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The last part with closing remarks.
Now that we’ve seen how both the subprime and conforming secondary market mortgages work, we can look to the future and ask “Where do we go from here?†and “What’s wrong with this picture?â€
Well, as long as the economy and housing prices keep rising, the answers are “nowhere†and “nothing.†It’s a system that appears to work. But what happens when we get to a period where both the economy weakens and housing flattens? We can then imagine that the subprime market will experience a rise in the foreclosure rate. We can also imagine that the conforming market will probably be able to hold relatively steady, except for growing a case of price paranoia.
But what would happen if we threw another variable into the mix? What if we found out that the investment banks, the very ones that give people a sense of security, were found to have an equity interest in some of the mortgage banks from which they acquired the loans? In that case, what motivation would an investment bank have to really check the quality of the originations? Likewise the REIT that securitizes its own loans and can play games with gain-on-sale accounting isn’t going to slow down the pace of originations to worry about quality, is it?
It seems to me that if the regulatory environment allowed this all to continue, then we would eventually have to contend with a lot worse than just rising foreclosures in the subprime market, and housing price paranoia for the general public. And when big players push their weight around to hide conflicts of interest, and play games with assumptions we all take for granted, those games suddenly get a lot more serious.
Link for the last part.
http://www.fleckensteincapital.com/hotpotato_pt3.htm
Solid? How about some shiny yellow metal?
I almost went "all in" on IAU today, but held back a little cash so I am not totally bereft in my retirement. OO, keep us updated on when the "idiots" start buying gold... or am I already in good company?
And still, buying "virtual PMs" does not exactly engender warm fuzzies (where exactly are they keeping my gold?). From IAU prospectus:
The custodian [Bank of Nova Scotia] may keep the trust's gold at locations in the vicinity of New York, Toronto, Canda, Montreal, Canada, London, England, or with the consent of the trustee and the sponsor, in other places.
I don't think I like Maria Bartiromo's new haircut. In fact, I'm sure of it.
"triggered margin calls that would have failed at 5% market loss"
Well exactly. Makes you wonder how anyone signed off on this stuff? Btw the coverage on CNBC today has been very strange. There IS... only (1) story today.
Will Bank of Japan attempt to slow the advance of Yen by supporting our Continental 2.0 dollar?
EBGuy,
don't worry, one of the "idiots" I met was still busy finding deals in financial stocks, he bought C all the way down, gold was not even on his radar screen.
Peter P,
I think the resistance level is @80, and BOJ is running without a chief right now, so short-term wise Yen could surprise everyone by shooting that high. But I won't put lots of money into Yen, because I am not completely confident on BOJ's spine.
I think AUD is a good buy today, as Yen carry trade unravels. RBA has proven to be a more disciplined central bank than BOJ, and as long as Yen climbs in the longer term, AUD will climb, because Japan is the biggest export destination of Oz.
Not investment advice.
I am not completely confident on BOJ’s spine.
You think they have cut interest rate? Is it even possible? :)
OO, your analysis on AUD is reasonable.
My only worry is the effects of unwinding Yen-carry trades on high-yield currencies, AUD being one of them.
At some point, especially when food price soars, Japan will have to break the peg with USD, but I am not sure if right now is the moment. 90% of the raw materials Japan needs, food inclusive, is imported. So a weak Yen is very detrimental to the standard of living for Japanese. When Yen breaks the peg, there will be inevitably overreaction, so breaking historical high will not surprise me.
Historical high of Yen was 83:1 in 95.
Yen carry trade unwinding has dragged down AUD several times in the past, but the general trend was still up. AUD will definitely be suppressed in the short term, but it will never return to the original trading range, because nothing can be going down against USD at this point.
Does anyone find it comical that Dow is up over 100 pts? The PPT is working too hard this morning, it doesn't even look realistic any more.
As all of you are begining to demonstrate, the winning hand is food in a hot commodities market. Making stuff no-one can buy because everyone is spending all of their money on food means - hold food.
Japan will break peg, and import of food is what will drive their economy for the foreseable future.
For the conspiracy lovers out there, rumors of "big" player withdrawal from commodities towards equities to prop markets. Not surprising speculation all things considered.
Clearly there has been an attempt to influence and diffuse market psychology and sentiment. Invisible hands are at work.
Here's a nice summary page for world food imports/exports:
http://news.bbc.co.uk/2/hi/in_depth/7284196.stm
The US is clearly the "Saudi Arabia of food".
The media and most everyone are forgetting several important bigger picture factors in this whole BSC mess. First, We haven't even seen the bulk of ARM resets yet. If the subprime collapse was the precipitating factor for what we're seeing today, what happens when Alt-A starts failing? Second, everyone glumly worries about fire sales of MBS and other securitized products leading to huge markdowns on the values of these securities. Well, HELLO! These securities are in fact worth jack sh-it, since they are full of toxic loan crap. So, why keep pretending???
skibum,
don't forget our lovely option/ARM reset after Alt-A.
Wall Street banksters have to pretend, if they stop pretending, they will be left penniless. At least pretending wins time. You won't want to see them suffer from a cliff-dive in standard of living, will you?
If the subprime collapse was the precipitating factor for what we’re seeing today, what happens when Alt-A starts failing?
I''ve 'heard' that said scenario leads to WaMu going poof. Or being 'bought' by someone (Wells?) for a pittance.
This BSC mess is happening now simply due to lack of liquidity. Short term repo money evaporated. Uncertainty as to future ARM performance is already factored in, the suckers have long left the room (exception for US taxpayer of course). Future ARM resets do not *matter* in this current environment, the wheels of our securities market have grounded to a halt. Nobody knows what these things are worth, and no one is willing to invest capital in them until they become relatively known quantities.
There simply is no secondary market for mortgage backed securities. And when a secondary market does arise from the ashes, it will not be like the one we once enjoyed.
OO :
Today's market action stinks big time. If this was indeed PPT or some Fed induced manipulation, then it's going to end badly. If they kill the shorts with any fake rally, they will simply remove the floor beneath the market. But given their past history, another pathetic attempt to push the day of reckoning wouldn't surprise me at all.
Does anyone find it comical that Dow is up over 100 pts?
I wonder if foreign holders of large amounts US dollars are jumping in for bargains after they see a drop.
Stuck,
DOW is the most manipulated index, because that is what the sheeple care about the most.
When US indices lose their credibility, that is when huge capital flight will start. At that point, USD will unfortunately see a total collapse. Investment is all about confidence in the market, in the system, if that confidence is breached, there will be no market, period.
Headset,
My knee-jerk reaction was to say, "At these prices? and then I was going to make an argument that holders of foreign dollars ould do well to wait.
Then it occured to me, that handing US dollars back to the US while the Fed is doing all of the heavy lifting to prop up the equity markets is pretty smart.
I would not be at all suprised to see a ton of buying coming from Japan and China, two huge holders of dollars. Spend 'em today, cause tomorrow they won't be worth much.
So after decline, the smart foreign bag holders jump in, and they buy till the price is higher than open? That sounds like a lot of ultra-smart foreign bag holders.
Foreign USD bag holders get stuck with the USD toilet paper not because they are dumb, but because they have no choice. They are either reliant on US consumers (which becomes a smaller reason for them to continue being the bag holder), or cannot get rid of the USD fast enough (oil money). If Middle East and China stop injecting fund directly into US financial institutions at a bulk discount price, don't expect them to buy in the open market. Japan has already started dumping USD since early 2007.
I find it hard to believe that the inexplicable rise in DOW is not a concerted action by Fed & Co.
Sovereign Wealth funds have very strict mandates, they are not allowed to day trade.
oo,
The stock market is SO manipulated, it's not even funny. I can't even try to begin to understand the depths and complexity. Without even invoking an official "PPT", the Hedgies provide such a huge volume of trades that they can probably collude very easily and manipulate the market. Of course that would be a monumental scandal, but it seems plausible to me. the average joe trader on etrade or ameritrade is hopeless against this system.
At this point, today's market moves do not surprise me one bit. As you or someone else pointed out, it's only setting us up for an even larger fall down the road. But by then, all the insiders will have "cashed out."
I find it hard to believe that the inexplicable rise in DOW is not a concerted action by Fed & Co.
JPM, a DOW component, is up 10%.
And DOW is a priced-based, as opposed to a capitalization-based, index.
Spend ‘em today, cause tomorrow they won’t be worth much.
Why buy businesses when you can buy resources?
I know I am sounding like the resident Fed basher. Or may be I am already.
But I just want to point out that the same Fed which is getting SO freaking creative in helping to "stabilize" the finance system - yes the same Fed - did absolutely nothing when the whole mess was building up. They willingly IGNORED all signs, warnings and decided to not "interfere" with the free market.
It's completely beyond me how anyone can have any faith in these double talking SOBs. Please note. Nothing, NOTHING here is being done to save the general public. It might be the outcome, intended or otherwise, but the primary goal is to save the banks and the bankers. PERIOD.
The sooner you grasp that, better for you.
I have to believe that we are now past anything the PPT could manage even short-term. I think we're on our own from here on out. Asking HF's to work together seems contra to everything HF's stand for?
Asking HF’s to work together seems contra to everything HF’s stand for?
Exactly. HF's are the heroes of cowboy capitalism.
When they are not crybabies, that is.
I'm by no means attempting to poo-poo the notion that the PPT exists. They have worked against me and my positions on a number of occasions, defying all logic.
I don't know what their capacity or depth could possibly be but it would seem (again) obvious that their resources at this point would be strained to the breaking point. Shoring up a 200-300 pt. sell off is one thing, plugging the damage being created by the re-set chart goes beyond the imagination.
HARM Says:
Greenspan or Hitler
They are both b*stards of the first order, but at least one of those guys had the decency to off himself... the other guy still shows no remorse for the destruction he has wrought.
Greenspan sees many casualties from crisis: report Mon Mar 17, 5:02 AM ET
There will be many casualties from the unfolding financial market crisis, which will lead to a large-scale overhaul of international banking regulations, codes and risk management, former Federal Reserve Chairman Alan Greenspan said.
Writing in the Financial Times, the former Fed chief said much of the financial system's risk-valuation models failed, not because they were too complex but because they were "too simple to capture the full array of variables governing that drive global economic reality."
"The crisis will leave many casualties. Particularly hard hit will be much of today's financial risk-valuation system," he wrote.
While insisting that current risk management models and econometric forecasting methods remain "soundly rooted in the real world," he said risk management can never be perfect.
"It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response," Greenspan said.
He added, however, that he hoped one of the casualties from the worst U.S. financial crisis since World War Two would not be the spirit of broad self-regulation within financial markets.
Although he said the Basel II international banking regulatory framework would almost definitely be revamped and financial institutions' financial models would need to be re-drafted, Greenspan warned against over-regulation.
"It is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition," he said.
Greenspan article at FT.com: http://www.ft.com/cms/s/0/edbdbcf6-f360-11dc-b6bc-0000779fd2ac.html
Yeah, "over-regulation" is our biggest fear right now. Thanks Al. We'll keep that in mind.
DinOR Says:
What are the earliest known references to the MBS/CDS meltdown we are now seeing. Seems to me SP and a few others made comment on it during late 2004
I don't really remember when I first realized the edge of the cliff towards which we were headed... but being _that_ prescient is practically indistinguishable from being plain wrong. :-)
Luckily, I was too lazy to go out and start shorting stuff back then, or I would have lost a ton of money before things actually turned south.
Peter P Says:
What is putting pressure on gold price?
A couple of factors - Yen at 96 is a major suspect. The other possibility is that gold is being liquidated to cover margin calls on illiquid securities.
[Not any kind of advice. My advice is usually free, but you might pay dearly for following it.]
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From a reader:
Wow, is this true? The Fed is now printing money to pay Wall Street bonuses?
An alternate explanation I heard is that Bear is somehow essential to the mechanism for the Fed's money creation, but I don't understand how that works.
Patrick