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

To: russwinter who wrote (76759)	12/27/2006 5:36:30 PM
From: benwood	Read Replies (1) \| Respond to of 110194

The United Arab Emeritus announced they would reduce their dollar position by 8% by September of next year. jsmineset.com

To: russwinter who wrote (76759)	12/27/2006 8:06:19 PM
From: NOW	Respond to of 110194

Is the world awash in capital or credit? Wed., Dec. 27, 2006, 9:30 AM I am increasingly miffed to hear so-called experts saying the world is awash in money when what they are referring to is credit. ADDENDUM That credit may be in the form of an unused bank line. It may be unrealized gains in brokerage accounts. Possibly, it’s in the collateral value of a home. Yes, it’s there today, but as we all know, circumstances change. Banks tighten; market prices cycle down as well as up, collateral disappears, loans are called, credit lines pulled, and unrealized gains become losses. Sales people don’t want you to think about the bad times because they have something to sell you today. But, the availability of ‘money’ does not equate to opportunity. I assure you that sometime soon I will be talking about the world being awash in opportunity, and many of you will be complaining of a lack of money. "Monroe" sent me the following mail, which is precisely on point. The situation re credit is just unbelievable, and many Wall Streeters are calling this “money” as if it refers to equity. I just cannot believe how stupid or misguided some of these TH’s are to use the expression "awash in money" without any thought to the other side of the coin. The following is in response to an editorial that appeared in Sunday's NY Times written by Ben Stein. Dear Mr. Stein, I have been running a hedge fund for almost seven years now and prior ran derivative trading at several wall-street firms. My fund trades derivative instruments with our $1.5 billion in capital. In addressing your first assertion, that hedge funds make their money on positive carry, I would say that you are partially right. There are most likely many hedge funds borrowing low and lending high in “safe” investments, but the key word is “safe”. There are many likely scenarios where these safe investments would turn toxic quickly. It is not only hedge funds that are speculating in this way; you can say the same thing of Goldman Sachs and JP Morgan. I disagree for the most part on your thoughts of where this cheap money is coming from: It is not coming from a high savings rate from Asian investors but from the creation of credit by all central banks. The Federal Reserve creates credit through its open market operations like REPOS and coupon passes. If the Fed wants to inject liquidity (credit) into the system, they simply call up large broker dealers and buy some of their bonds with credit they create out of thin air (this expands their balance sheet). The dealer then passes this credit on to “the market” by making loans to mortgage companies or margin accounts or whatever. Because each layer of lender is only required to keep marginal capital on hand, a $1 billion REPO done by the Fed eventually creates as much as $100 billion in new credit to the consumer. That credit creates the liquidity for additional consumption in the U.S., but these days we are buying our stuff from China (other countries too but we will just say China to make it easy). When a Chinese company receives dollars in trade, this normally would drive up U.S. interest rates: the company goes to the central bank of China to exchange Yuan for dollars; the central bank of China would normally sell those dollars into the currency market for Yuan thus driving up U.S. interest rates. But in our world of today these dollars are being sterilized: the central bank of China prints the Yuan to give to the company and takes the dollars and buys U.S. securities. It is not the excess savings of Chinese investors that are buying U.S. securities. It is central banks creating credit themselves to buy those securities. The tick data that measure foreign inflows of money does not distinguish between private investors and central banks going through brokers to buy U.S. securities. We believe that as much as 90% of foreign money buying U.S. securities (not just Treasury bonds, but corporate bonds, mortgages, and yes, stocks) is not private investment, but central banks. In order for other central banks like China's to print the Yuan necessary, they too must create credit. Public debt in Asian countries is expanding as a result and creating worries: this is why Thailand came out essentially raising margin requirements to reduce speculation that is occurring as a result. Notice how they were quickly slapped down by their trading partners who do not want to rock the boat at this time. This situation is very unstable in the long run. The Federal Reserves' balance sheet this year alone has expanded by $30 billion in this way and created $3.5 trillion of new credit in the U.S. Public debt around the world is growing exponentially and total debt in the U.S. now stands at nearly 3.6 times GDP (1929 was 2.8 times). My hedge fund's position is the opposite of the carry trade you mention. There is coming (timing is unclear where it may be tomorrow or may be years away) a massive correction in debt and derivatives whose magnitude is only growing with time. I invite you to visit and spend a few hours with me to discuss in depth hedge funds, their role and growth, and specific positioning and risk control we employ. Best Regards, John Succo Posted by Posted by Bill Cara on December 27, 2006 09:30:12 AM \|http://www.billcara.com/archives/2006/12/is_the_world_awash_in_capital.html#more

To: russwinter who wrote (76759)	12/27/2006 10:17:23 PM
From: Ramsey Su	Respond to of 110194

I have not left, just seldom found much to say. When I have something to say, it is usually too boring except for a few that are as into details as me. I also think most will post and read this and the real estate crash thread so either one is the same.

To: russwinter who wrote (76759)	12/28/2006 10:30:14 AM
From: John Vosilla	Respond to of 110194

'Public debt around the world is growing exponentially and total debt in the U.S. now stands at nearly 3.6 times GDP (1929 was 2.8 times). A massive correction in debt and derivatives whose magnitude keeps on growing with time is coming. Timing the event is difficult to predict.' Yes timing is everything as is whether purchasing power of your dollar goes up or down when we chose the next fork in the road. Two points I see little discussion on are the financial strength of US corporate balance sheets today versus prior cycles and how much more tax and spend, infrastructure rebuild ect.. is going on at the local level due to the housing bubble.. Much of this seems to offset Joe6pack being up to his eyeballs in debt which receives too much focus. As long as he is employed and has access to credit from JP Morgan, Bank America and indirectly the Chinese manufacturers the party can continue indefinitely IMHO..