U.S. Economic Collapse

[scandal 951]

uscandual: Do you trade stocks on a regular basis? If so, what are a couple of your holdings and where do you think market is headed short-term?

Nope, I used to do a fair bit of options trading but for many years now I've been just a buy-and-hold accumulator in my 401K - pretty much just broad index ETFs. Since I can't go short in a 401K my only choices are going long or staying flat. I've been fairly conservative for the past year, holding about 70% cash (money markets), and the rest in stock ETFs. I was buying throughout the downturn Jan-Mar, so that's turned out quite well.

I work for a trading firm though, and we are active in pretty much any market you can think of and with pretty much any strategy or holding period you can think of. There are always opportunities to profit in the markets if you know where to look.

Personally, I have no special insights. Like just about everyone, I think we're due for a correction on the S&P probably down to around 750, if not even lower to retest below 700. If I were a bit more aggressive I'd maybe be selling hedged Aug or Sep SPY calls. That is NOT !!!! advice. You've been forewarned.

Hey...you dont have to believe it. Im not going to force it down your throat. But im sure you were one of those people in 2006 that said "real estate prices never go down" and probably bought a house then.

Um, I never said I "don't believe it". I just said that count# of Youtube videos is a silly metric to quantify a market trend.

Your point apparently is that you believe the USD is about to stop being the global reserve currency, and that we're headed for hyperinflation.

Both are possible. I don't think either is likely. The former is unlikely for reasons I posted about just tonight here. The latter is unlikely because (a) we are in no danger of being unable to service our debt, (b ) our debt is financed at historically low rates, so low that any corporate CFO would be fired if he didn't take advantage of capital at these costs (c ) the ratio of our debt servicing/GDP is still within historic norms for a recession. We may very well experience an uncomfortable inflationary spiral as a result of what's going on, similar to the 1970s- but Zimbabwe style hyperinflation? Hardly likely.

As to real estate. Boy, are you wrong. I bought in 2000 in Silicon Valley, was fearful all during the 6 years we owned it, convinced my then-wife (now ex) to finally sell it in Jan 2006, and never looked back. You got me entirely upside down on that call, bud.

[Economist 0]

I work for a trading firm though, and we are active in pretty much any market you can think of and with pretty much any strategy or holding period you can think of. There are always opportunities to profit in the markets if you know where to look.

A trading firm or a prop shop like Interactive brokers? <wink> (sorry to those of you that wont get that)

[Economist 0]

The latter is unlikely because (a) we are in no danger of being unable to service our debt,....

As to real estate. Boy, are you wrong. I bought in 2000 in Silicon Valley, was fearful all during the 6 years we owned it, convinced my then-wife (now ex) to finally sell it in Jan 2006, and never looked back. You got me entirely upside down on that call, bud.

Of course we are in no danger of not being able to service our debt...we have a printing press. Thats the problem and thats what causes hyperinflation.

Good job on the house in silicon valley. I myself bought in las vegas in 2001, sold in 2005 for double what i paid. I was only fearful the 6 months it took me to sell it. Appraiser appraised it about 100k too high. I was upset for a while even though i sold for double, i still feel like i lost 100k LOL.

[scandal 951]

I work for a trading firm though, and we are active in pretty much any market you can think of and with pretty much any strategy or holding period you can think of. There are always opportunities to profit in the markets if you know where to look.

A trading firm or a prop shop like Interactive brokers? <wink> (sorry to those of you that wont get that)

You haven't got the foggiest. Let's just say we're self-clearing where it counts.

The latter is unlikely because (a) we are in no danger of being unable to service our debt,....

Of course we are in no danger of not being able to service our debt...we have a printing press. Thats the problem and thats what causes hyperinflation.

I'm sure you know perfectly well we don't literally inflate our currency by printing it physically on a printing press. Those days are long, long gone.

When I talk about servicing our debt, I mean that the Treasury is able to make regular coupon payments on outstanding notes, and is able to refinance issues at auction which are invariably oversubscribed. Meaning? Out of general tax revenues and new bond issues, we are very comfortably able to meet the nation's obligations. If it were not so, or even remotely possibly about to become not so, believe me the bond market would be in a hysteria that would make the current spread seem a joke.

The Treasury does not (directly) influence the money supply. So the ability to service debt is "real" in the sense that the fiscal authority (Treasury) only has ability to make payments from general government revenues, or from rolling over debt it deems unattractive and auctioning new bond issues.

Meanwhile, our monetary authority (the Fed) can "print" money (i.e. inject liquidity) by lowering the cost of overnight borrowing. And that they have been doing, agreed. Nonetheless this is not (directly) responsible for Treasury's ability to borrow, or to service debt. What the added liquidity can do is to stimulate the economy, by making it easier for individuals and businesses to borrow and invest and spend. And that should, with a lag, result in increased tax receipts at Treasury which can be used to pay debt down faster. The danger of course is that if credit is kept too loose for too long, we may create inflation. Not hyperinflation, but certainly over the Fed's comfort zone of approx. 2%. The FOMC is watching for it, but it's easy to overshoot and miss the signals to tighten/loosen credit.

[mRx 16]

uscandual,

A major floodgate holding back widespread inflation is the intermediary bank's decisions to deposit fresh credit back into the Federal Reserve, instead of lending it, through fractional reserve banking. This inhibits the money-multiplier.

Look at a chart, the money is out there; it's created... But banks are too terrified to lend it.

Additionally, the Feds Treasury bond binge cannot be sustained. Eventually this bubble will blow up. And it will blow big. The FOMC will be unable to shield itself from the fallout--but I'm sure you already know all this.

[scandal 951]

So, we agree that inflation is not on the immediate horizon. Either because it's being watched for by the Fed who's as yet seen no signs of it (my view), or because the Fed's attempt to stimulate is failing and the money is not being circulated out to the broader economy (your view). Either way, we're not seeing inflation at this time.

As to your last sentence, "binge cannot be sustained...bubble will blow up... unable to shield... fallout.."

Fairly apocalyptic language.

I don't share the sentiment. Call me an incurable optimist who believes better days lie ahead.

Look, I've been reading Bill Fleckenstein's report, and Bill Gross (Pimco) and Stephen Roach (Morgan Stanley), and David Tice (Prudent Bear) for years. I "get" the bear point of view, and for many years I shared it. I still share it, just not the doomsday part of it. Those guys were warning about Fannie and the GSAs back in 2001. Clearly there is a bear case to be made. And I think now that we had the implosion of the past year everyone can see they were right all along about the credit expansion and lax regulation and underwriting and bond rating etc.etc.

But I believe we've seen the worst of the very worst. Last Sept when Lehman failed, I thought that might very well be the official End Of Capitalism. As in - pack up your marbles boys, the game is officially over. I believe we really were on the very edge of a precipice, and it was a 10,000 foot drop over the side. But we've come back from then.

At this point, I don't see it as being that dire. Yes, we'll still have a ton of bank failures yet to come. But none of the big institutions will fail. Either they can hack it, like Goldman, or we've made it clear by now that they're just too big to fail, like Citi. The stress test was just a bit of smoke and mirrors, nobody left today is going under. That's clear to everyone at this point.

There is still a massive amount of cleanup to do. There's tons of unpriced assets sitting on balance sheets, there's tons to still write down. There will be credit card delinquencies that are only now starting to come into focus. There will still be some major shudders, and we're definitely due for a big correction in the equity markets once the shorts are all finished getting squeezed out in this current round. I'm not saying it will be pretty. But doomsday? I don't think so.

I think we could very likely see a quarter of positive GDP by Q4/09 or Q1/10, and perhaps a turnaround in the labor market by this time next year. Overall I think Bernanke got it right. The Fed was stingy in 1930-32, Bernanke did not want to repeat that mistake. I think he (and Paulson!) last fall saved the country. I really do.

[Niels Bohr 72]

Arthur Laffer got fired. He's working as a people greeter in Wal-Mart at minimum wage. While Peter is on the high chair of the IMF. :rof:

[ready4ONE 5,400]

[one...two...tree 2,762]

Flavor Flav FTW!

[mawilson 2,133]

At this point, I don't see it as being that dire. Yes, we'll still have a ton of bank failures yet to come. But none of the big institutions will fail. Either they can hack it, like Goldman, or we've made it clear by now that they're just too big to fail, like Citi. The stress test was just a bit of smoke and mirrors, nobody left today is going under. That's clear to everyone at this point.

We'll see.

Six months ago we were told that a GM bankruptcy was out of the question, that it was

synonymous with Depression.

GM and Chrysler were considered too big to fail, and yet, some 30 billion dollars later,

they have failed anyway.

You can't mess with the natural order of things. Pouring billions of dollars into insolvent

banks just delays the inevitable.

[Peikko 1,575]

Who said they were too big for chapter 11 bankruptcy? I don't remember anyone saying that...must have missed it. They have not been dissolved. Now that would be news.

I am interested in how many banks (and which ones) are genuinely insolvent though.

[Niels Bohr 72]

I gota say this, if FOXNews heeded the advice of Peter 2-3 years ago, we would have been able to circumvent this problem. Now, we are in deep chit. Well, FOXNews aren't in charge of the market, but, people listen to them it seems.

[w¡n9Nµ7 §£@¥€r 123]

I gota say this, if FOXNews heeded the advice of Peter 2-3 years ago, we would have been able to circumvent this problem. Now, we are in deep chit. Well, FOXNews aren't in charge of the market, but, people listen to them it seems.

I can't stand the treasonous terrorist douchebags who run Faux News, but even I don't they impact the markets as much as you think. Heck, CNBC likely impacts the market more than FNC does (and even that isn't much).

[scandal 951]

You can't mess with the natural order of things. Pouring billions of dollars into insolvent

banks just delays the inevitable.

Granted, Citi is technically an insolvent institution. Probably BofA is as well, and maybe even Wells Fargo since who knows what contagion they picked up from Wachovia.

At the most basic level, what I'm arguing is that a bank is really nothing more than its balance sheet. Unlike an operating company like the automakers which have inventory, supply chains, parts & labor ... a bank really is its balance sheet above all else. And a balance sheet can be "bought out". It really is just a matter of adding liquidity to even things out. Oversimplifying, of course, but not dramatically. Sure you'll want to have management shakeups, get rid of weak lines of business, do some of that good management-consulting stuff.

By and large the banks are able to run very handsome profits with today's spreads (remember they get to earn the spread between short and long term loans which as we all know is at a lifetime record right now). Hence they're in no danger of running an operating loss right now. Their real problem is the hangover of toxic junk from the bygone years. And after the scare last fall, and the stress tests this spring, America's top banks have effectively all become GSAs with the same implicit guarantee that the old GSAs always had. They're not going to be allowed to fail.

[mawilson 2,133]

Who said they were too big for chapter 11 bankruptcy? I don't remember anyone saying that...must have missed it.

Here:

GM Rises After Pelosi Urges Industry Aid Plan Passage

Nov. 12 (Bloomberg) -- General Motors Corp. rose 5.5 percent in New York trading

after House Speaker Nancy Pelosi urged Congress to pass an industry bailout, embracing

the premise that GM is too big to be allowed to fail.

In backing an emergency aid plan, Pelosi rejected calls to let the largest U.S. automaker collapse,

saying she wanted to stop the loss of millions of jobs. Today, House Financial Services Committee

Chairman Barney Frank proposed tapping $25 billion from the $700 billion in bank-rescue funding.

"Trying to reorganize the auto industry in bankruptcy would be as close to reorganizing the

whole U.S. economy as you could get,'' said Alan Gover, a bankruptcy lawyer with White & Case LLP

in New York. "The vast supply chain involves thousands of businesses, millions of existing jobs

and just as many retirees, as well as whole communities and states.''

Passage of an industry bailout plan may keep GM from running out of operating cash by year's end,

which it says may happen without U.S. help. Detroit-based GM is the second-biggest provider of

private health-care benefits and was the third- biggest advertiser in this year's first half.

"It's truly one of those companies that's too big to fail, and everybody understands that,'' said

Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. "If it

does collapse, it could make the recession deeper and longer.''

Recession Fallout

Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from

October's 14-year high of 6.5 percent, and produce a recession as long as that of 1980-82.

Ford Motor Co. and Chrysler LLC also might be at risk.

GM climbed 16 cents to $3.12 at 4:15 p.m. in New York Stock Exchange composite trading after

tumbling yesterday to a 65-year low. It was the only company among the 30 in the Dow Jones

Industrial Average to advance. Ford rose 4 cents, or 2.2 percent, to $1.84.

While Pelosi, a California Democrat, didn't cite GM by name in her statement endorsing a bailout,

she said an automaker collapse would have a "devastating impact on our economy.''

Frank said he would convene a hearing Nov. 19 on legislation to use $25 billion of the Treasury's

bank-rescue plan for loans to the auto industry.

"The consequences of a collapse of the American automobile industry would be particularly

troublesome,'' said Frank, a Massachusetts Democrat.

Industrywide 2008 U.S. sales are headed toward a 17-year low, hammered first by gasoline prices

and then the credit crunch. The slump is overwhelming cost-cutting efforts including elimination

of 46,000 U.S. jobs at GM since 2004, when the company last posted an annual profit.

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