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alstry (35.33)

Is Next Week The Crash????

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June 13, 2008 – Comments (11)

From MarketWatch:

"The two-year's yield has jumped 60 basis points this week, the biggest 5-day jump since November 2001, as futures showed an increasing likelihood the Federal Reserve will increase interest rates later this year because of the risk of inflation accelerating due to record oil and food prices.

If inflation keeps moving higher, it may motivate Fed governors to make the case for hikes," said George Goncalves, chief Treasury and agency debt strategist at Morgan Stanley. "Bonds have suffered such a bloodbath over the last week."

 

The problem facing America right now is revenues are shrinking.  Revenues are shrinking for individuals losing their jobs and/or earning less.  Revenues are shrinking for business as consumers cut back.  And revenues are shrinking for municipalities as tax receipts decrease.

We see the effects everywhere.  Layoffs.  Foreclosures.  Airlines Cutting Routes.  As revenues contract, it creates further contraction.

The BIG problem this time is that we accumulated an unprecedented level of debt going into this contraction.  A LEVEL THAT HAS NO HISTORICAL PRECEDENT. 

How do you pay off trillions in debt without the income to pay it off?

Without a means to generate income, you default.  And right now, there seems to be little on the horizon big enough to generate sufficient income to cover our debt obligations....as a result we are seeing record defaults(foreclosures) and rapidly deteriorating debt coverage ratios.

To compound the declining income problem, for the past six months we have had rapidly rising food and fuel prices.  Evidence of the distress is increasing usage of credit cards to pay for food and fuel.  At some point, credit card availablity runs out....and then what when the debt must be paid without access to additional credit?

Was this week the final nail in the coffin.....interest rates are now rising very quickly.  WTF, the economy is in a recession and interest rates are rising.  Not only that, a FED governor is talking about PREEMPTIVE rate increases?

Shrinking revenues, suffocating debt, rising foreclosures, falling real estate values, rising commodity prices, falling wages, rising interest rates....the effects are being felt everywhere.......

Now the question is how far does this go? 

I don't think there is an easy answer because we have never been here before.  Never has so many of our nations governments faced these kinds of deficits simultaneously.  Never have prices risen so fast against stagnant or declining wages.  Never has our economy been so dependent on the creation of credit versus production.  Never has our banking system held this much debt.....and now the stress is being felt as its customers are defaulting.

 

With the 10 year at 4.26% as we end the week, stress on our financial system at unprecedented levels, food and fuel prices out of reach for an increasing number of our citizens, many Americans wondering what does the future hold with a negative perspective not seen in three decades, what can Wall Street manufacture next week to keep this rally going....after all it is options expiration week that it has been a generally positive week.......or are we in store for something else?????

 

11 Comments – Post Your Own

#1) On June 13, 2008 at 6:09 PM, alstry (35.33) wrote:

From TMF Sinchiruna:

The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=61333&t=01006124249416869148

In the great depression, we slowly worked our way into it.  This time there are hundreds of Trillions of dollars of SWAPs that could create an unprecedented chain reaction of defaults.

In order for the system to work, defaults need to stay at low levels......well defaults are rising to levels never contemplated in many financial models.....therefore the results are likely not foreseen nor adaquately hedged.

We saw what happend to Bear Stearns....a bank that was profitable in The Great Depression.  What happens if 10 BSC's implode simultaneously?

In the end it comes down to ability to pay obligations...right now that ability is getting less and less.  Up until now, everyone slept easy because enough were holding up their end of the bargain........that may be about to change.

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#2) On June 13, 2008 at 6:13 PM, hansthered0 (< 20) wrote:

Alsrty,

 Have you read Ken Fishers book "The only three questions that count?"

In that book Ken Fisher argues that we don't have enough debt.

I'm no expert on the subject, but he does make a powerful case. Basically he makes believe that America is a business and he lists our assets and liabilities on a balance sheet.

It's an interesting read.

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#3) On June 13, 2008 at 6:20 PM, alstry (35.33) wrote:

I know the argument. 

It works for the Federal Government and that is about it.  Unless the Federal Government is going to start to write checks much bigger than $600....the people are screwed.

Think of the average American's assets.  Stocks, Bonds, Real Estate, and Debt.  Debt has become a much bigger component and percentage of the balance sheet and growing.

Right now Bonds and Real Estate are getting destroyed.....all that is left is stocks and debt....how do you think the assets and liabilities look?

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#4) On June 13, 2008 at 6:28 PM, ATWDLimited (< 20) wrote:

Yes, that is the basis for socialism, government is never big enough, the government is not spending enough, that is why they fail in the end, because they are inefficient. capitalist systems are free, and competitive. As written in my "official" Dollar report, google it, or use the Cpas blog search that I made, you can see the amount of debt per M3 and the fact that 110 trillion in obligations of all the Us, private and public, will not be payed of  by shrinking real growth and inflated money supply. So next time some one claims there is not enough Us government debt, tell them that no debt never collapsed a bank or nation. There is a difference between healthy debt, and obsessive debt.

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#5) On June 13, 2008 at 6:37 PM, alstry (35.33) wrote:

At this point, based on my perspective on central bank bahavior.....we are about to encounter a huge world wide crash due to a cascade of debt defaults.

It is absolutely amazing the level of debt distress at the consumer, business, and municipal levels all simultaneously and there is such little concern. 

 Amazing what the perception of insurance can do for risk tolerance.  The problem is that there is not enough money in the world to pay off the policies.

In the end there will be a restructuring of debt and the playing fields will be more level.  One might even posit the world will be a better place as a result.

Between now and then, we can expect a lot of distress.....no major change can come under an umbrella of prosperity for those that are shifting down.

 

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#6) On June 13, 2008 at 6:50 PM, RVAspeculator (29.01) wrote:

"we are about to encounter a huge world wide crash due to a cascade of debt defaults."

 Of course this is true, the problem is this has been the situation for quite some time.  Timing is everything if you are trading this like I am.  Currently I believe we are getting another bounce here and am trading accordingly. 

 When the 10-year breaks 5.0-5.3%, that is when people will start to panic a bit.

http://caps.fool.com/Blogs/ViewBlog.aspx?t=01001808419327792238

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#7) On June 13, 2008 at 6:58 PM, ATWDLimited (< 20) wrote:

Are You an Austrian? Mises Institute 
 Debt is fundamental factor killing the Us economy, over leverage is due to money supply, causes inflation, and artificial unsustainable growth, in the end it cause collapse. 

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#8) On June 13, 2008 at 6:59 PM, alstry (35.33) wrote:

People will panic when people panic.  Who knows what it will take.

It is simply conditions continue to deteriorate and now interest are rising rapidly.  4.25......4.50.....5 who knows?

Right now bonds are getting battered both on the interest rate rise and increasing default issues. 

Maybe this is a temporary transfer into equities...until equity holders realize that when bonds default....equity is usually worthless.

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#9) On June 13, 2008 at 7:24 PM, MarketBottom (29.23) wrote:

Participants are ultimately influenced to stay in the markets and become long long term investors by prices becoming so low that the only way they would sell is out of total desperation.

When will that happen?

When enough participants sell and inflict pain on those that have to buy.

IBM 1.37 Billion Shares Outstanding at 120 to 130 about 170 Billion

How many shares would have to be sold at mondays open to make that price open at 60?

I don't know, but I am sure just like social security the money is never intended to be paid in full

The market has started to gap down at the open and this is a bad sign.

 

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#10) On June 14, 2008 at 1:06 AM, jester112358 (28.78) wrote:

As for a crash in the equities market.    A strong counterargument is that there's a lot of money on the sidelines in short term corporate debt paying interest rates less than inflation (about 3.5 trillion in money market funds).  Where will this money end up?  Will greed win out over fear?    My bet is still with companies that produce real things like steel, fertilizer, oil, gas, coal etc.  And of course the commodities themselves.  We are in for resource wars (and maybe not executed via financial instruments only as we see in Iraq and soon Iran).

 Things have actually been worse, debt and leverage-wise.  Japan in the 1980s for example where the banks themselves were allowed to speculate in commercial and residential real estate.  Japan didn't recover  to this day because they refused to acknowlege the problem and allow bankrupcies to occur.  We are following the same attempt to prop up the whole house of cards which will only put off the inevitable.

 Further, global capital markets are always in a state of non-equilibrium as Soros pointed out in his 1998 book, "the crisis of global capitalism"  All the problems we currently face were anticipated in that book, especially the lack of transparency and global regulation of investment banks.   It is noteworthy that both Soros and Jim Rodgers, his former associate in the quantum fund, believe the current credit crisis is the worst since WWII (so they are leaving out the great depression).   So, we are in for a "bust" period following the last 20 year boom.  But we've put off a natural "bust" for so long that the leverage we have accumulated will really hurt.  So, as typical in a paper asset bust, real assets will be the only way to beat stagflation.   Own gold, silver, and other commodities.  Invest in strong currencies like the Brazilian Real and Austrialian dollar.  Keep your dollars for toilet paper.

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#11) On June 14, 2008 at 1:25 AM, alstry (35.33) wrote:

No doubt we will produce real things, the problem is the value of that production will not come close to the stimulous from the excessive debt we extracted over the past seven years.

I simply can't find a satisfactory supplement to the excessive credit extended.

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