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Financial Mini Rally Over



March 26, 2008 – Comments (11)

People have been rushing into financials just in time for the next series of down grades and cut earnings.  Looking for bottoms in this kind of uncertainty seem highly risky.  Of course, the traders will be out already...

The Fed is a Structured Investment Vehicle (SIV)?

Lets recap how the Fed managed this amazing transformation from so-called Central Bank to an off balance sheet, Distressed Loan Hedge Fund.

Upon reading this, how can these guys have objectivity for the people and a nation when their influence is so wall street? 

The hoarding by banks continues.   When banks stop hoarding is a sign that things are functioning normally again.  I think the banks hoarding is one of the bigger statements of the degree of the crisis.  No one knows where the next financial bomb will drop.

Yves makes a very good statement to counter the bulls out there:


I look at the ability to pay of the underlying borrowers, and the prospects are pretty poor independent of a recession. We have a large number of subprime ARM resets this year, followed by a not-quite-so-high but still pretty impressive level of Alt-A and option ARM resets through 2011. Many of these borrowers simply cannot afford the payments once the mortgages reset, and marginal borrowers are far more willing to walk than in the past if they have little or negative equity in the house. So the credit markets face a continuing deterioration of the underlying paper.

The housing market will look like a slow-draining bathtub for at least the next couple of years, with defaults and foreclosures likely to exceed new purchases. The unsold inventory will take a long time to recede to normal levels. And until the bottom in housing is visible, no one can be certain how bad the credit losses will be. We are so far outside any historical patterns that forecasts have become exercises in creative writing.

This summarizes my primary reasoning for how bearish on the markets I am.  Certainly my personal experience is to have been harder hit by high housing costs and a dismal job market from living in Vancouver.  But, the market wasn't as bad as it is now when I first got into the housing market.  My estimates are that affordability would have been around 4, maybe a bit higher, and that would have been for maybe 5% of the population of Canada, with a smaller subset like myself entering the market at that time.  The affordability index for the US at the peak got to 3.9, for the entire freaking country.  Sure, you can break it up and some areas were fine, but it simply means a huge number of people will be struggling.

Add to that that so many increased their debt with the home equity loans.  So, it isn't just the new home buyers of the period, but a huge number played the "I want and I deserve this now" game so even after the foreclosures there is going to be a lot of people who are debt slaves and do very little to stimulate the economy.  I look into how managing mortgage debt played out in my life and I can't see any optimism what-so-ever.  I'm a teacher, my husband is a lawyer and we were suppose have the option of being Consumers-R-Us, but the economy would halt to almost a stand still based on our spending.  Well, that is not completely true, we did have a beautiful home.  I just don't see how mortgage repayment stimulates the economy, which is what we mostly did.  And instead of this lack of buying power playing out in a tiny micro community, it is playing out wide-spread in a big nation. 

Those corporate balance sheets are going to decline and they expansion into new markets isn't going to save them because they've done an enormous amount of expansion already.

Austrian economics makes the most sense to me when I apply the theory to my own experience.  For example, 3 times we've made purchases ($1-3k) that give you a year or so to pay with zero interest.  So, I'm not a fool, I'm paying 6% on debt, I'll defer paying for it.  Well, a year later it has always hurt the finances in terms of then looking for what to cut or what to delay.  Austrian economics says debt is borrowing from your future economy, and in my household balance sheet that zero interest debt coming due has always caused looking to cut the budget somehow.  Mortgages are the same except the effects on spending aren't so apparent.  Well, the US has been on a spending spree with home equity loans and now the household balance sheet cuts begin, but unlike my $1-3k purchases, with mortgages they become a way of life because that debt doesn't go away short term.

I think yesterday I touched on a link about Medicare, Financial Armageddon has a link saying it reaches its legal limit by 2014. I'm going out on a limb here, but no one talks about the resentment that has to develop in younger people and the effects that will have on the safety of seniors, especially with the social conditioning of compliance with social standards declines as education is being cannibalized.  Being in my mid 40s I see myself in the age group that is going to live through the biggest backlash against seniors by the time I get there if we don't stop this grossly unjust socialized transference of wealth from youth to age and start changing policy to it is fair and sustainable for all.

11 Comments – Post Your Own

#1) On March 26, 2008 at 11:02 AM, Zanibel17 (93.36) wrote:


With regard to the upcoming generational backlash, I think you've touched on a very important point that few are willing to discuss.

The fact is that the US debt is $9 Trillion+.  The expectation has to be that our children will carry a very, very heavy financial burden brought on by the irresponsible spending by the baby-boomer generation who are now all in positions of power on Wall Street and in our nation's capitol.

Boomers have got to be willing to accept some responsibility for what they have wrought, either by delaying the retirement age, reducing some portion of what they were due from Social Security, or taxes strictly on that age group.  To ask GenXers like myself of our children to bear that responsibility alone will cause major societal upheaval over the next 25 years.

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#2) On March 26, 2008 at 11:16 AM, floridabuilder2 (98.22) wrote:

i would never vote for obama, but i think we will see a president soon in the United States that will get the younger generations to revolt...  The AARP has a stranglehold on politics.... at some point young people need to stop being so disengaged and counter the special interests that are bankrupting the US....  I cannot support a system like socialist security and medicare when there isn't enough money to pay for it and by the time i retire there will be no money for me... sorry grandma, but just because there is the technology to prolong life doesn't mean everybody gets to get those drugs and medicine........  the costs to our society of trying to lengthen everyone's life (especially those who don't work) will eventually bankrupt us all........

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#3) On March 26, 2008 at 11:30 AM, EScroogeJr (< 20) wrote:

FL, you're right in principle, but I don't think the choices are as extreme as you describe. There are plenty of fat cats that could pay up a little more. The medical care system, for one, is twice as expensive as it needs to be.

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#4) On March 26, 2008 at 1:59 PM, GS751 (26.87) wrote:

Medicare is BS is Socialist Security.  I have an IRA that I put money into, I don't look for handouts from the Government

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#5) On March 26, 2008 at 2:09 PM, DemonDoug (31.30) wrote:


Paul Volcker's endorsement of Obama not good enough for you?

I have already voted for Obama, and look forward to helping to make history by voting for him in the fall.  I feel that all the negative stuff people feel about Obama is similar to what happened to Kerry - you are being manipulated by the neocon 24/7 negative press machine.  Then again if you are listening to Rush, you might be voting for Hil-Dog because you know that people like me, a democrat with an independent/libertarian streak, would never vote for that witch.  Obama is a smart guy who has the country's best interest at heart.

Again, Paul Volcker, the last guy who had any clue who was at the head of the most important financial institution in the world, has endorsed Obama.  And you'd never vote for him?  You'd rather have John "Hundred Years War" McCain or Hillary "I'd rip out my mother's eyeballs for power" Clinton?

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#6) On March 26, 2008 at 2:13 PM, DemonDoug (31.30) wrote:

oh, sorry dwot, should have replied to your main blog post:

I have been saying this for over a year, and will continue saying it until I feel we have bottomed.  The North American lead real estate bubble is by far and away the biggest bubble that we have ever seen in all of human history.  It is not going well, and it is not going to go well for quite some time.  The biggest bubble in all of human history.  Nothing is even close - tulips, south seas, RE in the 1920s, gold in the early 80s, tech, none of it comes even remotely close.  Why this is so freaking hard for the MSM and everyone who is bullish who isn't a paid shill is beyond me.

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#7) On March 26, 2008 at 2:53 PM, Gemini846 (34.90) wrote:

What's up with Obama and his Donut Holes. I swear this guy owns a Dunkin Donuts.

"I want to eliminate the medicade Donut Hole" - No problem here, It's kind of dumb that if the care is super cheep it's free and if its super expensive its free, but between 2-4k you have to pay.

"I want to create a Donut in the middle of Social Security funding so it can be the next big headache 10 years from now since it won't be inflation indexed like the AMT" - Ok. So let me get this straight. It's ok for me to pay SS tax on my first 100k and my money from 200K+ What's so wrong with that 100k in the middle?

 If I make 100K I pay SS on 100% of my income. If I make 1 Mill I pay SS on 90% - That sounds republicanesque to me. This is the problem with our tax code right here. It's stupid ideas like these protecting highly paid wage earners and screwing capitalists. You won't see any fix until Inflation pushes those highly paid wage earners above the 200k.

What the hell is wrong with paying SS tax on EVERYTHING or simply aknowledging that people who make over 200k will never collect SS even on principal so they only pay tax on the first 200k as thier cheritable donation to the great society.

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#8) On March 26, 2008 at 6:09 PM, Harold71 (< 20) wrote:

There should be an opt out of the Social security system.  So, if you're a big boy/girl you can manage your own money. 

Just because my parents got me this Social Security card when I was four years old, I'm now required to pay into a socialist system that sucks.  I'm not impressed. 

Unfortunately I've also realized that no one makes you sign up for a Social Security card.  In fact, you "apply" for a card.  No one has ever made you apply for anything. 

"Resentment?"  Yes dwot.  It's not going to be good.  I can see a revolution of sorts developing this next decade.

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#9) On March 26, 2008 at 7:54 PM, dwot (29.24) wrote:

Seems I touched on something a lot of people have thought about but that isn't being talked about on blogs.

I am Canadian and I would support our health care system any day of the week over what the US has, although it needs some limits.  But, we don't have this enormous do nothing to improve health sucking the life out of health care as with your health insurance industry.  Also, our fee structure puts some limits on doctors, and contrary to their complaints, they do pretty good on the Canadian income ladder.  Americans pay something like 50% more for health care and the health outcomes are not as good. 

Zanibel, because Canada started to fight our debt in 84, well, I was 22...  That means I've paid high taxes my entire adult life.  We've had a bit of easing in the past 5 years, but we still pay more now then when Trudeau was robbing me by making our deficit go to $39 billion when he left.  With 1/10 the population that would be like $400 billion for the US, only that was in 84, so double it again to get the magnitude in today's dollars.  Our economy was simply sluggish because of this for years upon years.  The US isn't going to escape this and being so big, won't be able to try and piggy back on other economies.

US is dealing with this with a much older population...

FB, I understand that.  I recent the tax burden we've had, but what I resent more is that we've reined in and it is manageable and the dork we have in now is reducing taxes, to the point that I am sure we will be running a deficit.  I'd rather be paying my taxes now then paying more later.

GS, school is part of social programs.  I don't think they are all bad.  I think education and basic health care ought to be covered.  Put a limit on health care, but at least that way you get people going to be checked for problems, getting treated for STDs, and things before they become serious.  The STD problem is that AIDS spreads 5x faster if sexual health isn't looked after.  It is in everyone's interest to have basic health care.

Doug, no doubt in my mind at all that this IS the biggest bubble ever known to people...  Something that is seriously different between this housing bubble and the one that caused the depression is the lending standards were reasonable with the last bubble.  I believe 15 year mortgages were the norm.  It gave a lot of options to enable people to manage their debt.  With 30 years mortgages and people maxed to the limit at low rates, well, there is little to be done that results in mortgages being made affordable that doesn't result in billions of losses for those invested in the debt.

Gemini, I don't follow what's happening in US politics that way all that well.

Harold, I personally don't mind paying for something that is reasonably fair.  I don't even mind paying more than my share.  I don't like being sucked totally dry to pay for it.

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#10) On March 26, 2008 at 7:58 PM, dwot (29.24) wrote:

OMG, big news day was it?  I've got 99 feeds on my google reader...

So, what happened? 

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#11) On March 26, 2008 at 10:27 PM, EScroogeJr (< 20) wrote:

Obama promices homeowner bailouts and supporting property values. Supporting property values=unaffordable housing. Why should I vote for that?

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