News What is wrong with the US economy? Part 2

[LowlyPion]

DOW Down 500 and now positive 75

 

[Astronuc]

DOW Down 500 and now positive 75

It is so volatile that it is swinging either direction by several hundred points each minute.

At one point the actual value and the points dropped from yesterday's close did not coincide.

http://news.yahoo.com/s/ap/20081010/ap_on_bi_ge/world_markets

The latest woes in Europe came after the Dow Jones index in the U.S. closed 678.91 or, 7.3 percent lower, at 8,579.19, its first close below 9,000 in five years. The slide on the Dow was partly fueled by the decision of credit-rating agency Standard & Poor's to review its rating on General Motors Corp.

The Dow's seven-day decline of 20.9 percent is the largest since the seven-day plunge ending Oct. 26, 1987, when the Dow lost 23.8 percent. That sell-off included Black Monday, the Oct. 19, 1987 market crash that saw the Dow fall nearly 23 percent in a single day.

 

[LowlyPion]

It is so volatile that it is swinging either direction by several hundred points each minute.

At one point the actual value and the points dropped from yesterday's close did not coincide.

http://news.yahoo.com/s/ap/20081010/ap_on_bi_ge/world_markets

The original 500 point plunge looked like the kind of V bottom traders have been looking for. And yes the indicator looks positively spastic jumping about like it has after coming off the bottom.

With Bush speaking now, get a good grip on your undies.

 

[Astronuc]

Dow 30 range so far today: 7888.48 - 8664.81

 

[LowlyPion]

The Lehman Credit Default swaps have been priced today and the first prices are 9.75%, though the auction is not closed and may close a little higher.

Let's see 90% off of $400B. Gee a person could retire on that kind of money.

 

[OmCheeto]

Has anyone seen the following?

"How the markets really work" Bird and Fortune(2007)


It seems to be posted everywhere under various titles.
The exact date is difficult to pin down when this program aired.
The earliest posting I could find was October 20th, 2007

 

[LowlyPion]

DOW off 350... oops 320 ...296 ... now maybe a double bottom?

Or going lower?

 

[Art]

Crisis? What crisis?

In a further development, the value of City bonuses in the UK is expected to fall this year by 58%, according to the Centre for Economics and Business Research.

But it still forecasts that bonuses of about £3.5bn will be paid out

http://news.bbc.co.uk/2/hi/uk_news/politics/7662586.stm

This is what angers people and destroys public confidence in the markets. These clowns just don't get it!

 

[chemisttree]

Just over a year ago, under Bush's wise stewardship, the S&P index went to $1565.15, a record high. However, fears of an Obama Presidency have caused weakness in this and several other indices. Indeed, the S&P index has fallen some 40% from its high, to $909.92 and it looks like it will fall further today. I am not much of a stock investor, but I do have a small portion of my money in a stock which miraculously was in the black until yesterday. Now I too have a slight dent in my retirement account. Today I will start buying small amounts of an S&P index fund, perhaps 5% of my retirement money and again each day for the next 20. I figure the market, if it recovers at all, will probably recover to around where it is now, perhaps slightly higher. But I am already 40% ahead of the game, and even if the S&P goes to $0, I will still be 40% ahead of everyone else.

I believe the current situation is called 'blood in the streets'.

Read http://articles.moneycentral.msn.com/Investing/SuperModels/poof-there-goes-an-american-dream.aspx" before you invest...

It's two weeks old but sadly seems to be coming to pass.

 

[Astronuc]

Read http://articles.moneycentral.msn.com/Investing/SuperModels/poof-there-goes-an-american-dream.aspx" before you invest...

It's two weeks old but sadly seems to be coming to pass.

From the article cited by chemisttree - about 3 weeks ago.

These institutions are likewise trying to figure out how much exposure they have to thrift Washington Mutual, which may find itself in bankruptcy court before the week is out. Insurance titan American International Group has also been a worry, but a government rescue announced Tuesday evening will likely keep it out of bankruptcy.

If American International Group can find the capital it needs, it will end the current panic. If it can't, look for more selling -- especially in Asia, says MSN Money's Jim Jubak.

Certainly Asian markets and economies are getting hit hard. An Japanese mid-sized insurer has declared bankruptcy.

This is part of the Dow's fall:
Goldman's Outlook Revised to Negative by Moody's, Stock Tumbles 15% to 52-week low - AP

This is some good news - but the deficit needs to disappear. The US needs to have a trade surplus.
August trade deficit falls to $59.1B - AP

Bush's speech of reassurance in the rose garden conjures images of Nero playing a violin while Rome burned. Bush still doesn't get - not that he ever did. They haven't yet addressed or admitted the fundamental problems, and no one knows for sure if the bailout will work as hoped.

 

[Greg Bernhardt]

Here is a comment made by someone on another message board that I think is interested and depressing.

It took me awhile to get what was going on...and you gave some good thoughts when we chat last. This is all crashing due to institutional liquidation so they can raise cash. Cash to cover their a$$es, not to buy back in...like you said.
It's going to end up more about who is NO LONGER in the market more than the shorts or what retail thinks. Suck enough liquidity out of the market and this is what you get...a hard and paper asset drain. Now imagine what will happen if/when the early and late majority of baby boomers pull their funds for retirement. This drain is going to remove much of the "money supply" in this country and in turn globally. There will be more damage to come from companies closing or tightning up, job loss etc...

 

[Astronuc]

I don't agree that the situation necessarily must go that way.

What we need is good, strong leadership, and for the majority of people not to panic - perhaps easier said than done. The cash is there - but it may not be enough to cover all current and future obligations. Printing more money doesn't work because inflation would blow up - Germany after WWI and before WWII.

Realize the production and the economic system is still there - production still occurs.

We've been drifting along the economic river have a nice time, and now we've hit white water. Hold on and don't fall out of the boat. If somebody falls out - pull them back in. Everybody will make it through to the next stretch of calm water.

 

[edward]

A closer look at credit default swaps.

As the government buys mortgage-backed securities from teetering financial institutions at less than face value prices, issuers of the credit default swaps could be liable for the difference.

That's troublesome enough, but it actually gets worse.

Buyers of credit default swap insurance are not required to own the underlying securities they are insuring.

In other words, the investor can buy insurance on a mortgage-backed security without having to buy the security itself. When that security turns sour, whoever is holding the credit default contract — whether they actually own the security or not — can demand payment for the face value of the security.

This has created a market in which speculators actually are betting that mortgage-backed securities will lose their value.

http://ap.google.com/article/ALeqM5hOsN_qL-c8hjW8BvU160ZYwhYB8AD93LSV480

Are we trying to put out a fire by dumping money on it? To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

Give people penalty free access to their 401 (k)'s. (This was in the original bail out plan.) This would help stop the bleeding among the middle class.

If people were allowed to roll their retirement plans into CD's and T Bills the government wouldn't have to borrow as much from foreign countries to finance the bail out.

OK so this does sound nutz...I'm just venting. My son's 401 (k) is down by over 40% and that's just through the end of September.

 

[mheslep]

The US needs to have a trade surplus.

Why? Needs to have? What do you propose are the consequences of not having one?

Bush's speech of reassurance in the rose garden conjures images of Nero playing a violin while Rome burned. Bush still doesn't get - not that he ever did. They haven't yet addressed or admitted the fundamental problems, and no one knows for sure if the bailout will work as hoped.

What are the the 'fundamental problems' then that have not been admitted, and how do recent actions by the Central banks/Treasury/Congress fall short of your prescription for addressing them?

 

[mheslep]

... To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

A large share of the home-owners are the speculators by exactly the mechanism prescribed - they paid only a small % of the value of the asset, or none at all in many cases.

 

[LowlyPion]

Are we trying to put out a fire by dumping money on it? To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

Unfortunately the banks and insurance companies chasing juiced returns have impaired their balance sheets and they are the speculators as much as anything. This is apparently Icelandic banks' problem and a good part of the reason that governments are having to step into bail out the situation. Some reports put the CDSes at 63 Trillion. This needs to be unwound because apparently it is all leveraged and layered and interrelated. And there has been lots of abuse.

 

[Astronuc]

Why? Needs to have? What do you propose are the consequences of not having one?

Because that represents wealth/cash.

China has trade surplus with the US, and I believe Japan and others do to.


Where does the US Treasury borrow money? From China, Japan, EU countries.


We buy their products with borrowed money.


The US is living on a credit card. What happens with the interest can't be paid? Default? Then out the window goes full faith and credit of the US Treasury. Perhaps that's the plan.

 

[edward]

A large share of the home-owners are the speculators by exactly the mechanism prescribed - they paid only a small % of the value of the asset, or none at all in many cases.

Oranges and apples. How many home buyers intentionally bought a home with failure in mind?? How many home owners intentionally bought an over the counter insurance policy to speculate on another persons potential failure??

 

[jal]

It helps to get a prospective by reading what analyst from other countries are saying.
From this website http://www.bmonesbittburns.com/Economics/
Look at http://www.bmonesbittburns.com/economics/bottomline/20081010/bottomline.pdf
More Action—Crisis Intensifies
October 10, 2008
Dr. Sherry Cooper, Executive Vice President, Chief Economist
We are quickly ticking off the rescue actions I predicted early this week:
Coordinated rate cut—done and more to come
Direct capital infusion into healthy banks through preferred share investment by
Treasury—done in the U.K., likely the next step in the U.S.
Insure all U.S. bank deposits regardless of size. Denmark, Germany and Ireland have
already done so.
Guarantee interbank debt—done in the U.K. The U.S. Treasury might go as far as
guaranteeing all bank debt.
Accelerate the FDIC process to shut down insolvent banks or (better still) arrange
sales of insolvent banks with or without government assistance.
Loans to state governments, which in turn could make loans to local governments.
Treasury could purchase municipal bonds and insure state and local pension funds.
Government low-interest loans to household
G-7 finance ministers are meeting this weekend. Secretary Paulson is holding a press
conference at 6:45 PM tonight to discuss the outcome of today’s meeting. No doubt it
will be a busy weekend, with additional actions taken prior to the market open Asia Sunday
night. Watch out for another wild Monday.
After the election and (maybe even prior to the Inauguration) further actions will be taken:
A government housing bailout including subsidized loans to creditworthy delinquent
homeowners and government purchases and redevelopment of vacant housing.
Fiscal stimulus for the economy, including stepped up government spending for
infrastructure, alternative energy, education and health care.
Massive enhancement and restructuring of financial market regulation.
========
There is soooo much more info in the link … do read it.
=======
In passing, it looks like the gov. could guarantee all of the ill gotten gains of those who oppose gov. intervention.
How ironic.

 

[mheslep]

Because that represents wealth/cash.

China has trade surplus with the US, and I believe Japan and others do to.

I think this mistakes the symptom for the disease. Consider : trade rules aside for a moment, the US could simply pass a large tariff on imported goods to force the trade deficit to zero. To what effect? The cost of goods in the US would sky-rocket and the economy would likely tank as when this would tried w/ Smoot Hawley. So visibly, erasing the trade deficit does not necessarily represent 'wealth/cash.'

Where does the US Treasury borrow money? From China, Japan, EU countries.

We buy their products with borrowed money.

The US is living on a credit card. What happens with the interest can't be paid? Default? Then out the window goes full faith and credit of the US Treasury. Perhaps that's the plan.

You are referring here to deficit spending by the US government, not the international trade balance.

 

[D H]

To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

To hell with those homeowners. Most of them are speculators, too. I do not want the government lending any financial support to those who refinanced their mortgage every time the paper value of their house went up so that they could afford to have a fistful of Starbucks lattes a day, a ski trip in St. Moritz, a weekend or two at Cabo, and an African safari. They can start drinking McDonalds coffee and spend their weekends at a nearby state park. I do not want the government lending any financial support to those who committed fraud on their loan applications, claiming they had an annual income twice their real income. That real estate agents and loan examiners colluded in that fraud is irrelevant. The fraud would never have happened if the applicants hadn't been a part of the greed equation.

OK so this does sound nutz...I'm just venting. My son's 401 (k) is down by over 40% and that's just through the end of September.

Mine has tanked, too. It looks like I will have to work another twenty years -- in other words, well into my seventies.

Oranges and apples. How many home buyers intentionally bought a home with failure in mind??

Anyone who lied on their application did exactly that.

 

[mheslep]

Oranges and apples.

Speculator: one who buys an asset for anticipated gain in market value, versus the material use of that asset. The definition does not depend on the political niceties of the asset.

How many home buyers intentionally bought a home with failure in mind?? How many home owners intentionally bought an over the counter insurance policy to speculate on another persons potential failure??

People buy insurance policies every day, expecting a pay off in the event of some catastrophe: life, property, auto. Then, fortunately, those policies can be resold on the marketplace to distribute the risk. If you are referring in general to 'shorting', or betting that an asset will decline in value, that practice aids in identifying fraudulent companies and 'irrational exuberance'. Warrent Buffet:
http://www.fool.com/investing/value/2006/06/01/berkshire-behind-the-scenes-part-5.aspx

 

[Astronuc]

I think this mistakes the symptom for the disease. Consider : trade rules aside for a moment, the US could simply pass a large tariff on imported goods to force the trade deficit to zero. To what effect? The cost of goods in the US would sky-rocket and the economy would likely tank as when this would tried w/ Smoot Hawley. So visibly, erasing the trade deficit does not necessarily represent 'wealth/cash.'

I said nothing of tariffs. And yes the government could, but that would provoke similar action on the export from the US.

You are referring here to deficit spending by the US government, not the international trade balance.

No - I was referring to the trade deficit. The government deficit is another problem. And the uncovered obligations of SS, which have not been addressed.

The US economy is like a victim of a car accident. The Treasury and Fed are the EMT/ER staff, and they are doing the intervention to keep the patient from further injury or death. Meanwhile, the patient unbeknowst to the patient and EMT/ER, the patient has diabetes, heart disease and cancer that are affecting recovery. Treat the injuries and keeping patient alive will not treat diabetes, heart disease and cancer.

The diabetes, heart disease and cancer are the credit default swaps (CDSs), other financial instruments, devalued real estate and collateral, hyper-consumerism, economic disparity, . . . . Basically the US cannot sustain the standard of living achieved two years ago because the money and capital (wealth) simply do not exist to do so. It's time people wake up and realize that!

 

[mheslep]

I said nothing of tariffs. And yes the government could, but that would provoke similar action on the export from the US.

I know you didn't. You said the US 'needs a trade surplus' because a surplus 'represents wealth/cash.' I presented one scenario to show where this is not the case.

No - I was referring to the trade deficit.

Again, you said:

Where does the US Treasury borrow money? From China, Japan, EU countries.

We buy their products with borrowed money.

The US is living on a credit card. What happens with the interest can't be paid? Default? Then out the window goes full faith and credit of the US Treasury. Perhaps that's the plan.

The US Treasury does not borrow money because of the trade deficit.

Basically the US cannot sustain the standard of living achieved two years ago because the money and capital (wealth) simply do not exist to do so. It's time people wake up and realize that!

I don't agree for any time window longer than a couple of years, but let's say you are correct. If people 'wake up and realize that' as you demand, what action should they then take, once so informed of the truth?

 

[chemisttree]

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

I think the problem has moved way beyond the mortgage crisis. The mortgage crisis was the first crack to appear in the disfunctional credit default swap market. Once the flames have spread there it is game over. The very structure of the credit market itself is at risk now.

This is why the Fed is throwing billions at AIG, lowering interest rates and begging for help from the rest of the world. Personally, I don't think there is anything that can be done to stabilize it and "http://www.marketwatch.com/news/sto...8462-1146-45FF-A280-00B7CD74BC49}&dist=msr_2"" Paulson appears to be willing to debride the weaker or more exposed banks. That coupled with the increase of FDIC insurance to 250K bodes ill for cash itself.

The next bad step will be runs on apparently unaffected banks by depositors. Paulson will make it illegal to do so (since the "value" of the deposits is insured 250K, y'know) and we'll all be lucky to have the use of our credit cards before it is all over.

A real sphincter-tightener, this one...

From the 3-week old article I quoted earlier:

OK, now here's the place where you may need to cover your eyes.

Satyajit Das, a credit derivatives expert based in Australia, told me in a phone interview Monday from Singapore that these events have "essentially destroyed the capacity of the banking system to provide funding to businesses." He added: "Investment banks have destroyed their capital by making foolish loans on a massive scale, and the chance that they will get new capital, as they did back in the spring, is low. If you are a sovereign wealth fund and give new money to Wall Street now, you look like a chump. They won't be sugar daddies anymore. It won't fly politically at home. It isn't going to happen."

So who's going to refill the capital well? You may have heard that money does not grow on trees, and neither can countries actually "print" money, since that actually involves the sale of new bonds at a time when the market is flooded with them.

Well, U.S. Treasury and Federal Reserve officials have urged American banks to pool together a $70 billion fund to bail out weaker members of their tribe. But Das scoffed at the effort as a nonstarter, considering they are all equally desperate to hold on to their capital: "It's like the deaf . . . volunteering to help the blind," he said.

So you can see why stock markets are suffering. The credit engine that has fueled the planet's economic growth is now kaput, as banks and governments have downshifted from risk-taking mode into survival mode. The only hope now is that the unraveling will not accelerate and become an uncontrolled spiral into the ground.

"The European Central Bank and U.S. Federal Reserve have held international financing together with chicken wire and hope, and only now are people seeing how fragile it has been for years," Das said. "As the contraction of credit feeds out into the real economy, business expansion will grind to a halt, unemployment will soar, and consumer spending will falter -- all of which leads, in turn, to lower production and more unemployment."

...Now he thinks the financial part of the game is in the fifth inning, as it has raced toward the inevitable conclusion of large-company bankruptcies faster than he expected. There are only so many major institutions that can go under, after all, and already two are dead, and two more are on the brink.

If American International Group can find the capital it needs, it will end the current panic. If it can't, look for more selling -- especially in Asia, says MSN Money's Jim Jubak.

Yet it turns out we're in a double-header, and the nightcap involving the crushing of the "real economy," which is where all of us live and work, is only in the first inning -- as companies are just starting to cut back jobs in a serious way to match diminished business and the loss of borrowing power. On Monday, Hewlett-Packard (HPQ, news, msgs) and Lehman Bros. announced plans to lay off 25,000 people each.

Now we just have to hope this game isn't called because of darkness.

That last bolded part is where the insidious side of the Credit Default Swap monster will eat us all...

 

[mheslep]

I think the problem has moved way beyond the mortgage crisis.

I think that is mistaken. Until housing prices stabilize as Greenspan says we have a problem, regardless of action/inaction of derivatives of those mortgages. That is likely to take until the middle of next year according to him.

 

[chemisttree]

Hmmmm. Total value of the Mortgage industry... 7 to 14 trillion.
Total value of the Credit Default Swaps (FY2007 only)... 45 trillion.

Naww! The mortgage crisis was only the spark. The real fire is in the rest of the credit market.

 

[edward]

Hmmmm. Total value of the Mortgage industry... 7 to 14 trillion.
Total value of the Credit Default Swaps (FY2007 only)... 45 trillion.

Naww! The mortgage crisis was only the spark. The real fire is in the rest of the credit market.

You may be right. The average credit default swap is sold ten times. No one knows where they are or when they will pop up.

http://www.todaysfinancialnews.com/...efault-swaps-a-blind-date-goes-wild-4718.html

 

[edward]

Speculator: one who buys an asset for anticipated gain in market value, versus the material use of that asset. The definition does not depend on the political niceties of the asset.

It sounds like you are insinuating that everyone who bought a home in the last three years did it for speculative purposes.

People buy insurance policies every day, expecting a pay off in the event of some catastrophe: life, property, auto. Then, fortunately, those policies can be resold on the marketplace to distribute the risk. If you are referring in general to 'shorting', or betting that an asset will decline in value, that practice aids in identifying fraudulent companies and 'irrational exuberance'. Warrent Buffet:
http://www.fool.com/investing/value/2006/06/01/berkshire-behind-the-scenes-part-5.aspx

Well it looks like we identified the fraud and irrational exuberance... about two years too late.

 

[russ_watters]

No - I was referring to the trade deficit. The government deficit is another problem.

I've pointed this out before and now others are. You are misunderstanding what a "trade deficit" is. Having a trade deficit does not mean that that balance is borrowed money.

You say these things over and over: start researching it and prove it to us. Hopefully, you'll read enough to learn you misunderstand the issue.