In the event of a (market) crash, do you have a safety belt?
Submitted by the_sentry on June 24, 2006 - 1:39pm.
Economy
Disaster is that on which good fortune depends. Good fortune is that in which disater's concealed. ~Lao Tzu
I have to admit it. I'm a very simple man when it comes to finances. I don't have any outstanding loans, and I try to save money at every possible opportunity because eventually I do want to retire, or more realistically, change careers eventually which would imply going back to college in order to get a degree. (I'm still kind of up in the air about that one, though. For those who know me....any suggestions?)
*cough*
Well, before considering the investment, I decided to put on my limited thinking cap and review the market so I could get an idea of what might be something worthwhile to look into. So, I bought the Wall Street Journal, and yes, I even watched CNBC, but nothing was really registering.
So, then I searched online.
I'm still wondering if my sanity is intact after reading so many reports in terms of the global economy.
There are a lot of things going on right now, and I don't know if anyone out there short of a Buffet, Bernanke, Paulson, or Bush (yes, that's right. Quit underestimating him, people) have a real clear idea of what exactly is going on in a market built on "bubbles" and against an economy that has a tremendous amount of debt. It's disconcerting to the average investor because quite frankly, the two things that have been an argument against investment is an almost zero return on short term interest rates, a real estate market that has had warnings of a possible 'bubble pop', and of course, many of us haven't forgotten that 401K debacle a while back. Many of us lost our shirts, and our retirement funds on that little gem as well.
So where does one stand? Hey, I'm not a financial advisor. But, for those who might want to know what I've looked at, I invite you to check out what I have discovered, and then make your own conclusions. I hope they're better than mine, because I can't see anything coming short of a crash of the stock market and a re-alignment of US assets.
First things first. You have a damning report that came out from the AEI regarding the GSE's Freddie Mac and Fannie Mae (1). Here are some choice excerpts from that report:
Although bank deposits up to $100,000 are nominally insured by the Federal Deposit Insurance Corporation (FDIC), deposits are only a small proportion of the obligations of large banks; their other debt, consisting of commercial paper and longer term notes, is not seen as backed by the federal government--so market discipline continues to work to some degree, even for large banks.
But Fannie and Freddie are different from banks in one important way: despite the fact that their securities explicitly state that they are not backed by the federal government, their government charter and mission--plus the governments past behavior--have persuaded investors that neither company will be allowed to default. Thus, in a very practical sense, all their debt obligations--not just some limited amount corresponding to a banks deposits--are seen by U.S. and foreign investors as nearly risk-free, and therefore are not subject to market discipline. In effect, they are given a free pass to take risk. The name for this phenomenon--in which government backing reduces market discipline--is moral hazard, and the GSEs represent moral hazard on steroids.
So, you have these GSE's out there assuming loans without risk, and a guaranteed securities exchange agreement. But, how secure is this? This is what Freddie and Fannie have been up to:
If there was ever any doubt about this, it has been erased since 2003, when first Freddie and then Fannie were forced to restate their financial reports because of false accounting and gross manipulation of their financial results. In the succeeding years, neither company has been able to file financial reports with the Securities and Exchange Commission or submit them to their shareholders or lenders. For ordinary corporations and banks, this would long ago have precipitated a plunge into bankruptcy--but not Fannie and Freddie. They have continued to operate normally, despite the fact that no one knows their true financial condition, and this has revealed a remarkable phenomenon. Because of their perceived government backing, the GSEs pay interest at a rate slightly higher than that of the U.S. Treasury. The difference between what they pay and what the Treasury pays is known as the spread, and the width of the spread signals the degree of risk that the market sees in holding GSE debt. The accompanying chart shows that after OFHEO reported in October 2004 that Fannie had falsified its financial statements, the spread of Fannies debt over the Treasurys actually narrowed. In other words, Fannies debt strengthened, rather than weakened, despite the financial scandals that then surrounded the company. And that was true not only of Fannies senior debt; it was also true of its subordinated debt, which was originally created to provide an equity-like signal of the companys financial condition. But it now appears that Fannies subordinated debt is also considered government-backed, and is therefore not subject to significant risk of default. In other words, investors have not lost any confidence in eventually getting paid by Fannie and Freddie, even though they can have no idea whether the two companies can repay their debts.
So, to clarify...you have these two major GSE's which have probably accepted money from international lenders that dump their dollars into these exchanges vs. investment in US Treasury Bonds because of the guaranteed returns. As for Freddie and Fannie, Freddie will start selling off debt on June 27th in order to cover its "assets". (2) Now, shifting gears a bit, what about some of those who are assumed to be the lenders to these GSE's? Who could they possibly be?
Good question.
Well, our federal government (and this might imply that they have no idea just how much debt is actually floating around out there) is on the case. A news story broke about the government's program to search global banking records.(4) Well, for those who are looking at this, I am of the impression that they are now looking at bank transactions around the GSE's to find out exactly who has money in there, just how much, and to delineate between domestic and international lending. As for who those lenders might be, here is a blurb from an article that appeared in the Gulf Times. (5)
DUBAI: Arab governments, some of which are facing sharp inflation, should be wary of heeding calls from the International Monetary Fund to boost domestic spending, the chairman of the Arab Monetary Fund (AMF) said.
The IMF is urging Middle Eastern oil exporters to spend more of their record revenues to help redress global trade imbalances.
Here's a questioin: If Fannie and Freddie were providing better rate returns on their loans, where did a lot of those dollars go? Did they go back into US banks, or Freddie and Fannie?
And, of course, the Asian market isn't exactly comprised of dummies either. In fact, some have gone on to suggest that the Fed in conjunction with Secretary of Treasury Paulson are working towards tightening the market in order to orchestrate a "crash" so that US finances and assets can be re-aligned for a speedier recovery. Here is the blurb from the Asia Times Online piece (3):
Why Paulson accepted the Treasury job
It is possible that Henry Paulson sees Goldman Sachs facing an uphill battle in the next few years as the US economy slows. Paulson has made enough money in the good years and may consider it smart to leave Goldman at the peak of the market - it's no fun to run an investment bank in a down market.
Paulson is a banker. Bankers are interested in the state of the market, not the economy per se. In two and a half years, a treasury secretary can, with the full power of the Treasury behind him, have a chance of saving the market from imminent collapse from its current structural imbalances.
The formula is to accelerate the crash in order to gain a fast recovery later. The prospect of Paulson engineering a sharp correction in the equity market right after the mid-term congressional election is almost certain. The strategy is to remove the structural bottlenecks and to weed out the weaknesses and have the market resume its upward path by June 2008. This strategy is doable with a heavy dose of government intervention, but it will require a crash to create a serious enough emergency to make government intervention patriotic, possibly including massive bailouts of several troubled giants such as General Motors, General Electric and Fannie Mae (the Federal National Mortgage Association) and the big money-center banks that are up to their necks with credit-derivative exposures.
So, now the bigger question: Why is all of this happening? Well, Fannie Mae accounts aside, one also has to look at what's going on with the gold market, and of course, who's moving and shaking in the commodities market.
Enter Russia, and to a lesser degree, Iran. As mentioned in another blog, I did talk about SCO, but I think that people should know that the EU is almost to the point of being held prisoner by Russia when it comes to a steady supply. (9) Furthermore, remember Iran? Well, they have been in collusion with Russia, and starting next year there Russia will open a bourse for natural gas, and with Iran they will control almost half of the world's gas supplies.(6,7) It should also be noted that Russia started an oil bourse based on rubles on June the 8th, and this is another maneuver in which Putin hopes to put the Big Bad Bear front and center as an A list player in global geopolitics.
I can't see them doing anything short of making a very real attempt towards shaking off US hegemony, and making it up by pushing the eurpean market as a source for a competitive consumer market to that of the United States. And, in terms of gold, have you noticed how the price of this has been steadily rising? Well, in anticipation of this new bourse, Russia has been buying all of the gold they can get their hands on so that they will have a set standard for their bourse, and their currency. (8)
And, in light of this development with Iranian collusion with SCO, I don't know if all of the carrots in the world offered by the United States is going to shift Iran away from a consolidation of a huge chunk of the world's resources into this bourse for purchase and sale.
So, where does that leave the US, and their affiliation with the GSE's? Well, that was taken care of yesterday by the Executive Order that was released. (10) I understand that he's not the greatest speaker in the world, but if you read the fine print under Section 4, "provisions", the US government will not accept responsibility or liability for loss loan investments. If the GSE's can't sell off their debt and try to File for Chapter 11, the government isn't going to guarantee the Securities Exchanges made by these "public/private" entities that have untold trillions of dollars floating between them.
So, a summation:
1. If the market is going to collapse, it will be triggered by news that Fannie Mae and Freddie Mac can't guarantee its loans because of short term interest rate hikes. That will be the beginning.
2. By then, the US Treasury will have hopefully separated delineation between foreign and domestic assets geared towards Freddie and Fannie. I wouldn't be suprised if the government attempts to "cash in" under the assumption that US hegemony over the total energy market will be lost under these circumstances.
3. Foreign investors will lose in this circumstance because the US government isn't going to assume responsibility for the inability of Freddie and Fannie to pay those loans back, thanks to an Executive Order signed by GW Bush. Furthermore, any lenders that are considering investing back into the US treasury face the real threat of their money disappearing due to rampant inflation of either the US or their local currencies, or a chance it could be lost into the great, big black hole that is Freddie and Fannie.
4. By 2007, there will be a radical re-alignment of the global economy. The United States will no longer have complete hegemony. But, at the same time, our government is going to bleed foreign investors dry before this goes down.
Hey, you know what? I could be completely off my rocker. In any case, I think I'm just going to get a CD, because I have absolutely no idea in what to invest in right now. And, to be honest, I'm wondering if looking too closely into this stuff was worth my time and sanity.
I have a safety belt, but at this point, does it work? I guess I won't know until the economic engine crashes.
Sources:
http://www.aei.org/publications/filter.all,pubID.24591/pub_detail.asp
(1) AEI: Moral Hazards on Steroids: The OFHEO Report shows that Regulation Cannot Protect U.S. Taxpayers
http://www.tradingmarkets.com/tm.site/news/BREAKING NEWS/288755/
(2)Trader Markets Live: Freddie Mac prices new 10-year debt security due June 27th
http://www.atimes.com/atimes/Global_Economy/HF17Dj01.html
(3)Asia Times Online: Americas Untested Management Team
http://news.yahoo.com/s/nm/20060624/ts_nm/security_swift_dc_1
(4)Dick Cheney defends search of bank records
http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=93514&version=1&template_id=48&parent_id=28
(5)Gulf Times: AMF urges caution on Gulf governments expenditure
http://en.rian.ru/russia/20060621/49826281.html
(6)Novosti: Gazprom expects to see gas market trade in 2007
http://www.moscowtimes.ru/stories/2006/06/22/002.html
(7)The Moscow Times: A new OPEC in the making?
http://www.washingtonpost.com/wp-dyn/content/article/2006/06/21/AR2006062100483.html
(8)The Washington Post: In Russias Far East, gold miner thrives
http://euobserver.com/9/21950
(9)EU Observer: Liquid Gas Market could soothe EU energy fears
http://www.whitehouse.gov/news/releases/2006/06/20060623-10.html
(10)White House Executive Order: Protecting the Property Rights of the American People
Here's what I noticed: He said his comments kept disappearing, and thought he was being censored because of the incident in the past. The thing was, we were at over 300 comments at the time and if you didn't notice the "next page" at the bottom of the page, you would think your comments were disappearing. I even tried to tell him about the next page, but of course he couldn't see the explanation, because it was on the next page. This happened to him at least twice that I saw.
Thanks for the comment, LJM. My portfolio is pretty spread out, but no worries.
But, with that being said: Is it just me, or do Fannie and Freddie have "Enron" written all over them?
You might find what you're looking for. Try to connect the dots that way and see if someone beat you to the punch. Let us know what you find.
Meanwhile, don't know on the answer to your other question about what liability there is to a homeowner for the debt held by foreigners who have invested in the Fs. SInce actual mortgage companies hold the mortgages and people pay on them (or not and then there's a foreclosure) the creditor should get their money with interest as promised. There are many questions about "what if" when we become a debtor nation the way we are now. There really is no precident for it, although Holland and Britain went through similar times in the last few centuries. They weren't large debtor nations as we are. They just came to depend on finance over industry and that led to their demise.
Bernanke apparently has a special interest and has written about the depression. I hope he uses all he learned about that time to figure out that which he can control. Alas, he can't really control people borrowing with credit cards and HELOCs. No way is there enough money in print to cover all of it. The states seem to regulate the credit card industries.
that the market could crash, and that whomever happens to be President at the time will surely be blamed... I know this is a stupid thing to say/think, but if it's going to crash, I hope it's before the neotheocons are out of power.
LJM, I've appreciated your thoughts/comments over the past year on investments. I've taken your and joe's advise and put a little into CD's, but not as much as I should. I still have an adviser who thinks as long as I have "safe" stocks, I'll be okay. My dad, having lived through the GD, also continues to trust the stock market... Not me.
Thanks for all your thought-provoking, interesting blogs the_sentry. Just want you to know they're appreciated, although I don't always comment.
Once in a while you get shown the light, In the strangest of places if you look at it right. - Hunter/Garcia
I do work for a company that monitors the health of our 401K options and quickly closes the door on anything that is the least bit unstable. Maybe not a safety belt, but at least better than being on my own.
That said, I don't think the US Federal Government would let Fannie and Freddie default because it would affect the ability of the Treasury to continue to sell their notes. And let's face it, without raising taxes their only option is to sell more Treasury notes, etc...
(Crossing my fingers and knocking on wood.)
One Nation...under surveillance
Well, what kind of struck me as odd is that you had all of these news events happening simultaneously that weren't screaming "we're connected", but in many instances everything in the economy is connected.
First, you had the Freddie and Fannie report.
Next, you had the US government story about data mining towards global banking receipts.
Next, you have the IMF pushing for OPEC cartel members to spend, and spend. They also asked for a tax vs. the American consumer.
Also, you have Russia, SCO, and Iran, the Russian investment bourse, the EU bent over a barrel with Russia, and of course, control over the world's natural gas supply by '07 if that source was correct. Note that the currency used will be rubles (a euro conversion has been offered based on Russia's estimated value on a gold standard.)
Hypothetical question:
Let's say Freddie and Fannie can't sell off their debt, and they can no longer guarantee their security excahnges agreements. Wouldn't the housing market bubble "pop" at that time? And, am I incorrect in stating that the new Executive Order puts restrictions against the siezure of homeowner's properties for private use? If F&F crashed, wouldn't this all but screw foreign investors out of any money they dumped into these GSE's?
In other words, if Freddie and Fannie died, how much of our nation's foreign debt would be thrown off along with F&F?
you are overly modest...about your understanding of the issues....posts say otherwise... are you trying to deflect or head off an aggressive debate ..that strong opinions will attract...
You have posted interesting valuable info... glad you are doing so....
You have reached imaginary voice mail - if you give me your name and number I'll post it on the fridge - by the way where do you live?
Thanks for the compliment, EB. As for where my residence is, it's Virginia, but I'm usually on the road for 9 out of the 12 calendar months. (A lot of that travel takes me overseas as well, so in some aspects my perceptions towards current affairs are probably a little "skewed".)
As for modesty? There's nothing wrong with that. I've long believed it's the better path towards knowledge and the promotion of civil discourse.
"To know you don't know is best.
Not to know you don't know is a flaw.
Therefore, the Sage's not being flawed
Stems from his recognizing a flaw as a flaw.
Therefore, he is flawless."
~Lao Tzu
on the road?
Hello this is Kevin's microwave if you want anything cooked while leaving your message just hold it up to the phone.
What portfolio I have is almost all in federal mortgage bond funds, paying from 5.5 to 6.0%. Safe, modest income, about as secure as they can be. Plus you always get your principal back eventually.
Stan Davis
Lakewood, CO
BE THE CHANGE you wish to see in the world.
If not us, WHO? If not now, WHEN?
You bring up many many points, but few tweaked my interest...
- It should also be noted that Russia started an oil bourse based on rubles on June the 8th
-->Interesting. Iran has been working on its own Oil Bourse, based in Euros.
See my blog WMD? Mushroom Cloud? Spreading Democracy? Oil? - And, in terms of gold, have you noticed how the price of this has been steadily rising?
-->Actually, after gold went over $700/oz. around May 10 CHARTS, it's dropped down to $585/oz. in the past week or so. Perhaps Russia was buying so much gold, they drove the price up, kind of like how Japanese gold buyers drove the price over $600/oz. last summer. Hmmmm. I look for gold to rebound. BIG. - The prospect of Paulson engineering a sharp correction in the equity market right after the mid-term congressional election is almost certain. The strategy is to remove the structural bottlenecks and to weed out the weaknesses and have the market resume its upward path by June 2008.
-->A crash on gwb's watch? Followed by an "upward path by June 2008"? If the chit hits the fan, it's not gonna rebound in two years. Haha. See my blog for LEAP predicts MAJOR World Crisis to 80% certainty. OK they're EARLY on their prediction date. But CORRECT in their analysis! And it ain't gonna be pretty. - This strategy is doable with a heavy dose of government intervention
-->BWAAAAHAHAHAHAHAAAA! gwb's gummint intervening? Did gwb intervene when Enron was SOAKING California? I buy the part about a "patriotic action", tho' ;-) - our federal government (and this might imply that they have no idea just how much debt is actually floating around out there)
-->Of course they have no idea how much "commercial paper" is out there because
a)The Fed stopped publishing the M3 money supply number. Federal Reserve money supply report is about to fall into the abyss QUOTE:"They know what's coming -- massive amounts of dollar creation to fund the worsening trade and federal government budget deficits," says James Turk in the Free Market Gold & Money Report. The Fed DID stop publishing M3 on March 26, 2006
(link to The Fed announcement)
b) Helicopter Ben Bernanke is printing greenbacks like there's no tomorrow! Refer to Bernanke, The Federal Reserve and the Deficit: What to do? QUOTE (from the Great Mogambo Guru):This is the same Bernanke moron that is infamous for saying that he WANTS inflation, and actually refers to his stupid idea of fostering continual, simmering inflation as the benign-sounding term "targeting inflation"! Hahahaha! One moron praising another one! Hahaha!
~snip~
So more and more inflation is guaranteed now that we have a mental defective as chairman of the Federal Reserve, who is actually going to consciously work to keep inflation at some "low" level, about 2%, instead of at zero, like it is supposed to be at maximum.
~snip~
But listen to the New Age economics as espoused by Ben "Call me Butthead" Bernanke, the next failure as chairman of the Federal Reserve. This Bernanke guy, whom I will now refer to as Ben "Big Bozo Butthead" Bernanke in a fit of gratuitous and vicious disrespect mixed with irritating-yet-pointless alliteration, is already on record as saying that the Federal Reserve stands ready, to buy stocks, bonds, houses, other assets, and even raw land, to keep deflation from happening! The Federal Reserve has already bought up, for its own enrichment, $725 billion in US debt, so what's another few hundred billion dollar's worth of assets disappearing into the greedy maw of the Federal Reserve? Hahahaha! We're idiots! - I could be completely off my rocker.
-->No you're not, but US equities is looking more and more risky. Remember, The Federal Reserve Bank is NOT a government institution. It is a PRIVATE BANK, just like Fannie & Freddie are PRIVATE, NOT PUBLIC. Read SECRETS OF THE FEDERAL RESERVE and see Aaron Russo's AMERICA: From Freedom to Fascism Watch the trailers!
What to do? I'd say, do what you're doing: pay off credit cards, consolidate debt (be careful!) pay CASH, save where you can, GET OUT OF EQUITITES and BUY GOLD AND SILVER!
(PREDICTION: paper dollars with be worth Riechsmarks soon)
Got GOLD?
a great blog debate.. hope it continues
You have reached imaginary voice mail - if you give me your name and number I'll post it on the fridge - by the way where do you live?
FR,
I think in terms of the economy, and overtures made by Administrations past and present, it probably goes without saying that true policy lies not in fair and free trade but rather a Machiavellian mentality which espouses leverage when engaging in foreign policy (which is actually what attracts me towards following the news and current affairs.)
From my perspective, I can't really say a whole lot about Bernanke at this point because I'm not a financial person per se. (I'll take your advice on the gold though.) But, I do follow economic developments overseas, and then with that notion make an estimation of ramifications towards our own economy. I don't know if people truly understand that the US economy and furthermore the fiat dollar system are not completely sovereign to the United States...it is in fact a global currency rooted in commodities and a "floating standard" which is set by the Federal Reserve.
Some other thoughts: As for the price of gold. That's a tricky one, isn't it? I tried to read up more on why the price of gold dropped so sharply on May the 10th, and it goes without saying that something "funny" did happen to the market...in other words, someone (and I couldn't tell who, I never caught that) flooded the market with gold in order to bring the price back down. Historically, the Federal Reserve has done this on more than one occasion in order to keep the trading price down. But, here is where it's going to get tricky.
AS aforementioned, Russia and Iran are planning on trading in the natural gas market starting next year. If their coalition holds, they will have 50 percent of the world's natural gas supply between them. (If this doesn't scream "new OPEC cartel", I don't know what does.) The EU at this point is beholden to Russia for its energy needs, and they in turn are no longer going to require US dollars in which to purchase energy, or more specifically, oil. One of the reasons from a foreign perspective that the dollars remains in demand is that other nations require US dollars in their treasuries in order to participate in the petrodolllar system which was implemented under the Nixon Administration. This new "petroruble" will also have a gold standard against it, and as far as the gold standard within the United States, does anyone really know how much gold is actually in Fort Knox? (If you ever want to read some really interesting reports, I'd recommend some essays on the topic that have been filed by Congressman Ron Paul out of Texas. Yes, he's a Republican, but he's still a man who appears to be concerned with country before party....that's a nice thing IMHO.)
The linchpin of our economic welfare for quite a while has been the hegemony that the petrodollar fiat currency system provides. If Russia is planning on throwing this off, and they will have collusion with the EU (who might not have a choice), Iran, and yes, CHINA through SCO contacts, doesn't one have to wonder if the hegemony is going to slowly erode irregardless?
F&F may have been left alone by intention. And, back to Bernanke....I have to be honest. WE can complain about Bernanke, but it wasn't his policies that put the US behind a 45 trillion dollar 8-ball as far as foreign trade balance is concerned. (I'd have to search for the source, but that is the actual debt that was accumulated by the end of the fiscal year of 2005.) I also know full well that when it comes to the system, things are not always as they seem when it comes to dealing with other nations in terms of trade and policies, as these policies are Machiavellian in their context.
Granted, no other president in the history of the United States has lowered taxes during wartime spending....that was foolish and obtuse IMHO. But at the same time, the greater question is whether or not the Fed is even in complete control of this situation?
I suspect that they are not. And, I wouldn't be suprised if our government is gearing up towards something big as a change.
Now, ramifications: What would happen if foreign investors defaulted? Yes, it would be terrible here. There would be a lot of untold suffering. But, down the road, if something happened that made our currency worthless, it wouldn't suprise me in the least if NAFTA was embraced like a lifeline, and there was a strong push towards massive investment towards renewables and alternative energies, especially if something like this soured OPEC nations to the point of no return. If you ever want to see something of interest, you might want to check out the charter for NAFTA, and more interestingly, Herbert Grubel's essay on the "Amero", and the arguments for a standard North American currency.
http://oldfraser.lexi.net/publications/critical_issues/1999/amero/
IF it ever came down to a world without oil, it would require massive agricultural efforts including the imports of hemp and ethanol to even temporarily support industry....and that would imply the need for a regional tarriff reduction and the inevitable push for free trade in the western hemisphere.
Now granted, I don't have a crystal ball; but even at that, there are too many overtures by the world to shake off US hegemony. And, for all intestive purposes, a lot of this debate is pure conjecture. When this happens (and inevitably it must because it is a participatory system, and the United States is not "hardwired" to enforce it at the point of a sword indefinitely), I suspect the wise leaders of the future will plan accordingly.
And, despite what the Fed does, this falls right back into the lap of the Administration, and to a greater degree the Secretary of the Treasury.
(Oh, PS: Is anyone here familiar with Hubbert's Peak Oil theory? We may be on borrowed time regardless if Hubbert was correct in his assumptions.)
I'm an independant consultant in the Oil and Gas industry. The pecularities of my job had me looking over almost all of the wellhead data world-wide for the last 8 to 10 years.
I would suggest Matthew Simmons' "Twilight in the Desert".
The last "giant" field to be discovered was Kashagan in Khazakstan. It was projected to produce as much as 5.5 to 8.0 MMBPD, but will only likely produce 2 to 3 MMBPD.
Even the "Big 5" oil companies (which aren't that big, most of the world's reserves are held by national oil companies like Saudi Aramco, Petronas, PetroBras, etc.) say there is only 5 MMBPD swing production.
The price has been following a the consumption driven pattern that is characteristic of the backside of Hubbard's peak, so I think we may be at the peak right now. The mess in Iraq has produced a "false peak" like to one in the '70's, but not by as much. I would guess that there are about $25.00 premium built into the price of oil due to most Iraqi production being held from market. That would still mean prices around $50.00/BBL. So Iraq seems to have pushed the peak forward, but only by a few years.
Tex,
You are correct about the Caspian basin being the last great discovery. I know that further discoveries have been made offshore, but ultimately, isn't this a game of going deeper, and deeper into the earth to keep up with rising demand?
The next leader of this nation is going to have a very difficult road before them. I am of the impression though that once the market is in alignment, then America can go about its task of finding alternative energy which in turn falls into place towards better environmental policies. I have long held the assumption that all 3 are interlinked together.
So, with that being said: In the short-term, yes, it would devastate the economy to lose hegemony over the OPEC cartel. But, is this a bad thing in the long run? If American know-how was pushed towards rapid development of alternative energy, then there is the argument of our nation rising to greatness as it addresses what will be the greatest challenge to industry and society in the 21st Century.
The one scuttled by Reagan early in 1981. It will make you weep with lost opportunity.
Of particular importance is the energy accounting system it proposed to develop. One of the biggest problem with the energy problem is determining an accurrate EROEI (energy return on energy invested). Since energy prices can easily get out of sync with costs, the price alone is not a good measure.
How many BTU (joules, kilocalories, kilowatts, etc) went into the manufacture of a wind turbine for example. Measure that against the total energy delivered by the turbine during its useful life, including parts and maintenance.
This is a very difficult thing, but would be of primary importance in any successful energy policy.
Who knows what they are really worth, since so many people don't really touch money anymore. It's electronic transactions and plastic. There isn't enough money in circulation to cover that debt. In the case of Reichsmarks, there were too many. What we have now is actually unprecidented. Read the debt section in Kevn Phillips, American Theocracy.
Absolutely, get rid of the plastic handcuffs. People have become indentured servants again to the credit card industry, who can raise interest rates on them at will. We need an overhaul of our banking industry (new regulations) which is how the Democratic party got it's start in the first place. Andrew Jackson hated the banks and the system of paper money that we had at that time. Not so very different from the credit and debt industry we have going right now.
As for the drop in gold, it went with the rise in interest rates on the dollar. The dollar also strengthened at that moment. Americans need to learn to be savers and give up the path of conspicuous consumption. Buy what you need, not what you merely want. People have to learn an entire new way of thinking. After 9/11 we were told to go shopping. We were told it was our patriotic duty. The trouble is that we don't make much here anymore, so the American consumer is the engine of the world economy. We go into debt to support the growth in China and India, etc... That's why they invest their money here. That way Americans keep going into debt to buy their stuff. Nobody voted on this. They just did what Bush told them to do post 9/11, spend spend spend.... BTW, if people bought using plastic, don't think that "money" is backed by "the full faith and credit of the government." No banknotes changed hands, so it's an interesting point.
the first bill Bush wanted 2001 was a bankruptcy bill... tells you priority.... do you recall?
when I was first married... my husband could have credit card... but I could not have separate credit card from him....women could not have credit cards.... when my husband I bought first house we were flooded with credit card offers .. when my niece went to college she and kids her age were flooded with pre-approved credit.... her generation doesn't know how not to live without credit card debt... my daughter's generation knows you must avoid credit card debt traps.... isn't the largest US industry financial services now? fact check would you.... they sell debt... and they must make up bubbles of different kinds to hook the bait... R&E ... stock markets... they rotate them .....
Hello this is Kevin's microwave if you want anything cooked while leaving your message just hold it up to the phone.
There's an E-CSI on this that you can find by clicking the series button at the top. It's archived there. According to Bush, the restaurant biz is the number one private industry in the US. The financial sector is why AQ targeted the twin towers in NYC on 9/11. They know where the power is in this country. So what did Bush tell us to do after 9/11? Go out and spend money. It was our patriotic duty to shop till we dropped. The Bushes have always been about protecting the financial industry as well as big oil. Look who all gets donations from these companies on both sides of the aisle. Biden supported that bankruptcy law for the credit card industry, which is huge in his state.
think of at the moment to say about Secrets but mostly Greider is the He is neither
obsequious nor smarmy and boy did he do his homework..I love it when a writer shows me just how much I have taken for granted and only understood in the most superficial way only to find out - what a land mine of important information I have not known ( and the rest of us ) about our/my culture and country
Hello this is Kevin's microwave if you want anything cooked while leaving your message just hold it up to the phone.
LJM,
Great response. I am in complete agreement over what happened during 9/11, and the immediate aftermath. "Go shopping"? Did FDR tell people to go shopping after Pearl Harbor?
One can almost taste the irony.
But on that note...Inevitably, the issue of taxation is going to arise again. One thing I have never understood why so many taxes are based on income in an economy that is based in consumption. But, as for one who argues balance, (and yes, good fiscal policy) when I can grasp it, this will be a major point in which the economy will have to be addressed. The need for revenue is there, but should people who want to put money in the bank be penalized for it?
Another debate, I suppose. Thanks again for the great response.
If you are interested in joining a blog series team (economy is the one I'm leading) let us know. If you want to work on economy specifically, let me know at the e-mail addy here. I can use another good writer:)
Thanks for the reference, LJM, I'll keep it in mind. (But, I may not be able to jump until I get back from my next business trip which is coming up in a couple of weeks.)
Just plugging away on a series on debt in America, which starts with the history of money in the Americas. It won't start running for a few weeks, while they keep working out the kinks in the new software here. I've got a couple of parts in the can, so they can start running whenever they're ready. Let me know if you have some time or ideas.
I'll give your blog another look.
Our safety net and college education fund for our kids is our California house and grandparents.
I'm writing a book --- which is what is going to give us that "more than $1,000 in the bank" --- and it involves predicting future trends. Invest in things that relate to bonding with groups, but which do not appear over indulgent or excessive.
Interest rate shock could lead to GSE insolvency: Henry
Last Update: 10:56 AM ET Jun 26, 2006
WASHINGTON (MarketWatch) -- The massive portfolios of government-sponsored enterprises such as Fannie Mae (FNM) and Freddie Mac (FRE) could become insolvent in a period of "significant interest rate movement," U.S. Assistant Treasury Secretary Emil Henry said on Monday.
"Unless the portfolios are hedged properly, in a period of significant interest rate movement, there is a risk to the GSEs that their assets and liabilities will...become broadly mismatched which can lead to insolvency," Henry said in a speech prepared for delivery to the Housing Policy Council of the Financial Services Roundtable.
Henry likened the potential for GSE problems to the savings and loan crisis of the 1980s.
To hedge against interest rate movements, the GSEs must anticipate borrower behavior and deploy risk-management strategies, much like other large companies invested in mortgages, he said.
But Henry said the massive size of the GSES - more than $1.5 trillion in mortgage investment portfolios - combined with a lack of traditional market discipline and a level of interconnectivity in the financial markets means the GSEs pose a unique systemic risk.
"Aggregating each of these attributes under a single entity that also carries with it the broad misperception of a government backstop or guarantee creates a perfect storm scenario," Henry said.
Henry noted that the markets continue to hold the "false belief" that the U.S. government guarantees GSE debt, which has led to preferential funding rates and the expansion of GSE portfolios.
The assistant secretary also noted that the GSEs operate with less capital, meaning "they are more leveraged than other financial institutions."
"Simply stated, our financial markets would be safer if these assets and associated risks were broadly redistributed," Henry said.
Henry noted that the GSEs say they are hedging against risks from an unexpected or sharp change in interest rates. In response, Henry pointed to a recent report from the Office of Federal Housing Enterprise Oversight that criticized GSE hedging practices.
Moreover, "hedging is not an exact science and models are only as good as the judgments and expectations reflected in their inputs," Henry said.
If GSE hedging models failed to anticipate an interest rate shock, "the results would be without precedent," he said.
Commercial banks and other creditors would experience direct losses as GSE debt obligations lost value, or there was a real or perceived inability of a GSE to meet its debt or mortgage-backed security (MBS) obligations.
But a sharp downturn in the financial health of a GSE could cause wider ripples in the financial world, Henry said. For example, yields on GSE debt and MBS relative to swap and Treasury yields could rise.
In turn, large banks, hedge funds and securities brokers "that might hedge the interest rate risks in their MBS positions by establishing short positions in swaps and Treasurys could suffer substantial losses," Henry said.
The assistant secretary concluded that "serious financial problems in the GSEs are not only a possibility, but an unfortunate reality."
"Do we really want to be faced with unwarranted and irresponsible calls for bailing out another failed GSE?" he added.
AME Info: Will global capital markets now follow Arabian bourses lower?
Just as the Asian Financial Crisis preceded the Nasdaq Crash of 2000, there is a growing concern in global financial markets that the bursting of the Great Arabian Stock Market Bubble this year is a forerunner to a serious fall in asset prices around the world. Tightening liquidity is the villain of the moment.
It has been said that corrections in financial markets are like tugging a brick on a piece of elastic, you keep pulling and pulling until suddenly the brick hits you in the face.
Thus the Federal Reserve can keep raising interest rates by 25 basis points each month for over a year, and nothing happens. Then all of a sudden a liquidity crisis is at hand, and investors cash out of assets that look very expensive in an environment of high and not low interest rates.
Analysts point to a withdrawal of $200 billion by the Bank of Japan earlier this year as another important liquidity squeeze. Dr. Marc Faber has also recently highlighted a slowdown in the growth of oil revenues in 2006 as an explanation for the stock market sell-off in the Arab world this year.
Market panics
The problem is that markets tend to overshoot on the upside and undershoot on the downside. This is the classic phenomenon of investors all rushing to exit assets at the same time, producing a panic and depressing prices beyond fair value.
So while the summer is traditionally a quieter period for capital markets, many analysts are nervously eyeing the outlook for the autumn. October is the usual month for stock market upsets, and the odds in favor of this year being a black period are shortening.
The only reason to step back a little is that here we are in late June saying this, which gives the Federal Reserve plenty of time to do something about it well in advance. The US electoral cycle also favors intervention in markets at this point.
So perhaps as early as next month expect to see a sign of a more accommodative stance by the Fed, and as Standard Chartered Bank's regional chief economist Steve Brice told journalists in Dubai this week, it would only take a few words to devalue the US dollar by 10-15 per cent.
US dollar devaluation
For in truth, the markets have two ways to adjust to the current global imbalances: a stock market crash and lower real estate prices; or US dollar devaluation. The latter is far less painful to US citizens, and so looks most likely.
On the other hand, sudden shifts in the value of the US dollar have also been known to spook investors, so clearly this is a time to tread wearily. It might also be a moment when stocking up on precious metals is advisable as a hedge against US dollar weakness, especially with gold and silver prices having undergone a recent correction.
However, it is certainly true that the sharp falls in Arab stock markets this year have been followed by turbulence in global markets, and we may not have seen the end of it.
Referenced: http://www.ameinfo.com/89902.html
Neil Bush got off scott free and a lot of other people got hurt. I'm leaning toward rethinking banking and all the de-regulation that got passed on that and other financial industries. We got easy money and credit card debt that is more than people earn. Credit card companies operate as if they can print money and so do the mortgage companies it would seem. Why would they care about the risk of who they lend money to in this current regulaton climate. Plus, they made it so difficult for people to declare bankruptcy when they raise interest rates to 30% on some credit cards. Shameful, really shameful we got rid of the safeguards both Roosevelts put into place regarding banking and the methods of the "robber barons." T.R.'s party was called The New Progressive Party. Bull Moose was the nickname. I think I'm probably in the Bull Moose camp of the Democratic party now. No way would T.R. be a Republican in this day and age.
Oh, oil stocks plunged today.
Fed Treading on Thin Ice as U.S. Housing Bubble Weakens
By Mark Weisbrot
Everyone recognizes that the U.S. economy is slowing, but the question is, how bad will it get? One disturbing sign is that the Federal Reserve is raising interest rates as the economy slows, and it is not clear when it will stop. This is not good because each rate hike is deliberately designed to slow the economy by causing both consumers and businesses to borrow and therefore buy less. The idea, as Fed economists see it, is that as overall spending is reduced, employers will hire fewer workers. As unemployment rises, employees are in a weaker bargaining position, and this leads to slower wage growth. Slower wage growth, the Fed hopes, will lower inflation.
Although it is no secret among economists, most Americans dont know that the Fed fights inflation by increasing unemployment and thereby lowering wages. The public probably would find this unsettling. Inflation, as measured by the Consumer Price Index, has been running at 5.7 percent over the last three months, up from 4.2 percent over the previous year. But most of this is the result of higher energy prices and the fall of the U.S. dollar against other currencies, which raises the price of imports and therefore adds to inflation.
The Fed sees rising wages as the problem, because the people who run the Fed do not look at the economy from the point of view of wage and salary earners. They have a bankers-eye view of the economy, which sees even a relatively small increase in inflation as a dangerous thing because it erodes the value of bonds. And for them, the way to keep inflation in check -- no matter what its cause -- is to keep wages from rising.
Average wages, adjusted for inflation, are less than they were four years ago which is unfair, to say the least, given the economic growth over this period.
But its about to get worse. Since the mid-90s the country has accumulated an enormous housing bubble, as house prices nationally have risen nearly 70 percent after adjusting for inflation. In some bubble areas, mostly the east and west coast, the real increase has been over 100 percent. Since house prices have historically increased at about the same rate as inflation, this means that more than $5 trillion of excess paper wealth similar to the stock market bubble of the late 1990s has been created. Just as bursting of the stock market bubble caused a recession in 2001, the collapse of the housing bubble will almost certainly do so.
There is evidence that this bubble is already beginning to burst: new home sales, existing home sales, and the median price of existing homes were all lower in the first quarter of this year as compared to peaks last year. Vacancy rates for new homes are rising.
House prices do not have to collapse at once in order to tip the economy into recession. Many Americans use their houses as an ATM machine, borrowing against the value of their homes. These home equity loans, including hundreds of billions of dollars cashed out when people refinanced their homes as mortgage rates hit record lows in recent years, are what has driven the U.S. economic recovery since 2001. Falling home prices leave less equity that homeowners can borrow against. The personal savings rate is at a record low for the post-World-War II era, hitting negative 1.6 percent in April.
Rising mortgage interest rates will finish off the housing bubble if oversupply and a psychological reversal of the speculative mania dont do it first. This party is about over, most unfortunately for the majority of Americans who never got to join in the festivities.
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Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, in Washington, DC
We talked about the market on the general discussion over a year ago. We had a great numbers guy named joe at the time. I put my money from mutual funds to CDs at that time. The rates are rising, so saving money is "the new black." If you read Economy CSI under the series button at the top you'll see one done recently on this topic.
Not having high interest debt is the number one thing.