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

To: Cogito Ergo Sum who wrote (11612)	2/1/2009 2:25:09 PM
From: Hawkmoon	Read Replies (1) \| Respond to of 33421

The US standard of living really started to soar. but somewhere along the line the installment plan changed to credit. Yep.. but when you have Japan, then China, parking a ton of the profits they made selling stuff to Americans in US denominated assets, it's basically "manufacturer financing". Not quite mercantilism, because they aren't repatriating all their profits back home, but still a form of "beggar thy neighbor" by making them dependent upon your credit. It keeps US interest rates low and capital remains plentiful, which places pressure on US banks to put that money to work somehow.. But, of course, it now puts us at financial risk because what happens if they decide to sell off those American assets and repatriate it back to their homeland? Unless they can spur domestic demand to compensate for reduced US demand, they may find themselves dipping into that "piggy bank" they have set up in US assets. But all that being said, you're right that American balance sheets have become stretched over the past 10 years. But Americans have been saving in other forms, primarily via IRA, Roths, and until recently, Real Estate. But now they have no place to save and draw a decent yield, except to stuff $$$ into electronic mattresses (ala Japan). I have no answers and find myself playing each day by ear :o( I hear ya.. What seems clear to me, however, is that the financial sector really took it's turn to the downside with the demise of the financial surety sector and the implementation of FASB 157. Without counter-parties able and willing to step up to diversity financial risk, and banks hesitant to loan against deflating collateral values due to market illiquidity, it's just the perfect storm. Financial models for valuing these assets were inherently flawed, and new ones need to be discovered (which will be difficult without trustworthy Credit Rating analysis). So IMO, that's where we have to start fixing the problem if we have any hope of stabilizing asset prices, and therefore, the banking system for which those assets represent collateral. Painful as it might be, we need to put a lot of those toxic Mortgage bonds into an RTC style "bad bank" so they can return to some form of credible "mark to model", as well as provide a program where people can stay in their houses with a mortgage they can afford, without necessarily rewarding them for foreclosure. Maybe extended mortgages at lower rates, where total amount paid over that time is not really a subsidy. It's not always going to be fair, but if this ship sinks, it isn't going to matter if you're in steerage or first class.. We're all going to go down together. Hawk