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alstry (35.46)

WARNING!!!!!! Serious Anxiety Could Result From Reading

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August 31, 2008 – Comments (2)

It is now time I teach you why we face such incredible CRISIS ahead of us.

Most people don't appreciate how important debt is to our economy and financial system.  Actually, debt is the key component our financial system....debt is our financial system.

The creation of debt stimulates spending.  Existing debt is the primary asset on our banks, insurance companies, and pension funds balance sheets.  Very little of America's wealth is cash.  This is very different from many countries in the world where the citizens maintain a relatively high cash savings.

In America, our primary wealth is concentrated in assets as we have been sold for the past 30 years that cash sucks and assets are where you need to be.  These assets consist of debt, equity and real estate.  A person's net worth in Real Estate is simply the REALIZABLE value above outstanding debt.  A company's equty is worth the net value above total debt and liabilities.....very few stock investors really understand this fact as stock is simply a fraction of equity.

In a rising credit environment, assets are great.  People can borrow more and more money and pay higher and higher prices to each other.  The more they can borrow the more they can pay for assets.  The higher asset values go, the wealthier people feel.  This has gone on for over thirty years and really went nuts in the past seven years.

The debt that accumulates convert into assets collecting interest for our financial institutions, pension funds, and retirement plans.  As our country's economy grows as people feel richer, borrow more and more, banks get bigger and bigger, profits explode, land values go nuts, business hire lots of employees and start servicing each other as shoppers shop til they drop.

It is one hell of a party as long as credit keeps flowing and debt is serviced.  During a period of rising asset values, even if the cash flow can't service the debt, generally the collateral can be sold and pay off the balance leaving no damage to the system.

But when credit stops flowing, debt starts defaulting and asset values fall.  As asset values fall, loans get impaired and financial institutioins start losing money.  As a result, credit tightens forcing asset values down even further causing even more defaults.

The crazy part is our banking system leverages up debt many times.  Debt becomes the assets which allows more debt to be created.  Today that leverage is unprecedented reaching levels of 30X, 40X, and more.

It is my estimation that debt directly or indirectly represents 80% of the total value of America's current total asset valuation.  Once you think that a home mortgage represents 54% of the Average American Home and it is also the asset at some bank or investment portfolio....that debt instrument gets counted twice.....where as the equity only gets counted once.  Add in the leverage of debt in our financial institutions and 80% could be a conservative number.

The reason debt is defaulting today is because we made trillions of dollars of loans in the past few years that simply was not supported by the revenue stream.....the only justification was the asset value and hope for future price appreciation.  Well we are learning that revenue stream is important and debt is defaulting at an unprecedented rate.

When a nation is as leveraged as highly as ours, it doesn't take much to wipe out all equity in the financial system.  If a banks is leveraged 10 to 1, just 10% of the debt needs to be impaired and ALL capital at that bank is wiped out.  Right now, banks accross America are scrambling to raise capital......very likely yours.

THEY KNOW WHAT IS COMING AND SO DOES THE FDIC....

There is no way to stop this unwinding process unless  somehow we can raise incomes to meet expense obligations.....the fact that we have had food and fuel price increases only makes the problem worse and likely CATASTOPHIC.

America's economy today reminds me of the day before Katrina hit New Orleans.  I was caught on video saying it would likely be one of the worst natural disasters in American History and that we should have been mobilizing assistance that day.  For most of America, why be worried, it was sunny and everyone in New Orleans seemed just fine.  Had we been looking forward, many lives would have been saved.  Chertoff should have been fired summarily for incompetence but instead an underling was removed.  Is Paulson in the same position today.

Today the value of our banks, pension fund, and insurance company assets are not just falling.....they are crashing in value.

The following is from an article today about British pension funds(which investments are similar to ours):

New figures from the actuaries Lane Clark & Peacock shows that while the FTSE100 companies (the cream of British business) had a combined surplus in their pension schemes of £12bn in July 2007 - when the credit crisis began in earnest - the situation has badly deteriorated.

This buffer has not only disappeared, but turned into a huge £41bn deficit. And for the FTSE100, read much of the rest of corporate Britain. Across the UK, companies and fund managers are grappling with the impact of the credit crisis on pension assets. And that affects many millions who may otherwise assume they're untouched by current events.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/31/ccliam131.xml

The above numbers are in pounds so to magnify the illustration muliply by 2X to get the dollar equivalent.

Each month the problem gets worse and worse as more and more debt defaults and asset values crash.  The more asset values crash, the more debt defaults and the more debt defaults the more asset values crash.  We are just at the beginning of this process as our government, banks and other financial insitutions are failing to provide full and fair disclosure as to the actual deterioration.

Ignorant FOOLS blame some racial group, or ethnic class, or education background as the primary cause of the problem.  Actually, it is the entire system at fault with government and financial institutions as the worst offenders for leveraging up.

We are now seeing the early stages of our finanical institutions failing.  We are already approaching the peak of the S&L crisis without fully accounting for the fair value of loan defaults.  As more revalations are made, we will see more defaults.  As a result, governments are starting to fail.  Businesses are starting to fail.  Hospitals are starting to fail. 

As they fail, they cause assets to shrink even further and income to decrease.  As income decreases, people have less and less money which causes even more compression.

No matter what you own, it will be affected.  Land values will crash.  Banks will fail.  Home prices could drop back to levels we havn't seen in a generation.

Remember, values went up due materially to a generation of increasing lending.....why should it be so difficult imagine prices going back a generation.  Heck, GM's stock price is back to two generation lows.

The problem is that in doing so, practically the entire wealth of America will be wiped out because most of America's wealth is debt dependant.  Our banks, pension funds, homes, shopping centers, offices buildings, farms ect......

Is it a big deal....depends on your perpsective.  Will the process be painful, without a doubt.  Will we as a nation be better off when we emerge from this process.....absolutely.  Think of it as America beginning chemotherapy to try to rid itself of a cancer that has spread throughout most of the body.  Even if part of the body is not affected by the cancer, the chemo will still impact that part.

Now you know why Alstry is the way he is..........

 

 

2 Comments – Post Your Own

#1) On August 31, 2008 at 2:07 PM, RainierMan (80.23) wrote:

It reminds me of the views presented by the NY academic economist (Roubini?) who is saying the current debt crisis is going to be a major financial disaster, wiping out at least a trillion dollars, and causing many banks to fail. I'm in no position to evaluate this, but he apparently called the current debt crisis several years ago, when most of his colleagues thought he was way off. He says we'll muddle through, but that if could be the end of America as we now know it. Actually, I believe he said it will be the end of the "American empire", but that seems so extreme. He says it's not just a mortgage crisis, but auto loan, credit card, etc., debt crisis. 

I keep hoping that, like previous disaster scenarios, this one doesn't turn out to be as bad as it seems that it might be, but again, I'm just a novice investor hoping for the best. I have no analytical reason to think everything will be just fine.

And then comes the question of what one should do, and are you sure enough about where things are going to do it with all your money? I doubt I'll ever be that sure. 

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#2) On August 31, 2008 at 2:36 PM, LordZ wrote:

Yeah its so bad that P diddy is now flying first class as opposed to flying his own personal jet.

And Africans in the poorest country are laying down thousands of dollars to munch on snails at an OBAMA fundraiser in Africa.

http://hosted.ap.org/dynamic/stories/A/AFRICA_OBAMA_PHENOMENON?SITE=MIDTN&SECTION=INTERNATIONAL&TEMPLATE=DEFAULT

In fact, the Obama infatuation seems to have somewhat annoyed Ugandan President Yoweri Museveni, who told Ugandans to turn their attention in more self-fulfilling directions. "Obama, Obama, Obama. He is an American. Why are you looking at him and not yourself? Why don't you build your strength here?" Museveni said at a news conference.

I can't agree more with Museveni and together lets chant NOBAMA, NOBAMA, NOBAMA.

The interest in Obama may be highest in Kenya, where his father was born and lived before traveling to study in the United States. There, vendors sell T-shirts, key chains, banners and hats to capitalize on the popularity of the candidate locals consider practically a native son.

The shindig, held by a group calling itself "Africans for Obama 08," drew hundreds of people from the Nigerian business elite. Each paid more than $2,000 to munch on grilled snails, sip from flutes of Veuve Cliquot and Moet & Chandon and join in a lively, if poorly executed, series of the "fist bumps" popularized by Obama and his wife, Michelle.

Hmmm if in the poorest country people can come up with thousands of dollars to raise money to encourage people to pray for Obama as they legally can't vote for him, so they are raising money to bring awareness to pray.

Are things as bad as Puff daddy says that he can't afford the hundreds of thousands of dollars it costs him to fly?

http://hosted.ap.org/dynamic/stories/P/PEOPLE_SEAN_COMBS?SITE=MIDTN&SECTION=HOME&TEMPLATE=DEFAULT

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