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alstry (36.27)

Why its about OVER

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July 29, 2008 – Comments (11)

Basically, the Wealth of America(and the world for that matter) is primarily centered in Real Estate, Business Debt and Equity(Stocks and Bonds), and Cash.

The Finance Industry accounted for over 1/3 the market valuation of stocks on the S&P in recent years.  Much of that market valuation was predicated on making agressive loans(recently) that no longer are being made(subprime, reverse am, LBOs, Private Equity, Auction Rate ect....)  As a result, the profits of the financial industry has evaporated.  Not only that, much of the assets on the books are now suspect.  Consquently, it is very difficult to determine whether there is any value in our financial industry.

In addition, the since the balance sheets of banks have deteriorated, it is becoming more and more difficult to make a loan.  As loans become more difficult to obtain, borrowing becomes more expensive and assets decline in value.

Now housing is crashing at a record pace.  Following housing is Commercial Real Estate.  Between the two, there is trillions and trillions of loans outstanding securitized by real estate that now is rapidly declining in value due to defaults.  These loans are the assets of our banks, insurance companies, pensions, and 401Ks.  As these values crash, so does the wealth our our country.

The insanity is that over the past few days, actual write downs have been taken by two major banks.  If the other banks, pension plans, and insurance companies took similar action....we could be facing HUGE writedowns.  Much of America's debt is based on Real Estate.

As lending stops, so does business.  Now that business is contracting, it is freeing up even more real estate.  With Business and Real Estate crashing, there is little left to securitize the trillions and trillions of dollars of loans on the books of our banks and insurance companies.  Over the past seven years, we basically leveraged America up on Trillions of BAD DEBT.

Now that debt is being written off, much of our financial industry could be insolvent very soon.  Basically, with an insolvent finanical system, it is difficult to value anything.

Behind the scenes, everyone is doing their best to make everything look as good as they can....but in the end, if you can't pay the debt, it is a bad loan......and the number of bad loans are skyrocketing everyday.  THE TREND OF DETERIORATION IS INCREDIBLE.

When we make a deposit in the bank, we loan the bank money and in exchange they give us interest.  The banks then goes out and loans it out 5-10X what we give them.  If just a fraction of those loans go bad.....the banks can't pay us back.  There is only $50 Billion dollars of insurance protecting $6 Trillion of deposits.

At this point there are two choices:

1.  Hyperinflate and dilute the value of money......penalizing saves and putting our increasing number of fixed income elderly in a very precarious situation.

2.  Simply wash out the toxic debt and let things collapse quickly, and start over.

Each day that passes, we get closer to the point where there will be fewer and fewer options left as more and more debt gets written down.  Few really see what is coming.....my guess is after meeting with Buffet and Volker yesterday.....Obama has a pretty good idea what he is facing.

 

11 Comments – Post Your Own

#1) On July 29, 2008 at 12:57 PM, jesusfreakinco (28.97) wrote:

Number one is what our government has chosen.  M3 is growing at nearly 18% and hyperinflation is upon us.  The USD will continue to be scorned by foreign investors.  Any investment betting against the USD is a safe investment for the next couple of years until this all gets flushed out.

You are right on the finls.  Even w/o the consideration of write offs and the dilution we are witnessing, their ability to produce earnings will be significantly less in the new few years. 

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#2) On July 29, 2008 at 1:39 PM, PhillyGator (< 20) wrote:

Hope you're wrong. You make a lot of good points. What I read today was amazing. Merrill made a drastic decision to sell $30 Billion in mortgage debt for $6 Billion. When you're selling things for $0.20 on the dollar, you're actually not improving. When opportunities exist, whether buying a Hotel, Office, Shopping Center or a House at $0.20 on the dollar, I think these opportunistic buyers will make a killing. Wish I could have bought my house for for 20% of what I paid just a year ago. There's an intrinsic value, is it at 20%, 50% , 75% , 125% of today's value- who knows but I think I would rather own real estate and related securities with a hedge against inflation than speculative stock in a company which has no underlying intrinsic value (see Dot.com crash). My 2 cents.

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#3) On July 29, 2008 at 2:06 PM, motleyanimal (48.85) wrote:

My money said good-bye!

It's over................

http://www.youtube.com/watch?v=SMiNRr5hSYM

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#4) On July 29, 2008 at 2:26 PM, QualityPicks (22.35) wrote:

Savers will be penalized...wait a sec, what savers?

Is it any wonder why the Fed and our Govt do not care about responsible people? there are not many, that's why.

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#5) On July 29, 2008 at 2:27 PM, DemonDoug (32.19) wrote:

PhillyGator, buying something at "20 cents on the dollar" presupposes that what you were buying was worth a dollar a few years ago, as opposed to being worth 20 cents to begin with.  Meaning you paid 5 dollars on the dollar because of inflated pricing.  Now when you can buy something for 20 cents on that new cost basis then we might be getting to a fairer valuation.

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#6) On July 29, 2008 at 2:31 PM, alstry (36.27) wrote:

The problems is the accumulated debt.  Most of the current assets base is highly leveraged.  That leverage is the assets of our financial insititutions and insurance companies and pension plans.

Debt is everywhere and it is collapsing due to Real Estate imploding and businesses failing.

Bennigan's, Steak & Ale Close,
File for Bankruptcy ProtectionBy JEFFREY MCCRACKEN and JANET ADAMY
July 29, 2008 12:47 p.m.

National restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 locations and letting go of thousands of employees.

 http://online.wsj.com/article/SB121734771456393641.html

Just the above is hundreds of new vacancies and thousands of jobs lost.  As credit tightens, conditions will get worse.

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#7) On July 29, 2008 at 2:44 PM, alstry (36.27) wrote:

Ford Credit Tightens Lease Terms

Ford has informed dealers that it is raising the price on leases of its most profitable trucks and SUVs due to the "extreme losses" its lending arm is taking on these vehicles. GM is also further restricting its lease offers. 

Bennigan's and Steak n Ale shutter completely.  Starbucks basically closing most of its Australia operations after just spending millions to expand.  MER selling assets for pennies on the dollar.

You think Ford and GM are going to sell more cars by tightening credit terms?  What about selling more houses because interest rates are rising?

Ford and GM alone have debt outstanding approaching $1 Trillion dollars.

Hyperinflate or Depression....the choice is yours.

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#8) On July 29, 2008 at 2:51 PM, abitare (43.81) wrote:

What stocks to buy?

Look at these ETFs:

SKF - ultra short financials

SRS - ultra short real estate 

UDN - short US dollars


FXS

-

CurrencyShares Swedish Krona Trust

Also what about a Tribute to Peter Schiff:

 

 

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#9) On July 29, 2008 at 3:07 PM, abitare (43.81) wrote:

Or Get Ready For America'z Economic Crash!!!

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#10) On July 29, 2008 at 4:25 PM, mandrake66 (42.28) wrote:

What I read today was amazing. Merrill made a drastic decision to sell $30 Billion in mortgage debt for $6 Billion. When you're selling things for $0.20 on the dollar, you're actually not improving.

The worst part about this was that this was not a distressed sale undertaken in haste. I believe the actual figure was 22c on the dollar. This is now the best market price available for pricing the debt that was sold (mortgage debt of 2006/2007 vintage), and it may force a lot of other banks to mark their own debt down to this level. CitiGroup, for example, is still pricing similar debt at over 50c on the dollar. Writedowns to the same level would be a loss of about another $7B for Citi.

Merrill is doing well to be the first to accept the new reality, but this is quite a haircut.

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#11) On July 29, 2008 at 4:31 PM, alstry (36.27) wrote:

What happens when pension funds start taking writedowns?  What happens when insurance companies start taking writedowns?  What about State and Local Governments?

 

Pretty soon, we will be writingdown America to zero!!!!!

Remember, every debt out there is an asset on someone's balance sheet.  The payment stream is income.  When debt defaults, not only does income decrease, assets evaporate.

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