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alstry (36.32)

A Financial COLLAPSE pretty much certain!!!!!

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August 07, 2008 – Comments (9)

Think about this for a second....the assets in our banks and insurance companies is basically debt.  You loan the banks money or pay insurance premiums and they loan money to individuals, businesses, commerical real estate projects, and municipalities.

Our deposits in banks is about $5 Trillion dollars....but the banks have loaned  out much more than $5 Trillion...many times more than $5 Trillion so if only a small percantage of the loans default.....all of our savings(loans to the banks) are wiped out!!!!!!

For those of you that say not to worry, I am insured......that may be so, but remember, the total FDIC fund is about $50 Billion......$50 Billion protecting $5 Trillion...Hmmmmmmmmmmmmmmmmm???????

Not only that....a HUGE percentage of the $5 Trillion in deposits is not insured such as large payroll deposits for corporations and municipalities and states parking their tax revenues.

Now a growing number of the loans on the banks books are starting to default.  The defaults are growing in frequency and size.  First is was Subprime Debt....that cost the system about $500 Billion(so much for Big Ben telling us that was a $25 Billion dollar issue).

Now the defaults are growing rapidly in PRIME mortgages(about 10X greater in size than subprime), exploding in Commercial Real Estate, spreading to municipal debt, and Billion dollar corporate bankruptcies are growing at rates not seen in years!!!!!!!!!

In the end, the value of the assets our our banks and insurance companies is imploding.  Here are a few examples today....one of a bank who has been ordered to stop taking deposits and another is from a Casino on the strip that has been forclosed(weren't Casino's supposed to be recession proof....maybe not depression proof):

BANK ORDERED TO STOP ACCEPTING DEPOSITS:

[F]ederal regulators have ordered Vineyard National Bank of Corona to stop accepting so-called hot-money deposits ...

Vineyard has nearly $2 billion in deposits, with branches in Orange, Los Angeles, Marin, Riverside, San Bernardino and San Diego counties. ... Vineyard had nearly $2 billion in loans as of June 30, of which 48% were to home builders and developers.

In its filing with regulators Monday, Vineyard estimated that about $660 million of its nearly $2 billion in deposits are above those standard insured limits.

FORECLOSED CASINO ON THE STRIP:

Deutsche Bank AG will foreclose on the $3.5 billion Cosmopolitan Resort & Casino in Las Vegas after developer Ian Bruce Eichner defaulted on a $760 million loan ... Deutsche Bank ... is talking with companies including MGM Mirage and Hilton Hotels Corp. to help run its 80,000-square-foot casino ...

Sagging commercial real estate prices ... forced banks to hold projects until prices rise or sell at a loss. The Frankfurt-based bank would oversee an 8.5-acre development with two high-rise towers, three wedding chapels, a sandy beach overlooking the Las Vegas Strip and a deck featuring ``European-style bathing.''

http://www.calculatedrisk.blogspot.com/

We know in the last few weeks, the almost $5 Billion dollar Eschelon project shut down mid construction on the strip as well, three department stores chains filed BK, WCI filed BK, a slew of private builders filed BK, spreads on muni bonds are reaching record levels.ect..ect...ect.....

All of the above collectively likely owed banks, insurance companies, and pension funds Billions and Billions and Billions.....one famous scientist would be proud!!!!!! 

Let's think about this for a second....Over $25 Trillion of Consumer, Corporate, and State and Municiplal Debt(not including Federal Debt) and only $5 Trillion in deposits.

And our government officals think $100 Billion dollar stimulous package is going to do something?????  That is not even close to one month's worth of loans during the credit bubble.  If we sent $100 Billion dollars per month EVERY MONTH to Americans....it would not be enough to service the existing debt.....even if every dime of cash in savings accounts were applied to paying down debt first!!!!!!!!

The reason debt was being serviced in the past few years is new credit was being taken out to service old debt.  Now credit is being cut off from almost every angle......as a result there is simply not enough revenues to service debt and the defaults are growing every month.

You can do the math....it is not too difficult.  Now the question is how long will Wall Street and our Government be able to deceive the people before the truth be told???????????

In the mean time.....we have just started the cycle of defaults......there are those out there that fantasize that our government will somehow print its way out of this.......just one small problem.

You can't print your way out of insolvency....only illiquidity.  Each time a dollar is printed......a dollar of debt is created and it requires a buyer to purchase the debt.....the buyers of government debt are very sophisticated and know when the printing presses are running.......at this point, debt is defaulting at a much faster rate than money is being printed so our dollar is relatively holding its value and interest rates are in check..........but if the government started printing faster than defaulting debt......our creditors would go nuts and interest rates would skyrocket.  Rising interest rates without rising wages would force America into starvation.....the Fed knows this and has chosen to keep the presses in check.

As more and more debt defaults, more and more assets of our financial institutions will implode resulting in more and more crashes.   The irony is it has only just begun and CNBC talks about the bottom for the last year.....amazing.

CA is the perfect example of the next major multi billion dollar default....it revenues now are simply too low to pay its workers and debt at the same time....if it fires its workers its revenues are going to fall further.......now its Governator refuses to sign bills unless a budget is submitted......the problem is that it is not possible to balance CA's budget even if you fired all the workers.....in the mean time....CA's legislative process is basically shut down and little is being said.....for now.  Just wait until the cities and county issues start getting added in to the equation.

And its not just CA....it is dozens of other states and growing rapidly.

In the end, we are ending the BIGGEST CREDIT BUBBLE in human history.....expect the unwind to be the BIGGEST DEBT IMPLOSION in human history.......it ain't too complicated.

9 Comments – Post Your Own

#1) On August 07, 2008 at 9:52 PM, alstry (36.32) wrote:

So Much for a Grain Shortage???????

 

 Australian Wheat Output May Exceed Government Forecast on Rain Wheat production in Australia, forecast to be the world's third-largest exporter, may exceed a government prediction after rainfall in July and farmers sowed a record crop, ProFarmer Australia said.

India May Export Record Soybean Meal as Rains Spur Planting India, Asia's biggest supplier of soybean meal, may ship a record quantity next year after rain in the biggest growing regions encouraged increased planting, a producers' group said.

The could have an interesting effect on rising food prices.

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#2) On August 07, 2008 at 10:06 PM, alstry (36.32) wrote:

Whoops!!!!!

IN THE END......WE WILL ALL KNOW THE WHOLE THING WAS A PONZI SCHEME

When Americans(and many people in the world for that matter) borrow Trillions and Trillions of dollars for assets only worth a fraction of that amount......a collapse is a certainty...the only question is how long can you deceive the people and when they find out......look out below........

“Newport Beach-based MKA Capital Group Advisors LLC has been running a Ponzi scheme on its investors, according to a Newport Beach couple suing the company.”

“According to the lawsuit, filed in Orange County Superior Court July 28, MKA Capital Group, a real estate investment-management firm worth between $400 million and $500 million, has been using new investors’ money to cover losses suffered by the group’s ‘Opportunity Fund’ investors. The Opportunity Fund is a fund created to make loans to real estate developers in hopes of turning a profit.”

“When Newport Beach couple John and Cynthia Gates invested $3 million into the Opportunity Fund in July 2007 they say they were promised a 12% annual profit on that investment and that there was virtually no risk of losing money, their attorney Gary Steinberg said. Instead, for whatever reason, their money was used to cover losses earlier investors had suffered, the lawsuit claims.”

http://www.dailypilot.com/articles/2008/08/07/topstory/dpt-mkacapitallawsuit080308.txt

Never before has so many borrowed so much.....now the banks want their money back......so will the depositors.

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#3) On August 07, 2008 at 11:30 PM, nuf2bdangrus (< 20) wrote:

And that is deflationary...which is why I'm watching my gold positions carefully.  Me thinks they may fall.

 

Deflation--falling prices as a shortage of capital is created by declining assett prices and deleveraging.


The system works when everybody has faith in it...and it's beautifully designed.  IT has worked well.

 

Here's the problem.  When economies correct, i.e. recession, the cowards and the CB's and politicians are afraid to tell the truth, or face the truth, that capitalism misallocates capital just as socialism does, the difference is capitalism is supposed to correct the missalocation of capital by punishment-bankruptcy.

 

We allow the little people to go bankrupt,but the A list fat cats are exempt. We bail them out.   "too big to fail".  We talk about moral hazard, just this time is an exception.

 

Thus our system becomes corrupted when the CB's abuse the faith of the FIAT currency to try to ease the pain,by running the presses (creating $ out of thin air) and  thereby delaying the inevitable, and also making it worse when it arrives.

 

We have arrived at the point where further net credit creation is unable to exist, because there are no worthy borrowers, and those that are find it difficult, because so much was lent to unworthy borrowers.  And the GDP growth on any new credit creation is of diminishing return.

 

The Fed knows nothing other than to pump $ into the system, that's the way they're trained.  Academics, intelligent, and no common sense. The trouble with being born and raised in the club.  They've never seen outside the walls other than on TV .

 

Banks won't lend, they're investing their $ in treasuries for a safe return, and building their balance sheets as they try to sort out their loan book.  In know, because I work for one, one of the top 5.  We are NOT lending $.  Nl loan sales.  I used to lend a million a month.  I haven't lent a million yet this year.  If the best  customer asks, and they qualify, yes, but other than that, no cash.  Sorry.  We'll takeyour deposit though.  We really need those.

 Now if banks aren't lending, and credit is scarce, then the velocity of money slows down, and credit and economic activity contracts. The Fed has pumped a Trillion dollars into the economy, but there are more trillions dissapearing from the economy, and their balance sheet is limited.

 

45 Trillion in derivatives.  The time bomb.   tick tick tick 

Now, as people lose faith in the system, they also either default on their debts, or refuse to accumulate more.   They alsolose faith in the system.  And thus they hoard.  Hoarding is a central bankers worst nightmare.  But it is the ultimate effect of their causative abuse of the dollar.

 Since the system is designed to be just liquid enough for overnight cash needs, the system cannot handle a "run", i.e. when people hoard cash.  The government has made it harder and harder to have cash anyway....as we move to a cashless society, all in the name of efficiency.  Works well when not abused. It hasbeen terribly abused.

 

People will always need a store of value The ultimate abuse is Zimbabwe, where corruption of the presses has destroyed a society.  FIAT currencies all end the same way.  They fail.

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#4) On August 07, 2008 at 11:34 PM, jahbu (85.23) wrote:

Alstry I dig your post man, but most of us see the truth as you do.  What I want to know and probably many others is What is next?  Some say this is deflationary and if that is true then the dollar will buy much more.  Others (like me) say inflation.  I guess what I am trying to say,  what do you believe is next?  Something has to give.  Shorting everything, even if they go to $0 only makes you double your money.  What good is double your money if its purchasing power is 1/2 or even worse?

Are you suggesting

Shorting stocks? Hiding cash under the bed?   or Buying gold? Oil?  Foreign currency? 

Thanks,

Jahbu

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#5) On August 08, 2008 at 12:14 AM, alstry (36.32) wrote:

Jahbu,

Quite frankly no one really knows what to do.....the only thing I have a strong feeling about is that there will be lots and lots of bankruptcies whether there is inflation or deflation......and in the end bankruptcy means loss of equity.

Hence, I try to keep it simple.....my IQ is challenged on the complicated stuff.

Right now, more and more things are going bankrupt....as they go bankrupt, they kill the equity holders and stiff the creditors.  The creditors are banks, insurance companies and pension plans for the bigger deals.

Thus, a big bankruptcy could cause the bankruptcy of a bank if it has enough exposure and that bankruptcy could cause the bankrutcy of its depositors if they have a significant amount of their capital in the bank that is uninsured.  Not only that, the bankruptcy can cause the bankruptcy of employees and vendors causing even more bankrutpcies.  Sorta like throwing a firecracker in a munitions shed....the firecracker may not be too big an explosion, but the chain reaction could be enormous.

I stay away from  the deritive issue because it is too depressing to think about the consequences and my brain simply can't get to that level in math.

As far as inflation or deflation....it really doesn't matter......but right now my bias is to deflation.

As far as where things are going...that is where it gets really scary...if people can't afford basic needs and governments can't afford to spend....that is when systematic changes take place......the irony the populous demands the changes simply to acquire their basic needs....

the government begins to demand more and more from those that have to satisfy those that don't to prevent anarchy....when enough don't have.....government takes everything from those that do just to keep a minimum level of peace.

Think about that for a while....some people call it socialism, others facism, and more call it communism......just different prefixes on isms.

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#6) On August 08, 2008 at 3:04 AM, DemonDoug (32.21) wrote:

nuf, you have it kind of backwards my friend.  a debt deflation most likely will mean significant inflation in the production-consumption economy, and gold, as a hard asset, is part of that p/c economy.  Real estate, btw, is not part of the p/c economy.

al, the government can resort to one final inflationary tactic, and that is to literally print or digitally print MZM.  They will never allow a true deflation, it is not politically tenable.

Nuf, you are also underestimating derivatives.  Credit default swaps alone are about 60-70T.  Total derivatives are estimated around 400T, which is something like 10 times the entire worlds GDP.

"It is better to be a dog in peaceful times than be a man in a chaotic period."  - Chinese proverb most commonly mistaken for "may you live in interestng times"

One question for you Al: Bill Gross from Pimpco says that the budget deficit for the federal government for next year is possibly going to breach the 1 trillion mark.  What do you think of that?  (my response: an inflationary ouch!)

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#7) On August 08, 2008 at 7:34 AM, alstry (36.32) wrote:

Demon,

I think Gross' estimate is spot on.  Once you factor financials not paying taxes, same with autos and airilines, and slowdown in other businesses, plus NOL carrybacks, we could exceed $1.5 Trillion.

But I think a whole lot more than $1.5 Trillion of debt will default.

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#8) On August 08, 2008 at 8:23 AM, alstry (36.32) wrote:

Demon,

More evidence of a "DRAMATIC" slowdown in recent months:

Business conditions have deteriorated dramatically over the past several months. Higher gasoline prices, weakness in the housing industry and a slumping market for trucks and SUVs made negotiations increasingly difficult. These factors, coupled with circumstances unique to this deal, all contributed to the end of negotiations toward a final agreement.

"We're disappointed, but due to a variety of factors, the timing was not right to complete this particular deal," said Bill Connelly, CEO, Automotive Components Holdings. "Johnson Controls is, and will remain, a valued partner of Ford and ACH."

http://biz.yahoo.com/prnews/080808/clf029.html?.v=101

The above deals with the cancellation of the sale of a plant due to deteriorating sales conditions.

Business is slowing and the rate of slowing is increasing.  Not to be opposite you just to be opposiste, but  it  just doesn't seem like inflation.

Grain might be a good example of this if supply keeps increasing and prices fall.  We shall see.

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#9) On August 08, 2008 at 4:53 PM, DemonDoug (32.21) wrote:

Al, you're still not getting the difference between consumer inflation and asset deflation.  They are not the same thing.  This is what I've been trying to tell you, and the evidence is there (recent drops in oil and comomdities notwithstanding).

In a debt deflation, there are two options, default on debt and monetary inflation.  As you can see with FNM and FRE, the "let the creditors eat their own puke" option is not the one being taken, it's "let's keep the printing presses open so everyone gets paid except the american taxpaying worker."

The dollar will continue it's precipitous fall after the olympics are over, and we will see oil at 150 and gold over 1000/oz as the dollar continues to slide into oblivion.

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