The Next Meltdown: Credit-Card Blowup Ahead

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Jayford: Sorry this off message, but it is truly astounding how much time some people spend researching their own views on the net, and then feel the need to post them.


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October 15, 2008

SouthAmerica: Reply to Jayford


I was not researching my own views when I posted the following:


October 15, 2008

SouthAmerica: I knew all along that the $ 700 billion dollars Wall Street bailout was just a case of a “Bait and Switch.” That is why Treasury Secretary Paulson wanted a blank check and Warren buffet also lobby on his behalf for the government to give him the blank check.

Bill Gross already got a piece of the new action, they reported yesterday on the news.

Last night an economist on the Lou Dobbs show on CNN said that all together the global economy is getting cash injection of about $ 4 trillion dollars in 2008.

Regarding the US government cash injection into the 9 major financial institutions that means these institutions are going to be hit with a massive derivatives losses and the US government decided to send money to these institutions for them to be able to write off their massive losses without creating a total panic and a run on the banking system all over the United States.

It is possible that they already know what is in the pipeline and they don’t want to cause a major Panic.

The FDIC fund is empty, but they increased the deposit insurance to the amount of each account with no limit.

...The liquidity that the US government regulators want to provide to the US banking system is for one purpose only it is for then to be able to absorb the massive losses that are snowballing into a giant wave of losses.

This US government latest strategy is not a bailout to the banking system it is a handout to keep them from collapsing and starting a nasty chain reaction.

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The above is a new conclusion that I arrived at last night based on the latest information that was made public about what the US treasury is doing with this Wall Street and banking bailout business.

When I was listening to all these talking heads on CNBC, and other business shows on Bloomberg News, CNN News, many economists on the Charlie Rose Show and so on….
It seems to me that most people had not grasped the core of what they are trying to accomplish with this cash infusion into the banking system and companies such as Goldman Sacks, and Morgan Stanley.

This is not about making an investment in the banks for them to start trading and extending credit to each other and to the public. This is a handout to these financial institutions to keep them from total collapse – this is just a coordinated PANIC measure to survive another day.

If you read between the lines about all the other measures that they put in place regarding government guarantees of certain types of bank accounts. All this government intervention is about damage control and damage containment – these guys are throwing a Hail Mary into the banking system and hope that it was enough to save the day.

I am sure that you had not grasped what is really going on.

And yes I have been spending a lot time watching all the latest events on the news and I have been reading and following the news around the clock – and some times I go 2 days without sleeping because there is so much stuff going on around the clock.

I am trying to make sense of what is happening and all its ramifications. Early this morning when I posted the above information I as so tired that I almost could think straight, but I think I have grasped the core of what is happening right now, and I am giving the information for you guys.

People pay a lot of money for this kind of insight and information, and I am providing this type of information right here on the Elite Trader Forum and you don’t have to pay for it – it is free.

Now do you understand why the financial crisis is going to continue and get worse and the stock market is going to move lower?

I hope I have clarified that for you.


*****


October15, 2008

SouthAmerica: I posted the following on this forum on October 6, 2008. That might answer your question about the size of global GDP in relation to the derivatives market.

Financial Derivatives Market Meltdown
http://www.elitetrader.com/vb/showthread.php?s=&postid=2107900&highlight=62+trillion#post2107900

It took exactly 3 years, but finally the current issue of Fortune Magazine dated October 13, 2008 one of the feature stories on this issue is “The $ 55 Trillion Time Bomb” Will credit swaps blow up?

Quoting from this article: “The financial crisis has put a spotlight on the obscure world of credit default swaps – which trade in a vast, unregulated market that most people haven’t heard of and even fewer understand. Will this be the next disaster?

The article has a chart with a label “Is That Trillion With a “T”?”

The chart says: “the amount at stake in the CDS market is greater than the world’s annual economic output.”

1) Credit default swaps (CDS) outstanding is $ 54.6 trillion

2) World GDP is $ 54.3 trillion

3) Value of all stocks on the NYSE + U.S. GDP + U.S. National debt = $ 50.5 trillion

…CDS are no mere artist’s fancy. In just over a decade these privately traded derivatives contracts ballooned from nothing into a $ 54. 6 trillion market. CDS are the fastest- growing major type of financial derivatives. More important, they’ve played a critical role in the unfolding financial crisis. First, by ostensibly providing “insurance” on risky mortgage bonds, they encouraged and enabled reckless behavior during the housing bubble.”If CDS had been taken out of play, companies would’ve said, ‘I can’t get this [risk] off my books,’ “says Michael Greenberger, a University of Maryland law professor and former director of trading and markets at the Commodity Futures Commission. “If they couldn’t keep passing the risk down the line, those guys would’ve been stopped in their tracks. The ultimate assurance for issuing all this stuff was, ‘It’s insured.’”

Second, terror at the potential for a financial Ebola virus radiating out from a failing institution and infecting dozens or hundreds of other companies – all linked to one another by CDS and other instruments – was a major reason that regulators stepped in to bail out Bear Stearns and buy out AIG, whose calamitous descent itself was triggered by losses on its CDS contracts.

And the fear of a CDS catastrophe still haunts the markets. For starters, nobody knows how federal intervention might ripple through this chain of contracts. And meanwhile, as we’ll see, two fundamental aspects of the CDS market – that is unregulated, and that almost nothing is disclosed publicly – may be about to change. That adds even more uncertainty to the equation. “The big problem is that here are all these public companies – banks and corporations – and no one really knows what exposure they’ve got from the CDS contracts, “ says Frank Partnoy, a law professor at the University of San Diego and a former Morgan Stanley derivatives salesman who has been writing about the danger of CDS and their ilk for a decade. “The really scary part is that we don’t have a clue.”

…A CDS is just a contract: The “buyer” plunks down something that resembles a premium, and the “seller” agrees to make a specific payment if a particular event, such as a bond default, occurs.

…Because they’re contracts rather than securities or insurance, CDS are easy to create: Often deals are done in a one-minute phone conversation or an instant message. Many technical aspects of CDS, such as the typical five-year term, have been standardized by the International Swaps and Derivatives Association (ISDA). That only accelerates the process. You strike your deal, fill out some forms, and you’ve got yourself a $ 5 million – or a $ 100 million – contract.

…There is at least one key difference between casino gambling and CDS trading: Gambling has strict government regulation.

..There’s another big difference between trading CDS and casino gambling. When you put $ 10 on black 22, you’re pretty sure the casino will pay off if you win. The CDS market offers no such assurance. One reason the market grew so quickly was that hedge funds poured in, sensing easy money. And not just big, well-established hedge funds but a lot of upstarts. So in some cases, giant financial institutions were counting on collecting money from institutions only slightly more solvent than your average minimart. The danger, of course, is that if a hedge fund suddenly has to pay off a lot of CDS, it will simply go out of business.

…This is not an academic concern. Wachovia and Citigroup are wrangling in court with a $ 50 million hedge fund located in the Channel Islands. The reason: A dispute over two $ 10 million credit default swaps covering some CDOs. The specifics of the spat aren’t important. What’s most revealing is that these massive banks put their faith in a Lilliputian fund (in an inaccessible jurisdiction) that was risking 40 % of its capital for just two CDS. Can anyone imagine that Citi would,say, insure its headquarters building with a thinly capitalized, unregulated, offshore entity?

That’s one element of what’s known as “counterparty risk.” Here’s another: In many cases, you don’t even know who has the other side of your bet. Parties to the contract can, and do, transfer their side of the contract to third parties.

…Settlement has been sloppy, confirms Jamie Cawley of IDX Capital, a firm that brokers trades between big banks…But even as recently as a year ago, Cawley says, so many trades were sitting around unfulfilled that “there were $ 1 trillion worth of swaps that were unsettled among counterparts.”

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Quote from southamerica:

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Jayford: Sorry this off message, but it is truly astounding how much time some people spend researching their own views on the net, and then feel the need to post them.


*******


October 15, 2008

SouthAmerica: Reply to Jayford


I was not researching my own views when I posted the following:
More...

I wasn't hazing you Einstein. I was hazing ZZZZ. Maybe you should read my post again.
 
SouthAmerica guy... I probably would like you in person, I like most people really, and I say demeaning things occasionally, I should not do that and in fact will not do that in the future. That said, it seems like you are always predicting things that are sort of obvious!! Once the news was out, and it was a few years back really, how big the derivatives and subprime problems are, it was fairly certain to me that there could be an 8.0 on the Richter Scale economic event. Martin Armstrong predicted a credit crisis and hyperinflation for this decade, he was once again right, at least regarding the credit crisis part. I have no clue how he does those things but he is a strange guy living out a strange fate anyhow... I read the news and I keep my ear to the ground as well.. A kid with an almanac can find out that US housing was valued in the ten to the thirteenth range. That would mean that if just 1% of it was subprime and the derivatives were leveraged up they way they are that just the subprime alone could be in the range of ten to the twelfth or thirteenth and it could go to zero value. Also knowing how incredibly stupid people are in the US, people with educations, people in positions of governmental leadership, people in banks, etc... regarding how they always think that a rosy scenario will continue as in "real estate will keep going up" I could tell that it could only end in crisis and it could be a big crisis. Think of a 4 place matrix, crisis /no crisis and big /little, you land in the big crisis square... knowing that those derivatives were sold all over the world to other stupid people, also highly educated in finance, then it was easy to see that the crisis would be world wide...

Now, in the US, the way it is playing out is exactly the way every recession plays out. Timing wise, we were ready to start the recession part of the business cycle. There are tent cities, there are defaults on mortgages, there are definitely defaults on credit cards. It's like that every time, and I'm looking at my 6th economic cycle and I have always watched them with awe as they play out...

The US government has only one solution to a crisis, to throw money at it. There is nothing else they can agree on except that. Now the marxists are coming to power in the US. Those are another set of really stupid people, perhaps as stupid as the bankers and other politicians but at least they develop street smarts somewhat. They will continue to throw money at the problem, what else are they going to do, call on all of us to become perfect marxist citizens and just give away all our life's efforts to solve the problem? As they are throwing money they will realize that it's not working very well and will throw more money, the last thing they would ever do is admit they are stupid and were wrong, meanwhile tax revenues will fall because they are stupid and believe that "tax revenues will continue the same". So tax revenues fall, money is being printed so they can have some more to throw and we will have inflation... I don't see any other outcome that is likely... the marxists don't care about old people, too many of them are conservative voters but they do need the black vote, do they ever need that black vote, without it they are out of work permanently, so they will not stop the money printing just because they have inflation, so we will have hyperinflation that will kill off the class of people on fixed incomes but the welfare class will make it.
 
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October 16, 2008

SouthAmerica: Yesterday the Financial Times (UK) had an article about the exposure of Brazil to the current global financial crisis.

There are two things that I want to bring the attention of the readers regarding this article.

First, as I have mentioned on this forum many times before, the Brazilian economy and Brazilians in general are in better shape regarding this current financial crisis than the people from other major countries around the world.

Brazilians are very smart and they usually learn from prior harsh experiences such as the oil shock of the 1970’s that almost bankrupted Brazil – and Brazil did something about it and today the Brazilian economy is isolated from the current oil crisis when the price of oil went out of control. Brazil is fueled with ethanol made from sugar cane.

Brazilians also learned from prior economic financial meltdowns, not only in Brazil but also in countries that border Brazil such as Argentina. The constant economic crisis that we used to have in Brazil was a good training experience for most Brazilians and they learned to be agile and how to adapt to new economic situations in a second.

Brazilians become very conservative regarding their financial affairs and in matters related to being in debt. Interest rates have been very high in Brazil all along preventing Brazilians from becoming indebted such as the people in the United States. Even though the Brazilian economy had a relatively low inflation rate for many years, the interest rate that banks and credit card companies charge in Brazil are so high that they discourage most people from borrowing much money. Credit Card companies charge about 14 percent on our outstanding balance per month and the real annual interest rate it is astronomic.

The second thing that I want to highlight on this article is something that the US mainstream media has not grasped as yet, and also most of the talking heads that appears on CNBC, Bloomberg TV, and CNN news. The Wall Street commentators also it seems to me have not grasped the impact that the nuclear explosion that is underway on the derivatives market and the massive losses that are materializing on all kind of companies financials. The reason most people have not grasped as yet is because we never had a similar situation like that before anywhere in the history of the world.

I want to remind the readers that this is the first time that we had a derivatives market of US$ 62 trillion dollars that was unregulated, in automatic pilot and off balance sheet.

Now when the companies start recognizing their losses from these nuclear instruments of mass destruction they have a severe impact on the company earnings – that means they translate into massive losses that companies have to record on their financials.

When the companies make public these massive losses that also affect in a negative way the price of its stock in the stock market. And when thousands of companies are reporting similar losses and the price of their stock start declining that also pushes the stock market down.

I had mentioned on this thread the massive negative impact that derivatives losses had in one Brazilian company - Sadia. Here on this article we have another example of another Brazilian company losing a lot of money in the derivatives market. And as the article said: “Grupo Votorantim, an industrial conglomerate, said on Friday it had paid R$2.2bn (US$958m) to liquidate positions in currency derivatives. It was the third large company to announce big losses on currency bets and is unlikely to be the last."

Here we have the impact of derivatives in only two companies one reported a derivatives loss of $ 410 million dollars and the other $ 958 million dollars.

I know that these are not big losses by today’s standards when we talk only about billions, but after the US government uses the $ 700 billion dollars bailout down payment people need to realize that there are a massive amount of losses that still are coming. The International Monetary Fund on a recent report said that based on their analysis there is another $ 800 billion in losses on the pipeline for US banks to absorb – and we can assume that the US taxpayer will be the one to fund these banking losses, otherwise the entire Us banking system would collapse, and most likely they have even more losses in the way as the US economy descend into a very deep recession.

Today, as the Japanese stock market continued its current collapse, Japan's Prime Minister Taro Aso said the U.S. government must accelerate steps to bail out financial institutions to help arrest plunging stock values.

Last night, Lou Dobbs mentioned on his TV program the detail of all the pieces that the US government had to bailout so far in 2008, and up to this point the bailouts total is about $ 2.2 trillion dollars, but he also mentioned that by next week AIG is going to need another $ 35 billion to continue the bailout of that company.

The United States stock market is going to continue its current collapse, at least to the end of October, since October is the traditional month when Americans love to have a big stock market crash.

To avoid future stock market crashes in the United States, Americans should consider closing its stock market in the future for entire month of October.


*****


“Brazil's low exposure may dilute turmoil”
By Jonathan Wheatley in São Paulo
Published: October 15, 2008
Financial Times (UK)

At Fábio Marangoni's printing works in São Paulo, pages of glossy magazines emerge almost silently from modern printing presses imported from Germany.

Asked how much he borrowed to install the presses, Mr Marangoni replies with an air of self-satisfaction.

"Nothing," he says. "We used our own capital." His family-owned business will be 50 years old next year. "During that time we've seen the currency go wildly up and down. Our raw materials and machinery are priced in dollars, so we've always taken care to use our own money. It means we have grown more slowly than otherwise. But it's worth it. Look what's happening now."

Mr Marangoni's caution has not shielded him entirely from the chaos in the world's financial system. Credit conditions have tightened and consumers and businesses are putting spending plans on hold.

Nevertheless, Brazil should emerge relatively unscathed. Economists who previously expected growth of between 4.5 and 5.5 per cent next year now expect between 2.5 and 3.5 per cent - by no means bad compared with the global outlook.

Not all companies have been as conservative as Mr Marangoni's. Grupo Votorantim, an industrial conglomerate, said on Friday it had paid R$2.2bn ($958m) to liquidate positions in currency derivatives. It was the third large company to announce big losses on currency bets and is unlikely to be the last.

Local media are talking of "the Brazilian subprime". Some observers expect to see bankruptcies as more exporters are forced to admit that they exposed themselves beyond sensible limits to currency contracts that worked in their favour during the real's long rally from R$3.95 to the US dollar in October 2002 to R$1.56 in May this year but which turned against them during its subsequent fall.

On the whole, however, Brazilian companies are much less indebted than their foreign competitors. The total amount of credit in Brazil was equal to 38 per cent of gross domestic product in August, much less than in many developed countries. where credit reaches multiples of GDP.

Economists and business leaders have long been calling on the government to enact spending reforms to release more money to finance investment and consumption through credit. There has indeed been a consumer-led acceleration of growth in the past few years, as lower interest rates, rising employment and enduring economic stability have encouraged borrowing.

But interest rates are still very high by international standards. Anefac, an association of finance executives, says rates offered to consumers by retail outlets averaged 105 per cent in August, while the average credit card rate was 230 per cent. Companies were paying an average of 60 per cent for working capital. At the international level, too, Brazil is relatively unexposed.

The government has paid down much of its foreign debt and is now a net creditor to the rest of the world. Less than 10 per cent of bank credit is raised overseas. Imports are equal to just 9 per cent of GDP and exports, about 12 per cent.

"Usually it is bad but in the current circumstances very fortunate that Brazil is relatively isolated from the rest of the world," says Nathan Blance of Tendências, a consultancy in São Paulo. "If this crisis had happened 10 years from now we would have been much more leveraged."

Brazil's good fortune is not all down to luck. The banking system is solid following a state-sponsored restructuring in the 1990s, with conservative rules on lending. Risky activities such as short selling are rigorously controlled - although the "Brazilian subprime" suggests tighter rules might have been needed for over-the-counter derivatives trades.

But the central bank has generally been alert to danger and quick to respond. It has repeatedly relaxed Brazil's stringent reserve requirements, allowing banks to lend more of their deposits and provide relief to companies short of credit.

"I'm not saying we won't get hit or even only marginally hit," says Jean-Marc Etlin of Itaú BBA, a São Paulo investment bank.

"But when the dust settles Brazil is going to come out of this better than a
lot of other places."

Source:
http://www.ft.com/cms/s/0/cf1792de-9a51-11dd-bfe2-000077b07658.html?nclick_check=1

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October 16, 2008

SouthAmerica: Yesterday the Financial Times (UK) had an article about the exposure of Brazil to the current global financial crisis.

There are two things that I want to bring the attention of the readers regarding this article.

First, as I have mentioned on this forum many times before, the Brazilian economy and Brazilians in general are in better shape regarding this current financial crisis than the people from other major countries around the world.

Brazilians are very smart and they usually learn from prior harsh experiences such as the oil shock of the 1970’s that almost bankrupted Brazil – and Brazil did something about it and today the Brazilian economy is isolated from the current oil crisis when the price of oil went out of control. Brazil is fueled with ethanol made from sugar cane.

Brazilians also learned from prior economic financial meltdowns, not only in Brazil but also in countries that border Brazil such as Argentina. The constant economic crisis that we used to have in Brazil was a good training experience for most Brazilians and they learned to be agile and how to adapt to new economic situations in a second.

Brazilians become very conservative regarding their financial affairs and in matters related to being in debt. Interest rates have been very high in Brazil all along preventing Brazilians from becoming indebted such as the people in the United States. Even though the Brazilian economy had a relatively low inflation rate for many years, the interest rate that banks and credit card companies charge in Brazil are so high that they discourage most people from borrowing much money. Credit Card companies charge about 14 percent on our outstanding balance per month and the real annual interest rate it is astronomic.

The second thing that I want to highlight on this article is something that the US mainstream media has not grasped as yet, and also most of the talking heads that appears on CNBC, Bloomberg TV, and CNN news. The Wall Street commentators also it seems to me have not grasped the impact that the nuclear explosion that is underway on the derivatives market and the massive losses that are materializing on all kind of companies financials. The reason most people have not grasped as yet is because we never had a similar situation like that before anywhere in the history of the world.

I want to remind the readers that this is the first time that we had a derivatives market of US$ 62 trillion dollars that was unregulated, in automatic pilot and off balance sheet.

Now when the companies start recognizing their losses from these nuclear instruments of mass destruction they have a severe impact on the company earnings – that means they translate into massive losses that companies have to record on their financials.

When the companies make public these massive losses that also affect in a negative way the price of its stock in the stock market. And when thousands of companies are reporting similar losses and the price of their stock start declining that also pushes the stock market down.

I had mentioned on this thread the massive negative impact that derivatives losses had in one Brazilian company - Sadia. Here on this article we have another example of another Brazilian company losing a lot of money in the derivatives market. And as the article said: “Grupo Votorantim, an industrial conglomerate, said on Friday it had paid R$2.2bn (US$958m) to liquidate positions in currency derivatives. It was the third large company to announce big losses on currency bets and is unlikely to be the last."

Here we have the impact of derivatives in only two companies one reported a derivatives loss of $ 410 million dollars and the other $ 958 million dollars.

I know that these are not big losses by today’s standards when we talk only about billions, but after the US government uses the $ 700 billion dollars bailout down payment people need to realize that there are a massive amount of losses that still are coming. The International Monetary Fund on a recent report said that based on their analysis there is another $ 800 billion in losses on the pipeline for US banks to absorb – and we can assume that the US taxpayer will be the one to fund these banking losses, otherwise the entire Us banking system would collapse, and most likely they have even more losses in the way as the US economy descend into a very deep recession.

Today, as the Japanese stock market continued its current collapse, Japan's Prime Minister Taro Aso said the U.S. government must accelerate steps to bail out financial institutions to help arrest plunging stock values.

Last night, Lou Dobbs mentioned on his TV program the detail of all the pieces that the US government had to bailout so far in 2008, and up to this point the bailouts total is about $ 2.2 trillion dollars, but he also mentioned that by next week AIG is going to need another $ 35 billion to continue the bailout of that company.

The United States stock market is going to continue its current collapse, at least to the end of October, since October is the traditional month when Americans love to have a big stock market crash.

To avoid future stock market crashes in the United States, Americans should consider closing its stock market in the future for entire month of October.


*****


“Brazil's low exposure may dilute turmoil”
By Jonathan Wheatley in São Paulo
Published: October 15, 2008
Financial Times (UK)

At Fábio Marangoni's printing works in São Paulo, pages of glossy magazines emerge almost silently from modern printing presses imported from Germany.

Asked how much he borrowed to install the presses, Mr Marangoni replies with an air of self-satisfaction.

"Nothing," he says. "We used our own capital." His family-owned business will be 50 years old next year. "During that time we've seen the currency go wildly up and down. Our raw materials and machinery are priced in dollars, so we've always taken care to use our own money. It means we have grown more slowly than otherwise. But it's worth it. Look what's happening now."

Mr Marangoni's caution has not shielded him entirely from the chaos in the world's financial system. Credit conditions have tightened and consumers and businesses are putting spending plans on hold.

Nevertheless, Brazil should emerge relatively unscathed. Economists who previously expected growth of between 4.5 and 5.5 per cent next year now expect between 2.5 and 3.5 per cent - by no means bad compared with the global outlook.

Not all companies have been as conservative as Mr Marangoni's. Grupo Votorantim, an industrial conglomerate, said on Friday it had paid R$2.2bn ($958m) to liquidate positions in currency derivatives. It was the third large company to announce big losses on currency bets and is unlikely to be the last.

Local media are talking of "the Brazilian subprime". Some observers expect to see bankruptcies as more exporters are forced to admit that they exposed themselves beyond sensible limits to currency contracts that worked in their favour during the real's long rally from R$3.95 to the US dollar in October 2002 to R$1.56 in May this year but which turned against them during its subsequent fall.

On the whole, however, Brazilian companies are much less indebted than their foreign competitors. The total amount of credit in Brazil was equal to 38 per cent of gross domestic product in August, much less than in many developed countries. where credit reaches multiples of GDP.

Economists and business leaders have long been calling on the government to enact spending reforms to release more money to finance investment and consumption through credit. There has indeed been a consumer-led acceleration of growth in the past few years, as lower interest rates, rising employment and enduring economic stability have encouraged borrowing.

But interest rates are still very high by international standards. Anefac, an association of finance executives, says rates offered to consumers by retail outlets averaged 105 per cent in August, while the average credit card rate was 230 per cent. Companies were paying an average of 60 per cent for working capital. At the international level, too, Brazil is relatively unexposed.

The government has paid down much of its foreign debt and is now a net creditor to the rest of the world. Less than 10 per cent of bank credit is raised overseas. Imports are equal to just 9 per cent of GDP and exports, about 12 per cent.

"Usually it is bad but in the current circumstances very fortunate that Brazil is relatively isolated from the rest of the world," says Nathan Blance of Tendências, a consultancy in São Paulo. "If this crisis had happened 10 years from now we would have been much more leveraged."

Brazil's good fortune is not all down to luck. The banking system is solid following a state-sponsored restructuring in the 1990s, with conservative rules on lending. Risky activities such as short selling are rigorously controlled - although the "Brazilian subprime" suggests tighter rules might have been needed for over-the-counter derivatives trades.

But the central bank has generally been alert to danger and quick to respond. It has repeatedly relaxed Brazil's stringent reserve requirements, allowing banks to lend more of their deposits and provide relief to companies short of credit.

"I'm not saying we won't get hit or even only marginally hit," says Jean-Marc Etlin of Itaú BBA, a São Paulo investment bank.

"But when the dust settles Brazil is going to come out of this better than a
lot of other places."
.
 
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October 16, 2008

SouthAmerica: These two front page articles published by The New York Times gives a good summary about the severity of the recession that just started in the United States. In reality this recession has started some time last year, but it does not matter, what counts now is how deep and severe this recession is going to be.

What makes the severity of this very deep recession get even worse is the fact that people on Wall Street and many corporations uses on their estimates the Fairy Tales information published by the United States government regarding unemployment and the US GDP monthly and annual figures.

If people used an unemployment rate closer to 15 percent and a GDP of around $ 10 trillion dollars – a conservative US GDP probably should be around $ 9 trillion dollars after you clean that number for the wishful thinking information that they add to that figure; mainly now that the US economy is imploding because of deleveraging.

Illegal immigrants are leaving this country by the millions with severe economic consequences for the communities that they leave behind.

The median household made $50,200 last year, slightly less than the $50,600 that the equivalent household earned in 2000, according to the Census Bureau. And the median household income is estimated to continue to decline for years to come

Real estate prices also will continue to decline at least by another 30 percent, and today’s real estate prices still are away above the prices from the year 2000.

The exodus of legal and illegal immigrants also will accelerate since it will be very hard to find a job in the United States.

The US government balance sheet is approaching “JUNK” status as the US government already with $ 10 trillion dollars in cumulative outstanding debt, plus another $ 2.5 trillion dollars related to the bailouts of the current financial crisis, and on top of that the US government is giving all kinds of guarantees to everything in sight, plus in the coming years we are looking at US government annual deficits of approaching the trillion dollar per year – when you add all this information you have the picture of a government in bankruptcy.

When you consider the “Mountain Everest” pile of debt associated to the US government, and all the guarantees that the US government have been extending to all kinds of gamblers that put the US economy in this critical condition, and you know that these fast operators are going to gamble all the money away that the US government gave to them as direct funding or in the form of guarantees. This entire story has a plot of a major tragedy in the making.

I have not mentioned all the other US government obligations associated to the social programs that are going to explode because of the Baby Boom generation.

And the economy that is supposed to carry the weight of this massive debt is a sick economy that is on life support, and imploding very fast because of deleveraging.

The US economy will have a wave of bank bankruptcies, and also bankruptcies in other areas of the US economy.

When the smart money realizes that the US economy looks like the Titanic, after the Titanic had hit the iceberg, then the US dollar is going to decline very fast as people get out of the US dollar to a safer currency.

Of course things can get a lot worse than that and in that case it is called a Great Depression.


*****


“World Markets Fall as Investors Weigh Relentless Trouble”
By PETER S. GOODMAN
Published: October 16, 2008
The New York Times

… Investors are recognizing that the financial crisis is not the fundamental problem. It has merely amplified economic ailments that are now intensifying: vanishing paychecks, falling home prices and diminished spending. And there is no relief in sight.

Wednesday’s rout began in the morning with the latest evidence of the nation’s economic deterioration — reports showing that retail spending slipped in September and broader signs of a pullback among suddenly thrifty American consumers.

…“People have focused so much on the immediate financial crisis that they haven’t realized how much the real economy is going down, largely independently,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “I don’t think there’s a way we can get out of this without a full-fledged recession and a lot of people losing their jobs. All we can really talk about is ameliorating it, making sure the people who are hit have support.”

… On Monday, as the Dow posted its fifth-largest one-day percentage gain in history, some investors found quantifiable proof that the crisis was solved. Yet an unpalatable historical detail complicated that idea: The four previous largest percentage gains occurred from October 1929 to March 1933, in the early days of the Depression.

… In Washington, and on the campaign trail, conversation centers on putting together a second round of so-called government stimulus spending, following the $152 billion unleashed this year via tax rebates to households and tax cuts for businesses.

Democrats in the House are drafting a roughly $150 billion package of spending measures aimed at spurring the economy, according to senior aides, including aid for states, large-scale construction projects to generate jobs and the expansion of unemployment benefits. Senator Barack Obama of Illinois, the Democratic presidential nominee, is urging $175 billion worth of relief measures.

…“The states are taking steps right now that are deepening the recession, through no fault of their own,” said Jared Bernstein, senior economist at the Economic Policy Institute in Washington. “They’re forced to either raise taxes or cut services. Neither of those are where we need to be right now.”

The crisis on Wall Street has sown fears that banks would hold tight to their dollars and starve the economy of capital, preventing businesses from securing finances to hire people and expand.

… But regardless of Wall Street’s travails, a broader set of difficulties has been taking money out of the economy, putting the squeeze on American households and businesses.

The economy has lost 760,000 jobs since the beginning of the year, and millions of workers have seen their hours cut, shrinking paychecks just as plunging real estate prices prevent households from borrowing against the value of their homes.

… In short, American spending power is declining, and this has become a downward spiral: As wages shrink, workers spend less, and that limits demand for workers at the businesses that once captured their dollars.

Many economists now assume that unemployment, currently at 6.1 percent, will climb to 9 percent by the end of next year. Some now envision it could reach 10 percent — a level not seen in 25 years.


*****


“Next Victim of Turmoil May Be Your Salary”
By DAVID LEONHARDT
Published: October 15, 2008
The New York Times

It is possible, for the first time in weeks, to imagine that the credit crisis may be about to ease. But one of the big lessons of the last year has been not to underestimate the severity of the economy’s problems. Those problems are not just about housing or Wall Street.

What, then, will the next stage of the downturn be about? It is likely to revolve around the worst slump in worker pay since — you knew this was coming — the Great Depression.

… Income for the median household — the one in the dead middle of the income distribution — will probably be lower in 2010 than it was, amazingly enough, a full decade earlier. That hasn’t happened since the 1930s.

… What will make this recession different, no matter how deep or shallow it is, is that it’s following an expansion in which most families received little or no raise. The median household made $50,200 last year, slightly less than the $50,600 that the equivalent household earned in 2000, according to the Census Bureau. That’s the first time on record that income failed to set a new record in an economic expansion.

… The bigger factors are probably some combination of the following: new technologies, global trade, slowing gains in educational attainment, the rise of single-parent families, the continued decline in unionization and the sharp increase in inequality, which has concentrated income gains at the top of the ladder.

… Last week, Bank of America reported that its losses on consumer credit had tripled over the last year.

In all, banks around the world have acknowledged $600 billion in losses as part of the financial crisis. The latest International Monetary Fund analysis suggests they still have another $800 billion in losses ahead of them — and a
good chunk of them will occur in this country.

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October 26, 2008

SouthAmerica: I wrote a lot of pieces against the Wall Street Bailout plan that the US Treasury was trying to get approved in Congress, but finally Hank Paulson was able to get his blank check when Congress approved TARP (Treasury Asset Racket Predisposition) or (Treasury American Reward Program)

The disappearance of all five major American investment banks – either because they went bankrupt or had to be absorbed by a major bank to avoid their own demise or even Goldman Sachs and Morgan Stanley that transformed themselves into bank holding companies to also avoid their sudden death they gives us strong evidence that what used to be known as Wall Street is in the process of dying a slow death.

Goldman Sachs and Morgan Stanley became bank holding companies, and immediately they starting playing a new game as they found a new source of funds with deep pockets – the US government.

As soon as these companies became bank holding companies a new problem arose and in a few quick steps the US government increased deposit insurance from $ 100,000 limit to the new no limit deposit insurance on any bank account.

If you think Wall Street companies destroyed the financial system in the United States with their gambling in sub-prime garbage and the unregulated derivatives weapons of mass destruction then just wait and see what they are going to do now that they have all kinds of guarantees from the US government and the new found funding source (US government) for their gambling activities. I will not be surprised if this time around they break the bank of the US government.

Hank Paulson and Ben Bernanke they just overreact when is already too late and the house is burning into the ground. They can't foresee things that are obvious to most people even to save their own lives.

Things have to get a lot worse and be at the edge of the abyss before these guys grasp what is happening. Basically you don’t have to be a rocket scientist to figure out that the soon they nationalize the last 3 automakers in the US – Ford, GM, and Chrysler – the better would be to save the auto industry in the United States.

From now on these 3 automakers are just going to be in a dying mode and they are going to lose further market share to the other automakers from around the world, because people are going to stop buying any American cars since they don’t know if these automaker will be around in a few years.

As these American automakers die a slow death and start going out of business that will send a ripple effect through out the US economy

The US government first nationalized the real estate industry, then the banking industry, the Money Market Funds Industry, the insurance industry, and now the automakers and the airlines are not far behind.

At least one thing is becoming very clear to me about how the new financial bailout system works: by collusion, conflict of interest, greed, and grab what you can as long as you can get away with.


*****


"Uses for $700 billion bailout money ever shifting"
Associated Press - Saturday October 25, 2008
By John Dunbar, Associated Press Writer

Treasury tacks on uses for $700 billion bailout money with shifting economic winds

WASHINGTON (AP) -- First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.

Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.

But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.

Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.

As the crisis worsens, the government's reaction keeps changing. Lawmakers in both parties are starting to gripe that the bailout is turning out to be far different from what the Bush administration sold to Congress.

In buying equity stakes in banks, the Treasury has "deviated significantly from its original course," says Alabama Sen. Richard Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee. "We need to examine closely the reason for this change," said Shelby, who opposed the bailout.

The centerpiece of the Emergency Economic Stabilization Act is the "troubled asset relief program," or TARP for short. Critics note that tarps are used to cover things up. The money was to be devoted to buying "toxic" mortgage-backed securities whose value has fallen in lockstep with home prices.

But once European governments said they were going into the banking business, Treasury Secretary Henry Paulson followed suit and diverted $250 billion to buy stock in healthy banks to spur lending.

Bank executives hinted they might instead use it for acquisitions. Sen. Christopher Dodd, chairman of the Senate banking committee, said this development was "beyond troubling."

Sure enough, a day after Dodd, D-Conn., made the comment, the government confirmed that PNC Financial Services Group Inc. was approved to receive $7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

"Although there will be some consolidation, that's not the driver behind this program," Paulson recently told PBS talk show host Charlie Rose.

"The driver is to have our healthy banks be well-capitalized so that they can play the role they need to play for our country right now."

Other planned uses of the bailout money have lawmakers protesting, although it is only fair to note there is nothing in the law that they just wrote to prevent those uses.

Sen. Charles Schumer, D-N.Y. questioned allowing banks that accept bailout bucks to continue paying dividends on their common stock.

"There are far better uses of taxpayer dollars than continuing dividend payments to shareholders," he said.

Schumer, whose constituents include Wall Street bankers, said he also fears that they might stuff the money "under the proverbial mattress" rather than make loans.

Neel Kashkari, head of the Treasury's financial stability program, told Dodd's committee this past week that there are few strings attached to the capital-infusion program because too many rules would discourage financial institutions from participating.

As the bank plan has become a priority, the effort to buy troubled assets has receded from the headlines. Potential conflicts of interest pose all kinds of problems in finding qualified companies to manage that program.

"Firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP or represent clients who hold troubled assets," Kashkari said.

The challenge was made plain when the Treasury hired the Bank of New York Mellon Corp. as "custodian" of the troubled assets purchase program. The bank will conduct "reverse auctions" to buy the toxic securities on behalf of the Treasury. The lower the price they set, the better chance sellers have of getting rid of the devalued securities.

On the same day it hired Mellon, the Treasury also picked the company to receive a $3 billion investment as part of the capital-infusion program. The same bank hired to help manage part of the economic rescue plan became a beneficiary of it.

With the Nov. 4 election nearing, lawmakers decided it was important to remind the government officials running the bailout program about parts of the law aimed at helping distressed homeowners by offering federal guarantees to mortgages renegotiated down to lower monthly payments.

"The key to our nation's economic recovery is the recovery of the housing market," Dodd said. "And the key to recovery of the housing market is reducing foreclosures."

Sheila Bair, who heads the Federal Deposit Insurance Corp., responded that her agency is working "closely and creatively" with Treasury officials to "realize the potential benefits of this authority."

Treasury: http://www.treasury.gov/

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Do you ACTUALLY trade any of your ideas ?

l somewhat get the impression that you are of academic pursuit rather than meaningful market participation.....
 
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