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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (36254)	7/18/2005 5:27:09 PM
From: bond_bubble	Read Replies (1) \| Respond to of 110194

The MBS is backed by GSEs. (And the GSE is not backed by Fed but US Treas). I believe that the US fin markets always levers to such an extent that some arm of govt always defaults. In 1933, US Govt defaulted on its people by reneging gold, then in 1970s it defaulted on foreigners (again gold standard) AND I strongly believe this time it will have to be GSEs!! Govt will default on GSE obligations!! Anyways significant agency bonds are held by foreigners!! MBS has not are growing in the last 1.5 yrs. It is the ABS that has been taking its place. And these ABSes are heavily traded by Hedge funds - which are funded by banks to a great extent. When the ABS fails, the calling will come to the banks (where hedge fund deposits are held) and this will cause a run on the banks!! In the 1931, the run was caused by people withdrawing money - this time it will be hedge funds default that causes run on banks. Any body who thinks this is a possibility? Because of the hedge fund withdrawal of deposits from banks - there will be lot of uncertainities in the bank - whether to hold higher reserves - to avoid bank runs. i.e the reserves will become excessive and the credit bubble stops growing OR you have what is called liquidity trap - No more liquid juice flowing!! I believe this is how deflation is going to be visible in a year or two. This will happen when the current interest only loans to home buyers stops growing - hence the ABS price stops growing - And hence people start unwinding ABS/MBS. I believe ABS are being bought only for price appreciation and not for the yield (which is mispriced considering the risk in it). When its price is not supported by appreciation - investors will start looking under the hood for the risks!! Is this likely to be the major route of depression? Any ideas....?