Capitol Hill Blue Forums Political Issues Finance, the economy & Economics The Economy - Stuff to watch

Tough times... no question, and likely getting tougher. Rays of light are fewer and farther between... On the business side, the current best outlook is for goods and services provided for the wealthy. NYC Condos, Sports Cars, Yachts etc., and what I'd call "service industries for the wealthy." Almost all other sectors of business will feel the crunch.

Update on Stuff to watch... (sadly, almost all on the darker side).

... Decline of the dollar... possible switch to Euro. (too many implications to cover here...)

... Subprime/CDO's/Hedge/Derivative/SIV/ etc... first wave of "due dates" coming in October. The collateralized Securities market is only directly affected when the security due date occurs. The institutions holding CDO's are able to maintain the value as an asset... so long as the CDO does not HAVE to be traded or sold. Banks, Brokers, Pension Funds who can provide liquidity with other money instruments, are not openly affected until they are forced to sell the owned CDO's. NOTE: the long-term problem of reduced actual value remains. Pension Funds, Bank Assets and Insurance Company Funds will likely be the last losses to be acknowledged... No one in the management area of these funds will willingly stipulate the actual losses.
The important thing to note, is that all of these "book assets" will be redeemed eventually, at lower values. The time periods of the loans, extend from months, to as many as 30 years. In the meantime, attempts to "unfreeze" are likely to fail.

...The actual "at risk" losses in the Subprime are variously estimated to be two to three hundred billion dollars, one year near term, and 1.3 trillion in total.

...The Fed interest cut (1/2 percent) was at best a short term gift to the banks and brokers, allowing them breathing space to restructure their bad bets. There will be no "real" effect on the consumer housing market (the supposed reason for the cuts). The failure to provide any long term help to the homeowner is already apparent. Fannie Mae and Freddie Mac are the two last bastions of relief for CDO's. A compliant Fed will probably use these entities provide more relief to the securities market, but there are built in limitations of trust that will ultimately limit this outlet.

...The Fed rate cut will also most assuredly provide the immediate result of beginning a rapid increase in inflation. The rate cut resulted in the immediate decline of the dollar, which will make imports more costly. Based on world markets, the Fed may be forced to raise the discount rate in October... (contrary to current opinion).

...Unemployment... While the official unemployment rate is under 5%, we are dealing with a non-comparable number. Considering the "gave up looking" and the underemployed... experts see the current rate at between 7.6 and 10.5%. This does not include the coming huge layoffs in the housing, banking, auto, and service industries (all of which are already known but not calculated in the official figures). It also does not look forward to the natural hardening of the market, as the effects of recession show up in the overall economy. The single saving grace in employment may be the Military Industrial Complex. This is the least understood of all the employment bases. The hundreds of billions of dollars ($450B?) in the annual Federal Budget, and the additional hundreds of billions in off book supplemental war budget dollars, are providing much of the current employment. In a non-war economy, these jobs do not exist. This subject is a conundrum not easily addressed in an overview. Don't look in the MSM for anything on this, since this is the ultimate taboo subject.

...The lack of a "financially based safety net". There appears to be no "fall-back" plan for the middle class. In the past (with ups and downs), we had the "dot.com" phenomenom, the housing bubble... the credit card debt... the "personal savings" backup (now down to .15%), and tax cuts (meager as they were for the middle class). ....And of course the loss of government created "fiat" money, which value, as stated above, is no longer valid, due to the falling dollar.

...With most options dried up, and the probable bankruptcy of State Governments (another subject, but relevant), the single possible economic redemptive option is the turnover of the public commonwealth, to the private sector. While this is already happening, it lies well below the radar. Look for increased emphasis on this... with the sale/lease of public properties, public lands, public utilities and governmental entities of all kinds. (yeah... I know this is kookie but it's my guess.)

Timetable????... hmmmm... Alan G. said "Turbulence"... Guesses are from 6 months (to the time when it hurts)... to 2 years. IMHO, the former. Tracking this is going to take clear thinking, as the worldwide markets twist up and down.

Enough... this can be depressing... What the nation really needs is a "Dear Abby" advice column for the middle 85% of the nation. Aside from betting on Gold... there doesn't seem to be any easy way of staying ahead of the game, that I can see. For those on fixed income, it looks like "riding it down" may be the best option... For everyone else, it looks to be a scramble to stay employed and pull in the expenses as much as possible. There aren't too many people around who have gone thru a serious recession, and even fewer who remember the great depression. Cutting the losses was the best choice for most. There will be those who stay ahead of the game, and come out with much more than they started with, but it'll be grading on the curve... in this case, with many more losers than winners.

Ummm... does the bearer of bad news fall on his sword, or suffer decapitation?

Let'em eat Twinkies.

http://www.safehaven.com/article-8487.htm

thought some of you may find this interesting as it is written by one of the republican presidential candidates

From your link quoting Ron Paul:

"The reality is that this type of manipulation of the markets masks where resources, or money, ultimately comes from. It comes from the taxpayer. The government doesn't create Gross Domestic Product, they just limit and control how it is done. They then absorb much of the value produced in the economy through taxation and inflation, so they can squander our nation's wealth with runaway spending."

Sure makes me feel relieved.

J

dollar hits new low against Euro

PLease USA sort it out, youre really screwing with our exports!

however if this trend continues im going on one hell of a shopping spree in the states!

So... we're into October... the market didn't crash, and the Dow is at an alltime high. August was the trigger for a recession/depression that didn't happen.

Was Bernanke right? Maybe!

With all the emphasis on the subprime, the question that comes out of the fast drop in the market was Why? ... and more importantly, "Why?"... all of a sudden.

Here's an article that may explain "Why?". I got the horse right here!

It has to do with derivatives (though not by name)... and the risks involved in "leverage".

Much to think about, for everyone who has a stake in the stock market.

A very effective way to make money in the stock market as Julian Delasantellis says in his article is to be a contrarian.

Contrarian indeed... Yes.
For every "down", there is always an "up". The trick is to know the "when".

Back to the current problem/opportunity. Faced with the worst market disastr in history, the "market" has managed to turn up, to a new all-time record. If you're confused, you are not alone.

Every major brokerage house is involved... deeply... in the losses from collateralised debt obligations. A short term boost came from the Fed, to make these houses liquid. For whatever reason, the "market" seemed to take this as a solution, when in fact, the illiquidity still existed. The "paper" assets still existed and could not be traded, due to the continued distrust.

Now, many of these banks and brokers have taken write downs of these "CDO's"... in the amounts of two to five billion dollars... each. So far, the total that has been publicly announced seems to be about 40 to 50 billion. Amazingly... once these firms made the writedowns public, instead of causing a loss of confidence, the market reacted by boosting the market values of the companies... as if this represented the total of the losses. The media and the banks/brokers announced that they were now poised to go forward... with new safety nets in place, to prevent future losses on hedged bets.

My guess is that the announcements represent only a tiny bit of the actual losses. When Fannie Mae made a similar announcement of potential losses af few years back, they stated that they had lost about 3 Billion dollars. That figure is now over 25 billion dollars. I firmly believe that the amounts of losses so far admitted by the banks/brokers, are the tip of the iceberg, and represnts only the amounts they needed to admit to, in order to restore some measure of confidence in the CDO market. (apparently this worked in the short run).

The early amounts of the total losses that were being discussed by financial experts, back in August... were in the vicinty of 300 billion dollars...

So, it's a matter of "who do you trust?".

Here's a link to the latest writedown by Merrill.
$5 Billion Merrill writedown/loss

Be careful about who, and what you believe.

update on losses taken by major banks as of 10/8/2007... total 20 billion.

writedowns for "mark to market"

optimists will figger this is it! a done deal. git on with investing.

some of us will be watching this... and believe it is the "tip of the iceberg".

a question of "who do you trust?"

One should have complete trust in the market. Sure, some may suffer and some may lose every thing they own due to no direct action on their part, but such is life. Some lose, some win and the market is the best at keeping it as equitable as possible.