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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (10541)	11/12/2008 10:49:43 PM
From: John Pitera	2 Recommendations Read Replies (2) \| Respond to of 33421

Hi Hawk, It's not just the Credit Default Swaps, it's not just house prices falling. an ordinary bond is an asset as well as a liablity. If the average person had 10 million dollars of US Government bonds or GE bonds and if inflation was stable, then they are set. They have an asset, that is also someone elses liability. The explosive growth in CDO's and Credit Default Swaps where and are assets, many of which have gone down significantly or completely in some cases. As more and more CDS where created they then represented assets that where on balance sheets and could be used to bid up the prices of other assets, stocks, commmodities, companies, land, real estate. The investment banks in the second half of the 1990's and the first 7 or 8 years of this decade figured out how to create credit ie. assets by packaging, and repackaging some highly complex synthetic credit instruments that where assets. The role of Credit Creation was literally usurped from the Federal Reserve and other Central Banks. Truth be told we had a momumental stock market collapse from March 10th of 2000 into early 2003, where the NASD went down over 80% and the SPX and DJIA would have gone down and stayed down alot more, and their would have been a half dozen years or more of no growth but collectively the Financial System had gotten to a state where, The Fed and other Central Bankers would act as the backstop; and the man on the street does not know the machinations of this. Having Fed Head Greenspan lower interest rates as low as they where coupled with the boomerang effect of very innovative Credit creation (Asset Creation) by the Investment bankers pushed up all asset values to an extreme; that as we know with all bubbles; when they pop they end and they end badly. For years we have gone from bubble to bubble, and so here we are. I have often spoken of "adam Smith" who is the nom de plume of George Goodman, he wrote a number of excellent books including the Money Game, and Supermoney. In his book the Money game he talks about how the financial system comes down to confidence. We have been through a really strong global run since 1982 or confidence, not everywhere, not the whole way (ie Japan 1990-200?) Pac-Rim meltdown on 1997. Oct 19th 1987. The strong spring backs lead to greater belief in the system and more systemic risk taking on a collective basis. The CORE of the problem is that the entire world is deleveraging and individuals companies, local state and national governments are unable to keep as much credit (assets) as they where formerly able to. Look at GE a triple AAA rated company. It 10 year bonds are having to pay 7.10 % interest to find buyers. That's 350 basis points over 10 years treasuries. When I, Randall Forythe, and Bill Gross wrote about ABN-Amro's amazing CPDO ( Continous Proportionate Debt Obligations) credit spreads where so tight that the yield differential between AAA and 6 wrungs down the rating agency ladders was a scant 125 basis points or so. The contraction of the assets that CDS absolutely are is what has destroyed the balance sheets of the investment banks and the major money center banks. How can we ask to go away and get rid of assets that people had on their books that where worth trillions of dollars and not expect that to be hugely deflationary. As this deleveraging goes on and their is less and less assets in the system, then the price of other assets such as stocks, real estate, commodities etc are worth less since ALL ASSET PRICES are being eroded. The Global Economy is truly slowing and that amplifies the Negative feedback loop You ask if we know the quality of loans, that's not know, heck the FED is being asked to tell the market what kind of prices they are placing upon 2 Trillion dollars of assets they have taken on board ( and I do admit that since TARP etc are term lending that we are seeing some of these things being counted more than once at coming up with 2 Trillion. If GE Triple AAA 10 year bonds are yielding 7.10% then it shows the significant and ongoing fear in the market regarding "Global Deleveraging" and this ongoing "Negative Feedback Loop" And remember London and many other global way stations played ever bit as big of a role in this, so we have plenty of finger pointing to go around. I have simplified this situation, to try to give an "out of the box" answer and give us some additional ideas as to what we are all collectively looking at. JOhn