patrick.net

It is so weird seeing the market rally on bad news.

Lets use the good ol number of 30:1. (Hedgies are even higher). If Lehman used 20billion of bad capital to buy 600billion of bad paper, and the recapture is 30 cents o the dollar we get 480b loss. Now, do this for Fannie, Freddie, Bear, Meril, GS, MS. I can see this going to $3t easy.

Backing this by the taxpayer is a bad idea. It means were are printing our way out of this. The inflation implication and destruction of the value of the dollar is clear. This will discourage trade. For any who think Japan and Germany are solid - think again. Export driven economies are really going to be hurting.

Now imagine the US is not really a $14t economy. Suppose our real base is closer to $9t (or less). Taking on $3t at a time when we have $5t on the books means we are close to 1:1 for debt to GDP. Uhh - this is worse than the Depression.

Look, the great unwinding is HERE. Now. The delveraging will not stop no matter the heroic interventions.

So - is housing irrelevant? Yes.

People should not be thinking about even 3x income for homes when income may go to zero.

Its weird. For all of his studies on the GD, Bernanke seems to following in its footsteps almost exactly.

On the road right now and can't post much.

But this is SCARY. Fed and Treasury are indicating NO RESTRAINT, absolutely none, in their bailout. On top of this, we have SEC changing rules left and right on trading to suit the overall financial engineering purpose. Now you know how big the government can get.

I will say this, if you are buying gold as an insurance, do not dick around with the ultra long ultra short ultra light ultra ultra that are based on derivatives. Stop fiddling with the paper tool that the SEC can manipulate over a heart beat. Get as physical as possible. I used to think I would stop at certificate or stock in gold hoarding funds, oh boy, was I under-estimating the severity of the situation.

I really hope that Paulson is NOT serious about taking on the whole CDS toxic waste, that will be in the magnitude of $100s of T, I will be hoarding farmland and ammo if that is true. I used to believe that the US will never go through hyperinflation, we will just have a painful period of stagflation, now I am not so sure.

Massive printing doesn't stop us from reliving GD. It just ensures that all our savings will be wiped out before we get to GD to "level the playing field".

Greed was always there and will always be there. Its governments responsibility to have the right framework to control the beast for our own good.

A government is a body of people usually notably ungoverned.
-- Someone

Why is ABC running this story at this moment?
http://abcnews.go.com/Business/story?id=5835433&page=1

Hmmm, looks like a coordinated government PR to me.

The fact that the US stock market can change rules does not surprise me, but it surprises me that it can change rules so abruptly and apply a double standard - why ban shorting financials alone, how about banning shorting altogether?

This alarms me that when the credit crisis gets worse, the US can and will swiftly impose capital and exchange control just like a 3rd world country. That is how the middle class in these countries lose their lifetime savings, it is called government looting.

Short sale = getting money by selling stock that you borrowed
Buy on margin = getting stock by selling money that you borrowed

It is quite clear that if the SEC wants to ban short sales, it should also ban buying on margin,
even if it applies only to certain stock.

Yes, rampant double standards are again being imposed on the "free" markets.

why ban shorting financials alone, how about banning shorting altogether?

Because we most definitely need short-covering rallies in the coming times.

The funny thing is this: by changing the rules, who is gtting smashed right now?

The rumor is that the largerfinancial firms (who have every bit the same problem as the smaller firms) are using their might to sell short and crush the other firms. By changing the shorts rule, it is forcing them to cover their shorts and just creaming them.
Hedgies are shor selling behemoths are they are getting slapped around too. So, would say the rule is pretty cool in that it seems to be hurting the right people. Predators.
Recall that long ago I waned people not to engage in the markets as the deep pocket people will simply sweep you aisde on their momentum plays. That is truer than ever.
Small investors need to sit on the sidelines. As regularos and the govt change the rules to curb the big boys - who may or may not survive thos machinations - it can defintely crush the little guys.
Again, like I said the other day. We simply don't have informed guesses as to what kind of laws will e passed to fix this. Larger firms have much better guesses in that area. Their legislatative asymetric knowledge is jut too big an advantage.
So, for all trying to play in these waters. . .Don't

That is my two cents.

Duke,

Yeah, I'm sure that all the big wall st firms would all short-sell each other into oblivion, given half a chance. What we have now is sort of a armistice, but where the civilians are still getting hurt.

I think baninng short selling will reduce VIX a lot.

Perhaps in the short term. If the downward pressure is still there, the demand for Puts will increase and that alone will push up the VIX. Remember, shorting is just one way to obtain downside exposure.

Not investment advice

The Original Bankster @ September 18th, 2008 at 4:54 pm --

I am going to frame that post.

I wonder what kind of market we will return to on Monday?

I think this is the major warning sign for those waiting for housing to bottom. This is the first step that will take us from deflation to eventual high inflation. The enormous budget deficit being created in the name of saving our money will eventually devalue the same very rapidly.

Now is the time to start looking for a fixed rate very long term loan. If you need to buy a house to get that loan so be it.

This decision is not without the risk, of course. You need to be able to service the loan - and their is no guarantee that economy will recover and we will have jobs. But this loan might be the best protection against what is going to happen to your savings.

Don't take it in the wrong way. I am not saying house prices will start to recover. I am saying this because many on this blogs are prudent savers. How are you protecting your saving against the threat of extreme inflation that is almost guranteed now ? Find your ways, gold, oil or whatever. But start thinking.

It's not going to happen overnight. It's a slow process. But we are changing course from deflation to inflation (or stagflation if you will).

Personally, I would find revenge in returning extremely devalued dollars to these criminal banksters.

This home has got to be fun to show:
4 Bed 1.5 Bath Modern Home. Floorplan allows privacy within rooms. Modern Kitchen w/ granite counters and modern cabinetry. PROPERTY HAS LARGE GUARDIAN (ROTTWEILER) DOG- DO NOT APPROACH IT. DO NOT DISTURB TENANTS.
Couldn't resist looking it up on Property Shark:
1431 RUSSELL, BERKELEY, CA 94702
Bought on 1/24/2006 for $642,000
Currently for sale for $350,000
Tempted? Well, maybe not...
There was more trouble in the same south Berkeley neighborhood this morning. At about 9 a.m., someone fired shots on the 1400 block of Russell Street, four blocks south of where the earlier shootings happened.

I am still not able to wrap my head around this whole thing.
Some enlightment would be greatly appreciated.
why does fed have to print more money ( hard currency ? )

Lets assume

1) person A took money from person B to buy a home.
Suppose the home was just worth 100K and Person A took 200k loan and blew away the rest.

2) Now Person C ( Govt ) comes and takes the loan paper (junk loans) from person B. Person B comes clean and PersonC (Govt) is holding a 200k loan paper on 100k Home.

What has changed so much from step1) to step2) in economic terms that it will increase inflation.
Its does not need to inject any more money into the system. Bogus money was injected in to the system and spent in step 1 and not step2.

I thought inflation should have increased when person A was blowing away that extra 100k which was created out of thin air and didn't represent any goods or services created in the country.
please hlep me figure this thing out.

@ snmr,

It increases inflation when the banks are given good capital which they can lend out x10 again. That introduces 2 trillion x10 into the system.

The thing I am personally worried about is not just inflation, but a sudden, total collapse of the USD.

The value of USD is purely based on trust, the trust from us, the trust from foreigners (big time) that our government abide by certain universally accepted prudence measures to preserve its store of value. The Fed and the Treasury in the last couple months have demonstrated in broad daylight that they do not give a f*ck to the value of USD, all they care about is some short-term quick fixes to paper over the stinking shit.

The volatility of USD (expressed in terms of its exchange rate, stock price, oil, gold, commodities) has gotten bigger and bigger, it is a matter of time that such volatility will end up in one decisive, no-return direction, that direction I assure you, is definitely NOT up. And unlike what I had hoped for, an orderly exit of dollar, such a violent event will leave us with many social ramifications. The gangsters at the top of America are playing with fire.

I really think we shouldn't be talking about housing right now (you will have to put a gun to my head to buy a house right now), we should talk about preserving our lifetime savings, preserving our jobs and social order go through what is about it come.

EBGuy,

Berkeley doesn't need your promotion :-)

snmr,

the key about this is, the printing party, as evidenced in history over and over again, has no control where the extra supply of money goes.

Based on our understanding of the American banksters, when they get bailed out, you believe that they will just pay down their debt and be done with it? They won't use the Fed money to...for example, bet on something else to reap more gains, since the money is free anyway?

Leakage is what caused inflation. The Fed just cannot sprinkle money exactly at the place where it is needed. On top of this, there's huge moral hazard of NOT punishing those who f*cked up. You think these banksters are going to be prudent in the future? They will just lay larger and larger bets because they are truly "too big to fail".

snmr :

I am no economist either - so I could be wrong on this one. But this is the way I see it.

Govt is not simply going to take the bad paper for free. They are going to pay some money - maybe pennies on the dollar - to the bank. The banks capital can actually decrease because the asset they had on their book and valued at 1$ got sold to the Govt at 5 cents. So they have less assets on their books and hence can lend less. This is deflationary in the short term.

But now Govt has paid money for this. This will increase budget deficit. How do you think we will fix that ? By increasing taxes and offering less services ? By cutting costs ? Or by printing money ?

Budget deficit doesn't automatically translate into printing money and inflation. If economic activity resumes at a higher pace, increased tax revenue can be used to reduce government debt. For some reason ;-) I am not betting on that scenario.

In this weird arrangement, Govt in theory can profit from these assets - if they were bought at steep discount and eventually realized a much better value - either via cash flow or via sell. But it depends on at what price the Govt buys the paper. And do you think that the money will actually end back on Govt balance sheet ? Or it will be siphoned away in many creative ways ? My bet is, tax payers won't see a dime of it. Ever. Heck most even wouldn't understand what happened.

Remember this - they said giving subprime mortgages was for the benefit of the society. To help poor people get their share of American Dream. They said financial innovation protects us from systemic risk. Now they are doing this - of course to help us save our home, our retirement savings and our society. And our future.

Paulson says this is less costly. The way I understand him - it's not a good thing to pay the Mafia don some protection money - but it's cheaper than letting him rob you.

This is a giant mother of all scams to divert money away from tax payers and common shareholders to a few elites. For example, someone like Bill Gross will manage and sell of these Govt owned assets for a small fee. ;-)

This is - IFF the Govt buys only the mortgage paper. But if they decide to take derivatives/CDS based on that paper then US Govt will be the largest hedge fund in the entire world. Then even God wouldn't help us taxpayers.

And even otherwise, in general my bet is budget deficits result in higher inflation. We already have record deficit. Add this trillion dollars to it. No way we get out of it without printing more money.

From Troy on CR:
Thanks to this blog and patrick.net when I started a new job in mid-2006 I kept my 401K in the MM plan. I only made 2% or so, but that's better than LOSING 10-18% of my retirement principal in these funds over this term.

Berkeley doesn’t need your promotion
For the record, the incoming kindergarten class in the Berkeley Public Schools increased by almost 100 pupils. Never misunderestimate school fetishists ability to prop up home prices. BTW, OO, did you decide to sell your house?

OOO Wrote :
Based on our understanding of the American banksters, when they get bailed out, you believe that they will just pay down their debt and be done with it? They won’t use the Fed money to…for example, bet on something else to reap more gains, since the money is free anyway?

Leakage is what caused inflation. The Fed just cannot sprinkle money exactly at the place where it is needed. On top of this, there’s huge moral hazard of NOT punishing those who f*cked up. You think these banksters are going to be prudent in the future? They will just lay larger and larger bets because they are truly “too big to fail”.

Now that we are already in deep shit and the only way is bailout, can we atleast ask our elected officails to make sure that there are rules in place to guarantee that bank uses fed money to pay off thier debt.

One way to partly fix the moral hazard would be to fire the whole top level management without severance of any bank that used FED help.
If they can bend rules to stop things like short trading and lend free public money, can't they void the severance package clause in a contract of a CEO ?

Now that we are already in deep shit and the only way is bailout, can we atleast ask our elected officails to...

No, fuck off. Where do you think you live? In some kind of democracy, fool? This is a government of the banksters, by the banksters and FOR the banksters. Just who do you think _you_ are to ask your elected official to do anything?
[sarcasm off]

Did we not recently kill thousands of civilians to spread democracy and free markets ?

.....hypocrisy at its best !

EBGuy,

I decided to suspend sale, not because that I think that housing price will hold (in terms of purchasing power), but because I don't want to get caught in the weird USD unwinding during closing and end up holding a bunch of waste paper. With the crisis unfolding at a much faster speed, I really have no idea what is going to happen a week or two from now.

I had one prospective buyer earlier who turned out couldn't secure enough financing, two-income, solid credit rating. The mortgage market is certainly deteriorating fast.

http://money.cnn.com/2008/09/20/news/economy/bailout_proposal/index.htm?postversion=2008092012

A 700 billion dollar bill here. Just add that to the 850 billion already sepnt to save the thieves of America!

Morgan Stanley is the new Haliburton...