This Time it Really is Different - Panicky Naked Fear Blossoms Like Spring Flowers
"Market repairman Chopper Ben Brenanke has fixed himself right into a corner. Sir Alan’s easy money multiplied itself in the dark encouraged by hedgies and LBO artists taking outrageous criminal risks. They were simply not happy with 10-1 leverage. How about 100 to 1 with collateral so nasty some is now valued at zero. As the old Indian said in the classic western movie, “The Outlaw Josey Wales” as played by Clint Eastwood when he arrived to save the captured settlers-“Hell is coming to Breakfast.” We would respectfully suggest market repairman gets more than common indigestion. We think he’s white as a sheet, shaking and flat-out petrified with good justification.” -Traderrog
Our marvelous Federal Reserve scrambled and ran to the rescue last week propping too big to fail market abusers. They have no choice now but to continue their charade; either inflating or dying. In 1920-1921, America suffered a sharp, and short, severe economic depression because government kept hands off. Within 18 months this monster was gone and markets were healed ready to begin a new profligate spending rampage known as the roaring 20’s. We all know how that little beauty ended.
In our current dilemma, the Green Man should have let market inclinations run their course in 1999-2000. Instead after the Nazz collapsed, Sir Alan didn’t just helicopter money to the Sheeple but dropped it by the ton with waves of bombers.
His result was the mother of all dead cat bounces as consumers bought every house, car, truck and Asian toy to be found using easy, over-funded mortgage finance cash. Immediately, the remaining stock indexes embarked upon this splendiferous news with a screaming market rally saving us all from ourselves; temporarily.
Meanwhile, Japan was grinding itself out of deflation at a pathetically low speed seemingly taking forever to regain its footing from its 1989 stock market implosion. This set the economic stage for today’s crash and burn messes. Greenspan knows the consumer drives 70% of the USA economy, so he temporarily fixed their problems. But this successful event then opened doors for something much more spectacular; the origination of Wall Street Wild West derivative finance at its finest.
Those fund boys have never met a margin too large or too wide. Now they could borrow in Japan at ½ % and get those bucks working at 5-6% in other solid currencies, bonds, and bills providing a new basis for El Supremo leverage. Not happy enough with basically free cash, they leveraged it even more with magic derivatives. This was like shoveling it out of Brinks trucks for free but suddenly in 2003 the paper-buying suckers caught on and decided this collateral really didn’t smell too good.
Not to be defeated or even slowed in this get-rich-faster game, our fund boys simply packaged mortgages with numerous values from blue chips to cow chips putting it all in one big pile with the name tag AAA rated.
Numerous foreign banks and funds had standing open orders to purchase anything out of New York rated AAA. So guess where the suspect derivatives landed?
We Think Europe Bought Most of This Garbage Paper Tagged AAA
You think things are getting rough here right now, how about in Asia and Europe where banking systems have little experience dealing with this kind of junk? Plus their derivative pile greatly exceeds ours. This was the ultimate off-shoring in specious suspect paper. When it all slammed into the wall last week, the European Central Bank made an unprecedented move opening their cash vaults to borrowing banks offering all they needed or wanted at 4% accepting collateral of any stripe. Now, is that real fear or what? This offer preceded Chopper Ben’s Discount Window trick. The Euro boys must be very frightened.
Liquidity Problems Surfaced in Commercial Paper
Commercial paper is issued for shorter term borrowing used by companies and several kinds of financially independent entities for a variety of expenditures. If the lenders become worried about ability to repay in this group they either charge higher interest or don’t provide the loan. Users of commercial paper have good credit histories enabling them to borrow and they normally have the collateral. Suddenly, in the current instance, collateral was going bad with the speed of light and this market seized-up in flash.
This market is gigantic, shuffling over two trillion dollars at any given time with lending periods of a few days to usually 90 days or less. More than half of all this paper was recently issued by securities of asset-backed borrowers. With lots of suspect paper in the pile, the lenders got nervous and stopped rolling over the loans or in fact taking any new ones. Last week spreads widened dramatically in a massive spike scaring the hell out of those lenders and panicking borrowers.
Naturally, the truth was not reported by the Federal Reserve as to the extent of the problem. Information is so scattered and convoluted we cannot report an accurate amount, but the fragmented totals we saw were so miniscule, they could not possibly have precipitated this crises. The hidden financial trip-wire had to be in the billions with neither lenders nor, borrowers able to conduct normal business.
Yields on junk bonds have risen in a steady climb for several months while a substantial number have been discounted within days of origination. This action smells like a peak to me and coincides with other peaking chart action within serious, related companion markets. Things are moving so fast we don’t have a handle on the number of 2007 junk bond defaults but we’re sure its out there somewhere in internet land. However, you can take this one to the bank; the junk pile is building rapidly.
Good credits, primarily substantial corporations or, large financial partnerships often borrow with terms providing interest only payments. This is common in real estate and a variety of other industries. Construction loans both residential and commercial of all sizes operate this way using subsequent longer term take-out financing in the form of mortgages. Serious trouble surfaced between 2002 and 2005 when consumers were enabled to buy homes using the “sign and drive.”
That is, they got 100% financing and in some cases even 120% financing receiving the extra 20% for home improvements or, whatever. Down payments were zero cash and signatures. Some required the borrower to have a job and a pulse.
Now we see, the old, traditional loan terms of a 20% cash down payment coupled with 15 to 25 year mortgages being pushed aside. Newer exotic lending went way over the underwriting line with no down payments, interest only for two years then follow-on refinance. In some cases, lenders even permitted and encouraged loans with very easy terms but added the feature of allowing borrowers to periodically skip payments when things got tight, by just extending the loans’ term to cover. Yikes! No wonder real estate world is having a very bad hair day.
When derivatives were sold containing millions and billions of these loans the conclusion was known at the loans’ origination. Despite repayment concerns, instigators of this game approved and loved it as the banker’s got deals with some of them paying better fees than average. The appraisers winked and wrote their numbers to fit loan requirements while collecting their fees. The real estate brokers made lots of fat commissions and the buyers got a new house. Everybody was happy until house payments didn’t arrive in the mail. Now it’s hit the fan for this entire gang and their one large, collective, real estate party-time is over.
Derivatives investors got left holding the bag and it stinks. There is little or no collateral, no back-up reserves for bad debts, and no kind of insurance to cover as in the case of FHA or VA. And worst of all, nobody knows who the real culprits are in this massive game of “pass the hot potato.” The daisy chain of derivatives including borrowers and lenders squeezed into one package is so muddled that if European paper holders wanted to sue for relief they wouldn’t even know to whom they should serve the papers.
What Happens Next?
If you think this little derivatives frolic disappears with Chopper Ben opening a discount window, I have a neat big bridge for sale in New York. How strategically located is that, right in the home creative finance?
This kind of not so funny stuff seems to appear every ten years or, so and as one analyst mentioned today it usually arrives in those years having sevens. He was referring to 1907, 1937, 1947, 1957, 1967, and that recent fun date of 1987 when one master trader we know of in New York ran in panic, to the bank to remove his gold to save his family. The 1800’s had some scary seven years too, but you get the idea. What does this event tell about gold; about silver? You know the answer.
Extremely serious economic events never seem to hit us on the head with one giant wallop. Smaller less noticed nagging negatives bite at the edges and just as often are summarily disregarded as mere distractions. However, when these come in a repetitive sequence its time to pay attention. Last week was one of the larger variety and we think the Fed actually panicked. After all the billions in cash they’ve thrown out the window over the past few days, trouble hasn’t stopped yet as another $3 billion plus was offered today as we write on August 20, 2007.
The corrective answer is normally not tossing more cash but lies in news manipulation. Our market proppers, manipulators and fictional announcement providers are experts at this endeavor. This is why we think they muddle through and escape one more time. Eventually they’ll get caught usually by an unforeseen trip wire as in the mess we have today. Meanwhile, if they remain persuasive enough, it will all cool off until the next panic-stricken event. Consumers and the world at large have to continue to believe. When faith is gone, so is the money and the game. This week another little edgy bad one appeared as Countrywide Bank, the partner of Countrywide Mortgage Company experienced bank runs. Depositors became fearful as they mixed-up the bank’s name with the mortgage company. In reality they have little to do with each other. The bank funds are safe and so is the bank but depositors have lost the faith. That is how it all starts.
Understand these markets are no longer free and are regularly smothered with skilled and devious, shrewd tampering, deliberately designed for market control and personal gain. If this is true then Mr. Federal Reserve must be in on it right? Absolutely; almost every major financial position in central banks, world banks, investment banks, nation’s treasuries and other hidden managers of money control were trained in New York, London, and other financial capitals of the world. They are members of the leadership club of the world and decide who does what, instructing politicians with marching orders. This includes those elected to powerful political offices even country presidents. These men and some women operate high finance world-wide. Markets are not exactly free are they?
This means bad lending and business decisions will be rewarded. Markets and financial rules are legitimized for the personal gain of those writing the law. Money means nothing and the printing thereof is only another tool to maintain control. You can buy your way into and out trouble any day of the week. Bad loans are either covered or forgiven even if it means smashing economies.
Normal cycles can be abruptly disrupted disturbing the peace, tranquility and orderliness of markets. Risk and volatility are increasing exponentially in times such as today. Black is white and white is black. Things never appear to be what they really are or can become. Take the road of lower risk, hunker down, eliminate debts, buy gold and silver coins and trade their shares until the risk becomes untenable. At that point who knows what can happen. -Traderrog
Roger Wiegand is Editor of Trader Tracks Newsletter for gold, silver and energy traders. Roger provides recommendations for short and longer term traditional futures and commodities trading with specifics for individual trades. See webeatthestreet.com for more information.
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