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Credit Debacle the start of an imminent Recession

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Due to the recent market volatility, provoked by the sudden "subprime loan debacle" in the US, I'd like to share with you all my personal views on this subject, especially that it is something I have been watching closely for the last 4 months. But before I go on with this little dissertation I want you to understand that I don't pretend to be an economist, I simply use "basic economics 101", which is something our financial leaders maybe should use.

I feel the actions from the Fed and central banks worldwide including our own RBA (ie several massive injections of cash into the market to the recent 1/2 point rate cut in the US) was a desperate and hasty move. This "patch the holes" moves, is rendering the market a great disservice, and it will make things a lot worse for the long term.

Basically, the Fed is adding water pump to a sinking ship, instead of fixing the holes, and eventually the ship will sink anyway, because nothing has been fixed. But I don't think they care, they need to make the masses feel better now, because they need a happy consumer to keep on buying crap.

However as harsh as it sounds and as painful as it will be (but not a politically popular move) it is a needed economic cycle, needed to purge the excess and this imbalance that have been created in order to begin a new healthy, and lasting positive economic cycle. The "band aid solution" ( "instant feel better") will only delay the inevitable and once it comes, instead of going thru a "mild and short recession" it will be a lot more painful possibly creating if not a depression but at least a SEVERE long and VERY painful recession .

This credit debacle is far more serious than most even begin to realize, and here is why I think so:

I honestly believe that we are at a critical credit and liquidity imbalance , and it goes all the way down to the low income consumer. Our consumption society as a whole is now mostly based on borrowed money, practically no one nowadays has the discipline to save his cash to buy XYZ item or a car or take a vacation. Most spend more time planning "credit vacation" than they spend planning healthy finances.

For example I have witnessed in both Europe and the US (I have lived in both continents long enough and have the advantage of knowing both very, very well) and observed consumption habits on both continents and the similarities are very scary, of course the US is by far still the "the leader of the pack".

In general I have observed that families with medium limited incomes were basically shopping on credit most of the time, either for clothes, cars, food, electronics, and vacation. In my parent's days they saved for everything. But at the end whatever they had in their house was 100% paid for, their vacation was 100% paid for, and they still managed to save some hard cold cash for rainy days.

Today the people not only don't have a decent nest egg, they just don't have any, but they drive Mercedes, BMW's, have entertainment centers that would make George Lucas look like a hobo....

So when it comes to people and real estate, why are we so surprised? It is the same mentality, they have used their overpriced houses like an ATM machine, courtesy of clever and creative financing method to either make some other ludicrous over priced real estate acquisitions they can't afford (hell, they could barely afford the first one in the first place if it had not been for ("creative mortgage facility"), or buying all types of useless adult toys, not to mention extravagant home improvements or vacations.

They bought into the nonsense of these realtors and the media that real estate would go up indefinitely, these realtors, most of whom are no more than improved shoes salesmen and Tupperware housewives have been taught in an 8 hours seminar learning the cookie cutter classic economic theories why real estate will always go up. The funny thing is I hear the same logic being used in the US and in Europe. They all must attend the same 8 hours seminars, and all become economic experts at the end of it, why not!!! They have certificates of completion to prove it...And the media is basically owned and operated by the ones that want the mass to consume and spend for the benefit of some other companies they own. "The basic Asylum runs by its patients"

Now you might think what is then the relationship with subprime loan? well here it is in a nutshell: ( I will simplify the process for you):

This is what Banks, and financial institutions do (which are more worried of making short term money to obtain fat bonuses and fat executive salaries):

They borrow money in Yen (Japan has the lowest interest rate of all industrialized country) actually at almost 0 %, and they either invest in equity and debt markets around the globe (also creating a bubble on borrowed money, btw), and also they loan that borrowed money to other financial institutions that create all sort of "exotic mortgages", and "credit facility", you name it. Then some other layers of financial institutions re-package all these different forms of loans into high yield financial instruments to be parceled out and sold back to the financial institutions that had borrowed money in the first place. Basically, they are creating a gigantic credit Ponzi scheme on borrowed money with the consumer as its base for guarantee, and since the consumer himself is over extended, I don't need to tell you what will happen next.

Of course we try to find an easy typical fall guy "Wall Street" for creating all these derivative instruments, all they did is they found an opportunity and ran with it to make money. The real "crew of culprits "are the highest and also the lowest level on the food chain, the higher ones: well, we vote for them and the mass buy into their self serving demagogic promises and speeches, the lowest one is the consumer gullible naivety, and greed. Almost all financial experts want us to believe that whatever the fed is doing is good. Think again.

This will not save the people that are about to lose their homes, this will not save the basic overextended consumer, since most all exotic Mortgage and credit companies are closing their doors anyway, and even the conservative ones are now on "survival mode", they will not cut any slack to the overextended and delinquent consumer, on the contrary. No matter how much liquidity the FED is pouring and no matter how many times they cut rates. The surviving institutions are now in contraction mode, too busy doing damage control or even saving themselves. The only money they will loan back in the market will be to people that don't need it.

The only thing you will see will be fake "dead cat bounces" but at the end the real estate is "cooked" (actually it has been cooked for over 2 years , the masses just didn't know it yet and still don't even know it or to what extend it will be cooked). Houses that are sold today for 2 million dollars they will be lucky to get 1 million for it, and if they even get that. Keep in mind that in the next year another $700 billion or so of "adjustable mortgage are due to reset, that is over $170 billion more than this year, and more adjustable mortgages will be reset after 2008.

This massive liquidity and credit imbalance which started over that last 20 years or so is only about to enter a severe readjustment and it has barely just begun. I just don't know how long and how it will play out, but it will play out. Of course the Fed/government will play some of its "voodoo" economic short term magic tricks just in time to benefit some "crooked, lying, greedy, performing monkey ass politicians" election or re election, and it will make the "masses" feel better in short term, just in time to cast their vote, all this trumpeted by their favorite interested (paid off or own) accomplices "cheer leaders", the media.

Also don't forget, because it is related and will play a major role in this grand skim of things, that the US is running an unprecedented account deficit , basically in less than 8 years the current US administration have borrowed more money than any other administration put together, so if the country enters a severe recession ( which I think it will ) not only the US government does not have a "nest egg" but it has blown its wad by already overextending itself "debt wise" and in a period of decent economic time I may add, (for their own benefit btw, but that is another subject all together) .

So when we finally enter this severe recession the US government has already blown most of its "borrowing options"(during the good times), the only option it has left will be to go much deeper in debt rendering the US dollar as valuable as the pesos, the consequences of that will also be severe, and they will have to raise taxes drastically, just to pay the " bar tab" of the previous administration. So when I hear deficit don't matter they will re think that theory very soon, but of course the "fearless leaders" who left the restaurant with this "orgy tab" will be out of office by then, enjoying their pontificated retirement and collecting book deals, consulting deals, speech deals, and other corporate deals they worked out before, leaving the already over extended US taxpayers to pick up the "orgy bill" (via increased taxes) for decades to come. Hell, the US taxpayers are still paying for the S&L debacle they don't even know it, but trust me there (that was when Mr. Bush senior was VP, interestingly enough, most best S&L debacle asset that went into auctions were picked up at ridiculous bargain prices by some of Mr. Bush Senior's friends .The public was only allowed to bid for the chairs and tables and the bailout package was provided again- courtesy of the taxpayers.
 

wayneL

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Another bear... bewdiful.

Welcome to the club. :D
 

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nice reading...
really comforting to know the "real" truth behind the scheme.
hopefully the "destruction" is not happening soon.:D
 
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There are any number of threads on this forum that carry the type of arguments you have put forward. Don't take this the wrong way but you haven't offered anything new and quite honestly it falls short of a lot of the commentary put forward in other threads.
 
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You know what? The market will collapse only after the presidential elections... That's just a hunch
 

wayneL

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You know what? The market will collapse only after the presidential elections... That's just a hunch
Our "presidential" elections, or their's? </ironical_swipe_at_presidential_electioneering>
 
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In the mean time while I am waitng for the market to crash it usually does the opposite to what it should:confused: or rather what I expect.

So after last nights debacle the DOW futures are (at the moment) about 40 points higher and maybe it will be a triple digit gain tonight.

A stock I follow PNA has risen 50% from the recent sell off 10 days ago when it droped about 30% intraday and then recovered.
I missed the lot through indecision and waiting for it to get cheaper tomorrow.

Our own market seems to have disconected somewhat from the good old US of A .. only lost 1/2 of what it should have today and yesterday only 7 points down.

Sooner or later the bears will be right but it is a guessing game for someone with my limited experience.

Maybe I should just buy a good quality blue chip and ride this roller coaster out. With an election in the US next year pressumably the fed won't let it fall to far before cutting rates and of coarse the olyimpics might somehow help

I have not traded at all for this past month sitting on the side lines guessing what might happen tomorrow

I have heard/read all about greed and fear.... neither of which affects me.
What I was not prepared for was indecission ?

So what to do ???

Rob
 
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You know what? The market will collapse only after the presidential elections... That's just a hunch

Think you might be right there insider.exactly when is the next US election??

Great post ibradman.alot of effort and thought there.

wayne put me down for a bear as well!!!!!

I cant see the xao making new highs for a few years actually.We will go up and down for possibly a few mths maybe 6.Then i see a nice steady downtrend beginning.Well its already started just trying to fight against atm it will become more obvious when everyone starts to realise.

How long can the fed keep trying to fix the problems with band aids???
 

prawn_86

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i'll admit i dont know much about macro issues, but if it got to a severe stage with the amount the US has borrowed (a figure i heard is they are borriwing over $60million per DAY), is it possible that the western economy could or would try to reset itself?

ie - just wipe everyones debts and start again?

like i said just a thought so dont tear me apart too much.
 

explod

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There are any number of threads on this forum that carry the type of arguments you have put forward. Don't take this the wrong way but you haven't offered anything new and quite honestly it falls short of a lot of the commentary put forward in other threads.



True partly, dont' see what you mean by "...fall short..." and would like your clarification?

What is being said has been repeated but in my view cannot be repeated enough. This is not gloom and doom this is the actual reality today in the US and some of it will hurt in our land too. I will repeat part of that statement "IT IS THE REALITY TODAY IN THE US". Commentators say be calm but give no qualification.

Those of us in the know have a duty to warn our family and friends and anyone we can to prepare for the tough times ahead, pull in the belts and relinquish debt if we can. As with the carry trade and sub-prime margin calls, everyone wanting to suddenly reduce debt here in Australia will begin to unwind together and sadly it also will be when it is too late.
 

robots

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hello,

what credit debacle?

business to business is where the trouble is, businesses go down daily across the world in all fields

the main fed rate has not been cut, smarta**se investment bankers have made "sophisticated" products to on sell to suckers out there (fund managers etc)

have Rams executed all their mortgages and called in the money?

"property has been cooked for 2 years"

thankyou

robots
 
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True partly, dont' see what you mean by "...fall short..." and would like your clarification?

What is being said has been repeated but in my view cannot be repeated enough. This is not gloom and doom this is the actual reality today in the US and some of it will hurt in our land too. I will repeat part of that statement "IT IS THE REALITY TODAY IN THE US". Commentators say be calm but give no qualification.

Those of us in the know have a duty to warn our family and friends and anyone we can to prepare for the tough times ahead, pull in the belts and relinquish debt if we can. As with the carry trade and sub-prime margin calls, everyone wanting to suddenly reduce debt here in Australia will begin to unwind together and sadly it also will be when it is too late.

No need to repeat, you're preaching to the converted. After the way the post was introduced I was expecting some grand revelation. I was disappointed by the time I got to the end of it. I had assumed ( perhaps wrongly) that everything in the opening post was well known and didn't need repeating.

Falling short in the sense that it makes some rather sweeping generalizations without much support except for personal opinion.
 

explod

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No need to repeat, you're preaching to the converted. After the way the post was introduced I was expecting some grand revelation. I was disappointed by the time I got to the end of it. I had assumed ( perhaps wrongly) that everything in the opening post was well known and didn't need repeating.

Falling short in the sense that it makes some rather sweeping generalizations without much support except for personal opinion.

Agreed a bit wild. There is a lot of fear and uncertainty about. In that light it is hard to keep emotion out and remain objective. Nothing personal meant.

Perhaps we need look more at what we can do to insulate ourselves and families, but too late tonight after a big day for me
 
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I have read elsewhere that when taxi drivers give share tips be fearful.

I am starting to think that when stock forum posters give economic analysis quoting Economic 101 then be optimistic.

Nobody knows what is going to happen in the next six months. Uncertainty causes the market to swing on its rusty hinges. Why else would the Dow tank 280 points when...wait for it...consumer confidence is 'measured' and found to be lower in the wake of a month of headlines of impending economic doom. Talk about a self fulfilling prophecy.

Other investors are hell.
 

wayneL

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I have read elsewhere that when taxi drivers give share tips be fearful.

I am starting to think that when stock forum posters give economic analysis quoting Economic 101 then be optimistic.
Contrarian analysis is invoked waaaaaaayy too early these days, because everybody knows about it. This effectively rules out it's efficacy.

A better strategy is to fade the contrarians, it's been working lately. :)
 
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If people are interested in America's finacial stragedy I suggest you download this pdf file.
http://www.michael-hudson.com/books/superimperialism.pdf

Its a long read but quite interesting.

Basically shows how the rest of the world is financing the good old USA.
They are actually very happy to be running a massive account deficit, as its their financially weapon of mass destruction that they use against the rest of the world. :eek:
They started running a large deficit in the late 60's due to the Vietnam war, and than once they got rid of the gold standard they worked out they could print money at will and get the rest of the world to buy their bonds and receive some interest on them.
They achieve this by having the dollar as the reserve currency of the world. It explains quite well how no other currency can currently threaten the US dollar role as the global reserve currency. Basically says something along the lines that if one country (or a number of countries) wanted to challenge the US dollar than they would have to go on a massive military buildup and than challenge the US directly in military confrontation. You have to remember the US didn't get to where it is now in a short period of time. You only have to look at the US's defence spending to know that they aren't about to let someone else step up to the plate and challenge that dominance. ;)

Also it actually helps the US when their currency is weak against a back drop of other currencies. It makes their exports more competative thereby ramping up domestic production and stimulating their domestic economy. The Fed is well aware of this and have actively driven their currency down, much to the dismay of the Europe, Japan etc. Its also the reason why china refuses to unpeg its currency from a artificially low level. :rolleyes:

So what does this have to do with the current market. Well I'm not sure, but I do know I am not smart enough to think that I can predict where the market is heading. So I can only go on price action. If the market is moving in a certain direction than I want to try and make sure I am going with it. If not than I should be standing on the sides protecting my capital.
 
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Great post kitehigh.

There are 2 parts to this conundrum - the Yen carry trade unwinding & the US consumer.

I have been watching the US homebuilders for the key to what direction the US economy will head. If you were an American you could ask yourself "Do I feel wealthier than I did this time last year"? For an ever increasing number the aswer would be no. So this starts to feed into the mindset of the average US consumer who then needs to reduce spending etc. The recent consumer sentiment report alludes to this happening now. What we also have is actual once in a generation type (negative) changes in consumer linked indices and industries eg housing which indicate that the bottom is still a long way off.

Homebuilders are the canary in the coal mine - which one will file for bankruptcy first?

So my take is that the US consumer has already started down the path of a reccession, only the severity is in doubt. We will only know how bad it is when & by how fast the Fed starts dropping interest rates.
 
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No need to repeat, you're preaching to the converted. After the way the post was introduced I was expecting some grand revelation. I was disappointed by the time I got to the end of it. I had assumed ( perhaps wrongly) that everything in the opening post was well known and didn't need repeating.

Falling short in the sense that it makes some rather sweeping generalizations without much support except for personal opinion.
One of the reasons I love being Aussie-freedom of speech(opinion).These forums would be virtually non-existent if it weren't for people's opinions.
So back to the topic-regardless of all the prognostications(opinions) of the economists,fund managers,bank managers et al that the economy is in fine shape and growing worldwide,the U.S.is still number 1(not China or India) in the chain and it is showing signs of being sick.Like a family,if one catches the bug,the rest usually come down with it as well.The cure is medicine and rest.
Just what the overheated markets and economy need a dose of(opinion or fact?)
 
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