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

It looks like the media is finally doing some homework, and that they are beginning to understand what is happening in the economy. For some time now, I have been accusing the major media of hiding the truth about the markets, in order to satisfy big business. I've changed my mind, now, because it looks as if they really had no idea of how the markets work.

Here are some things that are happening, that you may expect to start seeing in the news.

Less talk about the subprime, and much more about the hedge funds and how they have been running under the radar. This means that a few more people may begin to understand the black box of derivatives, and how the lack of oversight has caused the entire market fall. The SEC as a cheerleader for business has now come to the fore, and to the credit of the Administration, they are refusing to bail out the big players.... The SEC had wanted to indemnify the hedge funds, and turnover the losses to the public... In effect Bush said he would not allow that. (Yeah, I know... I can't believe that myself.)

Recognition of the reality of inflation. From 2.3%, the real inflation is being recognized as about 7.5%. In fact, I believe that you may start hearing about 12% to 14% inflation... this year.
I believe that 15% to 20% may be reasonable by the end of 2008.

Remember the caution about the price of the Japanese YEN... The panic point was said to be $1.12... At that time, it looked to be well in the distance since the trade was at $1.22, and in fact looked to be going higher. In the past week or so, the trading has dropped to $1.16. While no one is talking about this right now, the Carry trade is in a wild panic. The effect of this potential problem on the Fed, could be catastrophic for US interests. Stay tuned, and watch the YEN.

Pension Funds... Notice that no one is even talking about this. That's because the people who run the Pension Funds don't know that they are paying for the current market drop. Fund values are only calculated at the end of the month, and unless the Fund Values reflect a mark to market, they may not know about the extent of their losses for several months. (Watch for Fund Directors' resignations).

The entire problem began with fast and easy trading of owed debt... (they call this "Credit")... The SEC was complicit with the big guys, and allowed the Black box Derivatives and Unlimited leverage... with NO oversight. Alan Greenspan was the Rasputin here. Credit him with keeping the balls up in the air for many many years, while the rich got richer, and the poor didn't know they would have to pay for it.

The bill for years of affluence is coming due. The guys who caused it are living in the Hamptons, on their yachts, or in Dubai.

Except for Americans who have already lost their jobs, the public is only now coming to the realization that their way of life may be seeing some changes. Jobs last, only as long as the companies who hire, are making money. With the current average rainy day savings standing at just over one month, trouble may be just over the horizon.

This really grabbed me by the neck.
http://thearchdruidreport.blogspot.com/

It's been reprinted in everything from The Energy Bulletin to The Oil Drum and I think a few major newsers want to pick it up too.

"The carnage began with mortgage companies, not so long ago the darlings of the financial press. Eighty-odd of them have imploded in the last few months as they discovered that if you loan money to people who can’t pay it back – who’d have thought? – they can’t pay it back. Next it was the turn of hedge funds that speculated in mortgage debt, with two Bear Sterns funds leading the rush to insolvency."

Los Angeles Times

THIS IS BIG!!!!!

BUY!

The only thing I would do is a "Put/Call Butterfly Spread" at this point with the Put on the near term and the Call on the long term.

Phil...Countrywide has about another week, if the crunch continues there is little the company can do to avert bankruptcy. As the largest mortgage originator in the nation, Countrywide provides 1 out of every 5 mortgages in this country. As such, this is one of those dominos that will signal alarm on the global economic front. Global confidence in the U.S. economy will falter, the U.S. Dollar will possibly take a dangerous hit as nations holding U.S. debt will seek to dump that rising risk instrument.

I was watching CNBC at market close (what to do while on the stairmaster at the gym with my favorite music playing but watch that -- the alterntaive was some dumb sopa opera) and the talking heads were rapturous about the magical "recovery" of today's market. Once down by 343 it rebounded and ended almost even.

In speaking about Countrywide, some pointed out they have used their reserves now so what happens if the financial markets continue to restrict credit for a prolonged period.

I am certainly no economist, but it just seems to be common sense that until the people of this country pay down their personal and governmental debts and reign in buying everything on credit hoping for a rosy tomorrow this economy is in deep doo doo.

just wondering, what happens to peoples mortgages if the company goes bust?

do they get to keep the money?

No...if a mortgage company or lender goes bankrupt and it has serviced its own loans, which few do, then the loans will be placed with other companies, lenders, banks to service them. Most loans are packaged into pools and sold anyway. In case of Countrywide, it does service a substantial amount of the loans it originates, but most are sold off, all are the basis of mortgage-backed securities. The problem is that confidence in such securities is low and getting lower, so investors are either refraining from the purchase of such loans...thereby causing the liquidity crisis, or dumping such securities, if they can, in favor of more secure, less risky instruments.