Tuesday, March 3, 2009

The Pressure is Building

Good Evening Everyone

Uhhhh....I gotta admit folks, these posts are getting harder and harder to write as things continue to fall apart. Watching our financial system literally implode before my eyes makes me extremely sad.

Anyway, lets get started. AAA Credit Spreads are once again beginning to break out:


Quick Take:

AAA spreads are once again nearing the highs that were set back during the November plunge. Whats disturbing here is the government has guaranteed a lot of this paper and yet spreads still continue to rise.

Its time to ask ourselves a serious question: Are we going to wake up one day and realize that all of this paper is worthless? I am beginning to think this might be the case. Folks remember, guaranteeing something and actually putting the money behind it are two different things. I can guarantee a car salesman that I am going to buy a new car, but that doesn't mean I going to actually buy it.

The government has now guaranteed trillions of $$$ worth of toxic financial assets. Whats so pathetic here is it means they have been forced to basically guarantee a good chunk of our whole financial system. Some examples of guarantees: AIG, Citi, BofA, Fannie/Freddie MBS, and bank deposits up to 250k. These are just the ones that I can think of off the top of my head. There are several others.

What we need to ask ourselves is what do these guarantees really mean? I mean the cost of actually guaranteeing what I described above is over $10 trillion. Do you actually think the government has the money to do this? Let me answer that for ya: HA! Uhhh NO, not even close.

What scares me here is the bond market knows this and they also realize the companies that originated all of this garbage are all insolvent. I think this combination is the reason why these spreads are blowing out. The bond boys are getting worried that there is no real liquidity standing behind any of this paper.

Folks, we may be nearing a "Come to Jesus" moment where the bond market demands price transparency on all of this AAA paper. A bond market dislocation may be in the cards if we don't get it. If this dislocation occurs and price discovery then ensues, there will be blood in the streets.

When this paper finally is put up for sale, we may find out there is "no bid" on all of this AAA garbage. This immediately would put the majority of our financial firms out of business because all of them hold billions of this stuff on their balance sheets.

I think its time that we do this before the DOW goes to 1000. Will this collapse be horryfying? Of course, , but if its going to happen either way why not just get it over with? When I was a kid and I had a tooth that was just about to fall out I would always twist and pull on it until it popped out. Did it hurt? Yes, but at least I didn't have to worry about it anymore.

Bottom Line:

As I said yesterday. Time is running out folks. We need a plan from Obama that forces transparency into the system. If we continue to ignore the problem, the bond market is going to take matters into their own hands and force Obama to make a move.

This pressure is rising and this keg is about to blow. The market continues to free fall in the meantime, and will continue to do so until clarity is brought back into the system.

Jim Rogers had a great rant around all of this today. It was reported by CNBC:

"Suppose AIG goes bankrupt, it is better that AIG goes bankrupt and we have a horrible two or three years than that the whole US goes bankrupt," Rogers said. "AIG has trillions of dollars of obligations, let them fail, let the courts sort it out and start over. Otherwise we'll never start over.

Bailing out the banks is going to increase the debt spiral and finally cause the destruction of the world's biggest economy, Rogers said.

"I think it's astonishing, they're ruining the US economy, they're ruining the US government, they're ruining the US central bank and they're ruining the US dollar," he said.

"You are watching something in front of our eyes, very historically, which is basically the destruction of New York as a financial center and the destruction of America as the world's most powerful country."

Japan's economic "lost decade" was caused by trying to bail out the banks, and the West risks running out of money if it doesn't let the bad banks fail now, Rogers warned.

Systemic risk is going to be the same in 10 months, 5 years of 10 years if the fundamental problem is not solved, he added.

"The idea that you have too much debt, too much borrowing and too much consumption and you're going to solve that problem with more debt, more consumption and more borrowing? These people are nuts."

Wall Street and the City of London are going to be "disastrous" for years, like in the 1950s and 1960s, and in 30 years, finance will "dry up and wither away" as we are entering a "long period of hard times," he said.

"Power is shifting now from the money shifters, the guys who trade paper and money, to people who produce real goods. What you should do is become a farmer, or start a farming network," Rogers said."

I couldn't have said it better myself Jim. Maybe its time I learn how to start farming.

9 comments:

Avl Guy said...

Or at least learn how to cook...which means a lot of Yuppies need to stop storing books atop the oven racks as a make-shift 'library'.

Jeff said...

I guess I better learn how to like spam!

Google had some negative comments after hours. Insurance companies all seem to be falling apart. Several downgrades in the sector.

S&P dropped about 10 more handles into the close. ES is in the red at 687.

Tomorrow should be intersting.

Minton Mckarkquey said...

God, Jeff, I feel the same way. I feel like I'm sitting on the Titanic and I'm the only one who can see we're going to sink. I've practically quit listening to CNBC or Bloomberg - the Bubblevision rhetoric is sickening.

I think Jim Rogers might well be right. I'm switching my CR-V for a tractor!

Jeff said...

Minton

I hear you.

I was just talking to a neighbor downstairs that just got laid off and needs to walk away from his condo.

I think the music is finally hitting the real economy.

I can tell the banks are getting desperate. I am going to share a story on my post tomorrow about a "short sale" in Vegas.

Jeff said...

Take a look at this read around Eatern Europe.

Many are wondering why the Telegraph yanked the article that discusses the potential $16 trillion Euro losses on the EU banks balance sheets.

Good stuff.

http://www.arpllp.com/core_files/The%20Absolute%20Return%20Letter%200309.pdf

Banditfist said...

Hey, I have a layover in Vegas tomorrow on my way to Seattle. Let me know if there are any short sales that you want me to bid on.

Maybe there will be good news about the markets when I land tomorrow.

Jeff said...

Bandit

Tomorrow is looking good so far. The world markets are up.

ES up 7. Of course we get the ADP # tomorrow so all bets are off.

No short sales for me thanks! Play some slots at the terminal tomorrow.

Your odds are probably better there than they are trading the market at this point!

What a mess this has all become.

Safe travels tomorrow!

johndaniels said...

good eye, jeff.

I have always thought the 250k fdic ins what a psychological ploy to prevent bank runs; in fact, it doesnt mean the government has any more capability to cover the insured deposits!

Jeff said...

JD

Thanks

Quite a bounce today. Financials are still tanking though.

Sector rotation going on here.