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Old 27-02-2009, 01:23   #16
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Wow Tao Joans
said a mouth full! thats the best explanation ive heard on CDS
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Old 27-02-2009, 03:56   #17
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I didn't realise it was this bad. I thought it was just countries living beyond their means and the inevitable problems when cheap energy started to falter and growth to pay off the interest on the loans was no longer sustainable. It seems absurd that there are people and factories that can make things, commodities to use, energy available and the whole thing can grind to a halt. Possibly the only thing is to let the financial institutions go to the wall and simply have a nationalised banking system to get things moving again, and while at it, improve the health system and energy sustainability. I think I'll have another read of Tao's missal of financial doom to make sure I really understand it
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Old 27-02-2009, 06:16   #18
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OK I liked Tao's explanation too and thought it well written as is his style. But now what Mr. C. Little? Six months isn't long and if we face the finianical doom predicted to be fact, why bother with what is our daily life now? Wouldn't it be prudent to cash it all in and have a ball for the next six months? Or do we ignorantly continue on believing in our dreams, adapt to the changing times, and do better than just survive like Mad Max. Well, I guess one good thing to come out of total economic collaspe is that I can have the ICW to myself on the weekends.
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Old 27-02-2009, 06:29   #19
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A year ago I wrote on this forum that I had decided to hold-off buying the boat of my dreams, which I had surveyed and was about to send a deposit for, because there had been a sudden downturn in our real estate business in Orlando, Florida. Indeed, it went down like thunder, but we quickly changed our emphasis into rental management and are doing fine. But I’m very relieved that I didn’t spend a chunk of our savings on the boat, which we could not now afford to retire and go cruising on anyway.
That boat is still on the market, for less than I was prepared to pay a year ago.
I don’t wish to denude Taojones' analysis of the present crisis, but in real estate—which I do know, and which was the route cause of the meltdown—the problem is one of confidence!. We have many clients with money, from the UK and here in the US, who are just sitting on the fence waiting until they think housing has bottomed out. They don’t want to miss it, so they will presumably, (at least we hope), jump in and buy the moment someone says we have hit bottom.
If this happens nationally in conjunction with the proposed reduction in foreclosures, the housing market will start to stabilize, and with it a renewed confidence.
The American people have notoriously short memories when it comes to money, and we believe the moment people start to see a bit of equity returning to their properties, they will rush out and buy that big screen telly’ which they really want, but have been putting off, because they will be worried the thing will go up before they can nab it. Just like me with the boat.
Since American consumer spending fuels the worlds manufacturing, (clearly evident with the sudden downturn in China’s production), if the American consumer gains confidence once more, we will be back on a roll.
I recently wrote President Obama what he needed to do was start another housing bubble, but this time, control it! I haven’t had a reply yet, but then I suppose he must have thought I was somehow prejudiced?
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Old 27-02-2009, 07:05   #20
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I too have been in the Real Estate Biz for close to 20 years all this time rentals- (some in Orlando bleeding equity) What Im finding is people that are renting from me are starting to lose there jobs and rents are becoming late- I beleave things will get better with all that money Obama is pumping into the economy but - its going to be a temporary thing until the fundaments are taken care of - I also beleave Like TJ that many things are never going to be the same -and perhaps in some ways that might not be such a bad thing-
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Old 27-02-2009, 07:52   #21
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Possibly the only thing is to let the financial institutions go to the wall and simply have a nationalised banking system to get things moving again, and while at it, improve the health system and energy sustainability. I think I'll have another read of Tao's missal of financial doom to make sure I really understand it

What your talking about is having the Federal Govt. attempt to guarantee all of the derivatives that Tao was talking about.

This is currency system suicide. The only possible means of having the Govt. guarantee all of these CDO's and CDS's is through Fed action to expand their balance sheet. In fact... they are already doing this (Fed balance sheet has more than doubled in the last 6 months and they are accepting these derivatives as collateral for lending to banks) but to do it on the scale that would result should the banks be nationalized would destroy the dollar through mass dilution.

The correct action would be to let the system work. Banks go bankrupt, the toxic derivative assets are wiped out, the depository assets are guaranteed and moved to a solvent bank and we move on to the next bankrupt bank or financial institution.

The problem with this is that if it is allowed to happen, among those who will suffer massive losses on US investments will be foreign central banks and all sorts of foreign banks, pension funds, and other investment funds. Entities that we count on to buy US Treasury debt. Entities that we depend upon to support the dollar as the global reserve currency. Should the system collapse as the monster of derivatives and issuers are wiped out, the US will no longer be able to sell debt to foreigners and ultimately the dollar will be abandoned as the global reserve.

Any investment in non-tangible assets I view as borderline financial suicide. Nothing is risk free, but at least with real tangible investments you will still have something of value when whatever reality that is to come emerges. Life will go on, things will stabilize and some people are going to come out of this smelling like roses.




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Old 27-02-2009, 08:18   #22
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Should the system collapse as the monster of derivatives and issuers are wiped out, the US will no longer be able to sell debt to foreigners and ultimately the dollar will be abandoned as the global reserve.
With nearly $11 trillion in debt and another $42 trillion in unfunded obligations against only $2.5 trillion in revenues, that day is all but inevitable. By the way, foreigners own roughly 25% of our national debt.

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Old 27-02-2009, 11:00   #23
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Kinda makes one want to get the biggest interest only loan one can handle...

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Love your thinking Steve !!!

Anyone care to Finance me a new Nauticat 515 in Zimbabwean Dollars?
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Old 27-02-2009, 11:47   #24
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Seriously though, it seems I am not alone in being a bit nervous. At present, the Company I work for is doing OK. We are working harder in order to stay where we are though, and we do notice that this is having a bad effect on our competitors.

However, we are to a degree, reliant on borrowing. To date, this has not been an issue. However, were our Bank to suddenly call in or decide not to renew our overdraft, then we would have significant problems. We cannot file for Chapter 11 (it doesn't exist in the UK and my boss is a sole trader who takes everything on his own shoulders).

So, we both decided to semi-retire (so we both still have some income), sell and lease-back our buildings to give us some capital, and sell the business as a whole if a buyer could be found. So far, we have had four buyers - none so far have been able to fund it, and while all four have had agreements in principle, their respective banks have changed the terms of offers on more than one occassion.

So, I decide to sell the house (now worth $100,000 less than it was a couple of years ago!), buy the boat anyway (a bit smaller than my original plans - it's now gone down to a 43 footer), and live aboard.

However, apart from a smaller boat, and the fact that I am not going to be giving up work completely, I am now restricting my cruising range, as I know that if push comes to shove, I need to be able to get back to my home country, as that is where my best prospects are if I need to earn more income. My mindset is different: now, it is what do I need in order to survive and be relatively happy? Basically just food, fuel and spares I cannot make myself.

A year ago, I would not have even dreamt of making something myself, as it would have been cheaper to buy it/have it done in the yard, as my time spent making such repair was worth more than the cost of having someone else do it.

This relates to that different mindset. Now, I look at a Genset, for example, and say: could I repair that myself?

Also, I want to buy capital items that reduce long term revenue and so on. Eg. More Solar panels, less fuel needed in the future. LED Navigation and interior lamps - less fuel needed in the future. And so on...

TAO's brilliant piece on derivatives/CDS will not effect me (?), I am not a stock trader, banker, etc. I am just an ordinary bloke, who does not have a pension plan. But that's just wishful thinking isn't it. Of course it will effect me. It has already, it's completely changed my thinking.

So, see you in St Helier or off the French Coast later this year Dave. Look out for a blue-water cruiser fully provisioned for extended cruising - but coast-hopping or actually going nowhere !!!

Hmmmmmmmmm. Well, maybe... the urge to go West is a strong one...
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Old 27-02-2009, 12:23   #25
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The Baseball Theory of Recovery

I used to think that the U.S. financial/economic engine would always recover. All great empires/economies/civilizations have declined, except for America. The reason, of course, is baseball. None of the others had it.

More importantly and unlike other national pastimes, baseball has or "had" sacred numbers. 60, 61, 714, 755, .406, etc. But the numbers have now been corrupted and inflated by steroids - 73?, 762? - does anyone believe these? Of course not. There is no confidence; the numbers have become worthless; and as a result, the whole system is on the brink of collapse.

As others have pointed out, this time it’s different.
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Old 27-02-2009, 12:45   #26
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Ya gatta Spread the Wealth ya’ know, Joe

Tao Jones presented a cogent, albeit simplistic, explanation of CDS’s, accurate as far as it goes. It does not go far enough, however, and thus leaves one tottering on the edge of an abyss of misunderstanding. While a complete discussion would be arcane and certainly too esoteric for this venue, the fact of the matter is that the perceived risk of the CDS market greatly over estimates the actual risk. In fact, despite the paroxysms of the overall credit markets—which is largely a failure of confidence—the CDS market has continued to operate in the manner intended (broad diversification), and remains essentially stable and liquid—even today—without government intervention.

There are, however, several flys in the ointment, largely “derived” from the mortgage credit market, courtesy of the likes of Barney Frank, Christopher Dodd, Maxine Waters and their ilk, who gorge at the public trough and the hind teats of lobbyists engaged by the likes of FNMA/FHLMC (“Fannie and Freddie”).

Good ol’ Barney, Chris, Maxine et al are the ones that threw the cookout at “Joe’s” house and passed out the fireworks and free matches for the kiddies, and arranged for the firewalkers, and jugglers of flaming torches. Unfortunately, the only thing cooked were Fanny’s books—by Obama’s “economic advisor”, Frank Raines, (who walked off with $90 million for his services)—in a pan nicely greased by loose monetary policy provided by Greenspan and Bernake (at the insistence of Barney, Chris et al). The fireworks, free matches and flaming torches were the “loans” to unqualified low income borrowers—courtesy of the Community Reinvestment Act (“ya gatta Spread the Wealth ya’ know, Joe”)—that Fanny was required to buy (also by the foregoing) which were then bundled up in portfolios (Collateralized Mortgage Debt Obligations—“CMDO’s”), shares of which were foisted off on an unsuspecting public via their banks, insurance companies, retirement funds et al, with A credit ratings because of the implicit (too soon to become explicit) government guaranties as Government Sponsored Enterprises (“GSE’s”).

To the CMDO’s, and Fannie, these toxic loans were the Salmonella in the peanut butter. Of course, when the Salmonella began to do its deed—and Fannie began to hemorrhage—this same cast of characters demanded that banks and other credit institutions (who get their money from every day depositors), recapitalize their terminal case by buying Fannies’ “preferred debt” (“I gotta a deal ya can’t refuse!”). That merely prolonged the period of demise for a few months (during which Fannie continued to gorge) until the Fed finally had to step in to prevent total collapse—which would have eviscerated the market for Fannies’ bonds, and, arguably, the government’s ability to sell US debt to the Chinese and Saudis, which would be desperately needed to finance the Dem’s planned spending binge.

But, the penalty for the Fed’s “rescue” was wiping out the interests of all of Fannies’ debt holders, the Banks! Who then suddenly—by an act of Congress through its agent, the Fed—became insolvent and thence didn’t/couldn’t meet their regulatory capital requirements! And with this, suddenly, even community banks that had nothing to do with sub-prime loans begin to fail and credit becomes scarce or non-existent on Main Street. Credit is not available to refinance loans, hence foreclosures begin—which erodes the value of all homes—further reducing the ability to refinance; and, businesses begin to fail for want of routine working capital credit, so layoff’s begin. Unemployed people cannot meet their mortgage obligations, more mortgage defaults, and worse, depositors begin to pull their money out of banks—disintermediation—and to conserve on spending, causing more businesses to fail—so the circle widens, and widens and widens.

Meanwhile, back at the cookout—CMDO investors discovered Salmonella in their investments in the form of default rates far, far exceeding normal due to unqualified and in many cases simply dishonest borrowers who were unable to meet their loan obligations to begin with, and otherwise qualified borrower’s now unable to meet their payments due to unemployment or inability to refinance because of the seize up of the credit markets. And, with these defaults, the value of interests in CMDO’s plunge, hence the holder’s—many of which are the same banks already being pummeled by credit losses—as well as investment banks, insurance companies, pension funds et al cannot meet their capital requirements (Mark to Market) and cannot sell them as there are no buyers, particularly so when good ol’ Barney, Chris, Maxine et al, now reinforced by his royal highness Barak—Coronated in the midst of this economic mayhem—insist that the Fed and the Courts step in to prevent foreclosures by tossing out legal mortgage agreements and forcing restructurings on lenders (Cram-Downs) that ensure that the underlying securities—which are held by the public through their banks, pension funds, mutual funds and insurers—will continue to be all but worthless. (“Screw you Joe, your house is now worthless because your erstwhile neighbors can’t/won’t/don’t have to pay their mortgages; but that doesn’t matter ‘cause you’re out of a job and soon won’t be able to pay your own; Your life-time of savings is gone so you can continue to work at whatever you can find ‘til you die of old age; and, by the way, your kids get to pay for all this largess—and your grand children; and, their grand children.” “See, ya gatta Spread the Wealth ya’ know, Joe.”)

Some may remember the collapse of the Savings and Loan industry, another economic crisis courtesy of Democrat’s mandates (in that case the elimination of the tax shelter effect of real estate investments that was a part of the Gephardt/Bradley Tax Reform Act of 1986—which also ushered in the Alternate Minimum Tax). With that, the value of investment property was gutted. Investors were “under water” on their holdings when tax benefits were eliminated and so had no reason to continue to support property that only cost them money. Investors simply left keys in mail-slots and walked away, leaving lender S&L’s holding the bag. This situation was dramatically exacerbated in 1989 with the passage of FIRREA which, inter alia, disallowed S&L’s to hold “Junk Bond” investments. While Junk Bonds were cited in the press and by politicians as a major contributor to the industry’s problems—and Michael Milken was all but burned at the stake—a GAO report issued just five months before the passage of FIRREA showed Junk Bonds to be the second most profitable asset, after credit cards, that S&Ls held in the 1980’s. Never-the-less, Congress mandated in FIRREA that all S&Ls sell their junk-bond investments—which they did, at huge losses. What finally resolved the S&L mess after 6 years were the evil Investment Banks that pooled investors into those horrid “Vulture Funds”, that circled over the carcasses of gutted S&L’s, and pulled out portfolio’s of loans for penny’s on the dollar, promptly foreclosed, took ownership of the properties and later resold them at huge profits. That brilliant effort cost US Tax Payer’s an estimated $124 Billion that ended up in the pockets of investment banks and their clients.

Unfortunately, today we have few investment banks left that could pull together large enough pools of investors to deal with the assets in question; and, a plethora of politicians lacking the moral courage to permit the harsh measures necessary to clear the market and restore the economy to health. The market will eventually clear, but, if current policies continue, not before many if not most of today’s aging adults are long dead unless there is some kind of miraculous renaissance. An awakening to the need of such renaissances is already in the making for the rank and file dem's, however.

I recently visited an old friend and client that once had a booming mid-sized specialty electronics’ assembly company on the west coast. During our meeting I commented on how few people I saw at his facility and how few cars there were in the parking lot.

“Yeh”, he said, “Business is so off, so far I’ve had to let over half of the staff go.” “Christ, that’s tough, how did you decide who to let go—seniority?”

“Well, somewhat” he replied, “But what do you notice about the parking lot?” “Gee, don’t know—aside from a lack of cars of course.”

“No Obama stickers. Ya gatta Spread the Wealth ya’ know, Joe.”
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Old 27-02-2009, 12:50   #27
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AND.....??!!

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Originally Posted by TaoJones View Post

It's just that times are no longer normal - and never will be again. The Credit Default Swaps represent less than 10% of the total derivative market, as I stated, yet they have the potential to annihilate the current financial system.

So, MoonlightShadow, you asked if the current crisis will effect cruising? Yes, absolutely, and everything else you know or think or believe to be true about capitalism!

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and... and... and...

How very cruel of you, TaoJones, to stop reading our bedtime story to us right at the most exciting part. Two questions:

1-- After consulting your I Ching, what do you think are the most likely scenarios for how this will all play out?

2-- What can the average Joe do to best weather the storm?

Imaginary Number
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Old 27-02-2009, 13:27   #28
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Good ol’ Barney, Chris, Maxine et al are the ones that threw the cookout at “Joe’s” house and passed out the fireworks and free matches for the kiddies, and arranged for the firewalkers, and jugglers of flaming torches.
Hmmm - never thought about it that way before - the blame game always confuses me. But, now I think you proved my point! If "Good ol’ Barney, Chris, Maxine et al" had ever owned a baseball team, none of this would have happened.
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Old 27-02-2009, 13:40   #29
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HyLyte,

Another excellent post, but in affixing blame for the current situation, I think you left out one major culprit (in addition to Barney, Chris, et.al.): a Republican president and, for 6 years, majority in Congress who forgot about their small government, fiscal responsibility principles. If they had the courage, they could have undone the Community Reinvestment Act. And, they could have continued the trend of federal government SURPLUSES, paying down the debt and putting us in a much better position to weather what probably would have been a much milder downturn.

Instead, they too jumped on the pork bandwagon, and we continued to reelect them. So, ultimatley, we have no one to blame but ourselves. We continue to put these same career politicians in office, Republican and Democrat, despite Congress' approval rating in the low 20% range.

What's it all mean for the future of this country? As can be seen from this thread, there are lots of differing opinions and probably the best answer is "I don't know, we'll just have to wait and see." In the meantime, this semi-retired (not necessarily of my own choosing) homebuilder is moving aboard and going cruising full-time beginning this Fall.
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Old 27-02-2009, 14:35   #30
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“No Obama stickers. Ya gatta Spread the Wealth ya’ know, Joe.”
That was a wonderful dissertation, Hy. More than once on this forum you have foisted America's problems on Obama. You know, being relatively intelligent, I personally don't blame Bush for 9/11. The policy's and motives were in place before he ever even read "My pet goat". The blame for our current debacle lays heavily and squarely on Bush, Cheny, and their cronies. Turn off Fox, Turn off Rush, and open your eyes. Tell me, if the Captain of the Titanic had jumped off the ship moments before impact, would you absolve him of blame too?
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