity rising market, as there is no more real value in holding stocks that go up in price, but actually lose money due to the USD devaluation. To someone living in US, make and spend in USD, they won't feel the difference. This kind of distribution takes several months before we can see the effect.
4. Long term short sellers are badly hurt in the latest rounds of government intervention - be that forex, equity, future, or bond traders. It will take them some time before they will act again.
So in coming 2 to 3 months, if we see continuous distribution in stock prices, no matter the indices are making new highs, then it is a sure sign of trouble.
Interesting synopsis of the problem from the article:
"Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheets for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan."
US banks found a way around the basic rules of fractional reserve banking :eek:
Regulators did nothing and the banks were able to sell the risk to European banks and foreign and domestic fund managers!! Hee hee.. it reminds me of when the Japanese and Chinese were claiming their coming superiority over the US and buying real estate in the 80's, they contributed lots of $ to the US.
The size of the problem is similar to the S&L defaults of the 80's adjusted for inflation. A government bailout is possible.. and the left is already jumping on the political bandwagon to make sure that costs the Bush admin political capital. The admin has to weigh the political fallout from a bad economy against a bailout and the bailout should win that one sometime next year unless Bernanke can sidestep the problem somehow. Stay tuned folks, it's just getting interesting.
"Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheets for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan."
US banks found a way around the basic rules of fractional reserve banking :eek:
Regulators did nothing and the banks were able to sell the risk to European banks and foreign and domestic fund managers!! Hee hee.. it reminds me of when the Japanese and Chinese were claiming their coming superiority over the US and buying real estate in the 80's, they contributed lots of $ to the US.
The size of the problem is similar to the S&L defaults of the 80's adjusted for inflation. A government bailout is possible.. and the left is already jumping on the political bandwagon to make sure that costs the Bush admin political capital. The admin has to weigh the political fallout from a bad economy against a bailout and the bailout should win that one sometime next year unless Bernanke can sidestep the problem somehow. Stay tuned folks, it's just getting interesting.
Regarding leveraging up around the world the article states:
"The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers that are now accused of predatory lending practices.
Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the U.S., these managers leveraged up their bets by buying the CDOs with borrowed funds.
So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing. "
In 1929 a stock buyer could get certificates with 1:10 margin, deposit them in his savings account with a bank, borrow on them, take the money and go get more certificates at 1:10...
And people can't figure why Bernanke did the bigger rate hike!!
"The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers that are now accused of predatory lending practices.
Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the U.S., these managers leveraged up their bets by buying the CDOs with borrowed funds.
So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing. "
In 1929 a stock buyer could get certificates with 1:10 margin, deposit them in his savings account with a bank, borrow on them, take the money and go get more certificates at 1:10...
And people can't figure why Bernanke did the bigger rate hike!!
Erm, I think you meant rate cut, eh?
Anyways, this is my point in all of this:
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and to create collateral during an era of a flat interest rate curve.
I think Bernanke made the mistake of holding rates too high, which is what fueled this market. That actually forced long rates down, and led to a flat to inverted yield curve that made it very hard for banks to make money in the normal way.
However, as this man points out in the rest of it, the problem was global. All currencies, not just the USD, will fall as a result of this unwinding, relative to gold. You'd never know that from the posts on this board, but the so-called gold bugs around here are more anti-American than pro-gold.
However, I don't think this particular thing will lead us into anything like a depression. This underestimates the money factories in the hands of the world's CB's, especially when you put that together with the fiscal power in the hands of the world's governments. They will collectively create enough paper to bury this thing. Which is why gold will go up against all currencies. The USD, meanwhile, may go down more, but it won't crater in relation to the rest, because the rest will be falling too.
As for all the moral hand-wringing, spare me. Your morality plays assume choice. In a fiat currency world where rates are set by CB's, there is no choice. When they screw up by distorting the yield curve, their only way to fix it is to screw up by distorting it in the opposite direction. This is an inevitable result of thinking that a central committee knows better than the market where rates should be, and that too is a global, not a US, problem.
Morality, therefore, is beside the point, unless your real goal is to impoverish the borrowers whose money was used for those CDO's. Yes, it's a debtor's world. But it has been for your entire lifetimes. Deal with it. Profit from it.
Anyways, this is my point in all of this:
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and to create collateral during an era of a flat interest rate curve.
I think Bernanke made the mistake of holding rates too high, which is what fueled this market. That actually forced long rates down, and led to a flat to inverted yield curve that made it very hard for banks to make money in the normal way.
However, as this man points out in the rest of it, the problem was global. All currencies, not just the USD, will fall as a result of this unwinding, relative to gold. You'd never know that from the posts on this board, but the so-called gold bugs around here are more anti-American than pro-gold.
However, I don't think this particular thing will lead us into anything like a depression. This underestimates the money factories in the hands of the world's CB's, especially when you put that together with the fiscal power in the hands of the world's governments. They will collectively create enough paper to bury this thing. Which is why gold will go up against all currencies. The USD, meanwhile, may go down more, but it won't crater in relation to the rest, because the rest will be falling too.
As for all the moral hand-wringing, spare me. Your morality plays assume choice. In a fiat currency world where rates are set by CB's, there is no choice. When they screw up by distorting the yield curve, their only way to fix it is to screw up by distorting it in the opposite direction. This is an inevitable result of thinking that a central committee knows better than the market where rates should be, and that too is a global, not a US, problem.
Morality, therefore, is beside the point, unless your real goal is to impoverish the borrowers whose money was used for those CDO's. Yes, it's a debtor's world. But it has been for your entire lifetimes. Deal with it. Profit from it.
Quote from maxpi:
In 1929 a stock buyer could get certificates with 1:10 margin, deposit them in his savings account with a bank, borrow on them, take the money and go get more certificates at 1:10...
And people can't figure why Bernanke did the bigger rate hike!!
That is very similar to the housing bubble in Hong Kong since 1980s and ended very badly in 1998.
People "buy" a condo, then use the hyped up price difference at the bank as collateral to borrow $ to pay for down payment on the next one. The cycle repeats at least several times for many.
And I think you mean "rate cut"
Uhh yeah, cut was the right word there.
I was not really suggesting that we were headed for a depression, I was remarking that the same things are done over and over and the problem is indeed big in terms of historical comparables. We have a lot more going on nowadays to deal with such problems, why we can't avoid them I don't know, I guess they sneak up on us.
I'm not at all interested in the morality issues. In Greenspan's interview currently available on youtube he deals with the morality issue. His view, and I can't find an argument against it, is that if the Fed was in the business of punishing irresponsible people they would have to accomplish it by punishing everybody..
I was not really suggesting that we were headed for a depression, I was remarking that the same things are done over and over and the problem is indeed big in terms of historical comparables. We have a lot more going on nowadays to deal with such problems, why we can't avoid them I don't know, I guess they sneak up on us.
I'm not at all interested in the morality issues. In Greenspan's interview currently available on youtube he deals with the morality issue. His view, and I can't find an argument against it, is that if the Fed was in the business of punishing irresponsible people they would have to accomplish it by punishing everybody..