Bubblegeddon...
As global markets are melting down this morning in the US pre-open,
you might be wondering -- how bad is it?
Well here's what Congress was told in private...
Prepare for a 2,000 - 3,000 point market meltdown and marital law,
if the bailout bill is not passed (looks like the vote didn't matter).
youtube.com
The Bank of Japan has now intervened for 14 consecutive days, injecting a total
of $26 Trillion Yen into the markets, which is equal to 1/3rd of Japan's
national budget.
And the US Fed wasn't waiting for a bailout package to be approved...
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bloomberg.com
Fed Loans to Banks, Dealers, AIG Soar to $410 Billion
Oct. 2 (Bloomberg) -- Commercial banks and bond dealers borrowed $348.2
billion from the Federal Reserve as of yesterday, an increase of 60 percent from
the prior week amid a worsening credit freeze.
Loans to commercial banks through the traditional discount window rose about
$10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today.
The total surpassed the previous record after the 2001 terrorist attacks.
Borrowing by securities firms totaled $146.6 billion, up from $105.7 billion.
Under a new emergency program announced Sept. 19, banks borrowed $152.1
billion as of yesterday to buy commercial paper from money-market mutual
funds, more than double a week ago.
The report reflects the Fed's expansion of credit and emergency-lending
programs to halt a yearlong credit crisis that pushed interest rates on three-
month dollar loans today to a nine-month high as short-term corporate
borrowing fell by the most ever.
``The financial system is on a lifeline,' said Tony Crescenzi, chief bond
market strategist at Miller Tabak & Co. in New York. ``The Fed will have to
maintain this expansion of its balance sheet for quite some time.'
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While US banks are raising capital, they have fallen short by over $130 billion
dollars to what they have written off. That $130 billion levered 12 x via
fractional reserve banking = $1.5 Trillion in credit that will no longer exist.
Figure a $2 Trillion reduction in credit, in a credit driven economy.
It is now apparent that JPM, Citi, Goldman, and Morgan Stanley are all
bankrupt. The Fed is trying to kidnap and shotgun marry deposit based
banks (in the dark of night) to shore them up. This "end run" of the Fed
by Wells Fargo over Wachovia tells just how desperate the Fed is, in
trying to save the Wall Street icons.
Only 35% of Citi's funding comes from it's deposit base... unless it can
roll up a large deposit base bank -- it's toast.
And it's not just in the US.
Deutsche Bank is leveraged more than the US investment banks @ 50:1.
It's failure will crater the German economy and markets...
Falling consumption (consumer spending) does not occur in most recessions,
this will be uglier and longer than prior recessions.
We are witnessing the collapse of the largest bubble in market history.
It is not chicken little to start discussing the "D" word.
It was reported this week that 20% of the Nations auto dealers will close
this year.
The States of California, Florida, and the City of New York are in crisis, and
face bankruptcy. The Industrial mid-west states of Illinois, Michigan, and
Ohio may soon follow, as tax revenues collapse.
And now the bad news...
Lower interest rates, bailouts, and stimulus packages will not work.
The only cure for a bubble is collapse.
The one thing that will NOT work - is trying to solve a debt bubble collapse,
with more debt.
You can postpone the inevitable (as did Alan Greenspan), but that will
only make things worse.
All bailouts and stimulus packages do, is determine who get's the lifejackets,
and access to the lifeboats... and unfortunately, America's $700 billion
lifejacket is going to Wall Street Banks & the NY Fed, not the people.
It's bailing out the bubble blowers and creators.
It's guaranteeing that THEY have the cash and the balance sheets to be
able to step in and buy up assets dumped at pennies on the dollar
post de-leveraging.
Exploding credit spreads and LIBOR rates signaled an insolvency problem,
not a liquidity problem.
Congress was lied to.
We were lied to.
It is not a liquidity problem - it's a solvency problem.
...the core of the US Financial system is bankrupt and is in collapse.
JP Morgan, Citi, Goldman, Morgan Stanley... all dead men walking.
And You and I as taxpayers, are now bailing them out.
Here's a graphic on the size of the bailout so far...
Upon our backs, our lost jobs, our closed factories, our emptied bank
accounts, and our foreclosed homes... they will rise from our ashes.
We've been witnessing a disconnect between the credit markets and
the stock market.
It's now clear that the credit markets were right.
But, what about Gold you ask?
Isn't this just the beginning of a 20-30 year up cycle for commodities?
What about China, India, and the emerging economies, isn't that demand
real?
Yes, it's real. And yes, we are only into year 8 of a 20-30 year up cycle
for commodities.
But when bubbles collapse, gold historically will bottom in year one
of the collapse, and then rise in terms of real purchasing power.
We were fighting the collapse of a historic bubble.
That fight is now over... and the collapse of the bubble has begun.
And we now have to admit that commodities were part of the bubble.
We had pension funds, and State governments investing in commodities
as an asset class, an arena that was in the past only for producers, and
speculators. We had a bubble in the number of hedge funds, and
assets in hedge funds. And we had a bubble in leverage. And now
that leverage must unwind. And unwind it is...
Oil futures alone have seen an collapse in just one month from $58 billion
dollars, down to $8 billion dollars.
So are we facing Armageddon?
This was posted here earlier this week:
nypost.com
The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.
According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.
The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value.
The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt. (Continued...)
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So what to do?
I'll repeat my earlier mantra:
"In this market if you are long anything, you must be short
something else.
If you're long gold, you may want to be short oil, industrial commodities,
or the broad markets.
For example, since the commodity rollover in July, long gold:short oil
has returned a positive +20% return.
And per our old Japan Deja Vu chart:
Short term US Treasuries, and currencies (USD, Yen) will be flight to safety havens:
Here's Gold vs. US Dollar, Japanese Yen, Swiss Franc:
We are now in a high risk:low reward environment.
Not a bad time to be in cash (USD, Yen), short term US Treasuries, and long
only a core Gold position, and short the broad market
indices, industrial commodities and/or oil (short) as a hedge to gold.
And stay away from leverage.
Hunker down, it's looking like it's going to get uglier, real soon.
S.O.T.B. |
