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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: William H Huebl who wrote (75132)	4/2/2007 6:36:59 AM
From: Real Man	Read Replies (1) \| Respond to of 94695

It's 9 Trillion notional, but the notional is exchanged, unlike interest rates derivatives, and it's the notional that blows up - when someone defaults on their mortgage, they do so for the full amount, although some is recovered in foreclosure. Not all of that is blowing up, but weird loans represent significant percentage (probably above 50%, someone on credit bubble thread has the numbers) of all loans made in 2004-2006. These loans are resetting to (much) higher rates now, and most if not all will reset in 2007-2008. Can J6P pay that, if they went for these loans? I sure doubt it. They can't refinance easily either - there are penalties, banks have been very greedy. The whole pyramid of credit derivatives rests on J6P's shoulders. If you read the report, equity derivatives also represent a very high portion of income, although notional is not that high. Now, guess what happens to VAR (Value at Risk) when volativity goes up sharply? My guess is that if credit derivatives get in trouble, so will derivatives in other areas - interest rates, equities, etc. The situation in option selling (equities) is insane. It all rests on mathematical Black-Scholes type models (options portion is very high), which, as we know, are like picking up nickels in front of a steamroller. The Fed is trapped as well. Inflation stats is high, and the dollar has dropped to the point of "no return". What they did before was a reasonable short-term solution - raise rates and monetarize, so the Yen carry does not blow up. Now the Japanese are raising, the Fed is careful monetarizing, can't raise (credit derivative meltdown), can't lower (Yen carry and dollar meltdown, leading to HIGHER rates). Conclusion: The Fed is becoming irrelevant, the market forces are about to take over, and it's not going to be pretty because these forces were held at bay by the Fed for so long. Now, the Fed is trapped. Can the government do something in case of a decline? The answer is no. They already passed the tax cut, the budget deficit is extremely high. Conclusion? BK is coming soon, Mr. Market will take over and purge the post-bubble excesses that were not allowed to be purged. A long and painful, but necessary process. Maybe the Fed and others will do something right this time? I sure hope they avoid getting the country into the total chaos of hyperinflation. We have to thank MR. Bubbles AG for all the mess. It could have been cleared by the tough Fed in the mid-90-s, but the Fed cared about short-term painless solutions, which, sure enough, were to facilitate the bubbles and add to excesses that will need to get cleared later. Later is the key word.