Good afternoon folks!
I hope everyone is having a great weekend. I wanted to talk a little about AIG today. According to The New York Times, AIG has already burned through $61 billion of the $85 billion bridge loan given to them by the Fed:
"The American International Group said on Friday that it had already drawn down $61 billion of the $85 billion emergency bridge loan it received from the Federal Reserve two weeks ago, an announcement that startled credit ratings agencies.
The emergency loan was supposed to buy the company time to sell its troubled assets in an orderly manner. But the sell-off has not yet begun, and now the insurer faces the additional pressure of trying to sell the businesses at a time when potential buyers are having trouble borrowing money.
Moody’s downgraded A.I.G.’s senior unsecured debt on Friday and said it might downgrade other types of the company’s debt, which could make it more expensive for A.I.G. to borrow money and do business.
A.I.G.’s chief executive, Edward M. Liddy, told securities analysts on Friday that $53 billion to $54 billion of the Fed’s loan had gone to shore up A.I.G.’s troubled structured-finance unit and its securities lending business. Another big block of the Fed’s money has been used to support A.I.G.’s daily operations, Mr. Liddy said in a conference call, because demand for the company’s commercial paper has dried up as a result of the worldwide credit crisis.
“The $61 billion draw to date on the facility is much larger than we had previously anticipated,” said Rodney A. Clark, an analyst with Standard & Poor’s, explaining the change in outlook.
A.I.G. is required to pay back its borrowings from the Fed within two years. Mr. Clark said that to raise the money, the rapid drawdown of the loan made it likely that A.I.G. would have to sell off more businesses than Standard & Poor’s had expected.
In response to questions, Mr. Liddy said it was impossible to say exactly how much money A.I.G. would have to raise to pay back the Fed and emerge from its crisis as a smaller company with adequate capital.
“It’s kind of a Rubik’s Cube,” he said. “We need to be very flexible” because of the fluid economic environment.
He said that in addition to using the $85 billion Fed loan, A.I.G. would be able to participate in the $700 billion bailout program signed into law by President Bush on Friday. The additional help from the Treasury might ease some of its financial burdens, Mr. Liddy said."
My Take:
This was startling to me. This is a great barometer to measure how bad things really are out there. We all wonder how bad the balance sheets are inside of our financials. The burn rate of AIG through this Fed bailout money is a good indication that they are probably much worse then any of us realize. Whats scary here is AIG isn't even a bank. Its an insurance company. I would guess some of the banks are in worse shape because they are less diversified.
This article also tells me that the taxpayers aren't getting their money back for awhile. I love the stipulation in this loan that AIG is supposed to pay this money back within two years. HA! Yeah right. Like that's gonna happen. Its a good thing Christmas is coming because they need a "Hail Mary" gift from Santa Clause in order to pay this loan back. Do you think Santa can get $85 billion down a chimney and under a Christmas tree?
Folks, there is no way $85 billion is going to be enough money to allow AIG to navigate through this mess. They have pissed away almost all of it in a matter of a few weeks! Expect this to cost the taxpayers much more.
Let me repeat: If things are this bad within AIG, what in the hell do the banks balance sheets look like? This was a frickin insurance company!
This also shows you how pathetic this $700 billion "rescue plan" is. One company has burned through almost $85 billion in a matter of weeks. How can the this rescue plan "save" the financial system when one company has burned through 1/7th of this amount in weeks?
Bottom Line:
You can rest assured that AIG will be heading back to DC with their hands out asking for more money. Expect Paulson to be doing the same after he burns through his $700 billion.
We need to start asking ourselves where does it all end? When do we start saying NO like any good parent does when a child throws a temper tantrum when they want something that makes no sense?
Washington DC needs to wake up and realize they need to get out of the bailout business before they ruin this country.
Saturday, October 4, 2008
Friday, October 3, 2008
Bailout Passes/Market Drops! Ooops!
Good late afternoon!
Lets all give The Fed's a big round of applause for saving the market! Nothing like a 500 point reversal into the RED after passing the largest bailout in the history of the US.
Does anyone feel like their 401k should be renamed a 201k? I actually am surprised the reversal was so violent today. I thought we would at least get a 1 day rally out of this.
Anyone notice how each Bailout rally is getting smaller and smaller. Bear Stearns stoked a two month rally. The Fannie/Freddie nationalization gave us a couple day bounce. The AIG "bailout" lasted about one day. The Paulson plan monster rally was what? A few hours? Yikes!
I thought this bailout was going to stabilize the markets and help restore investor confidence? Hank, you promised us this would settle things down! NOT! The bailout seemed to have the exact opposite effect. This plan will create more intervention into the markets which will do nothing for confidence in the markets. The Treasury will be buying securities without having a clue as to what their true value is.
I can't see any distressed buyers stepping up to the plate and buying mortgage debt right now as the economy implodes. I mean look at the jobs report today. Who on earth wants to buy any bad debt right now unless its sold at distressed prices? The whole economy is tanking!
This will continue to lower the value of houses. No distressed buyer is going to stick their toes in the water right now until things stabilize, or the price is right which means pennies on the dollar!
The problem for the taxpayer is we all know the Treasury has announced they plan on overpaying for these subprime sandwiches. Thanks guys! Enjoy pissing my taxdollars down the drain!
They have really backed themselves into a corner here. Why? IMO, the Treasury will have to give these securities away in order to set true market prices, and we will know about it based on the on the plan was written.
Let me explain:
The problem the Fed has with this particular plan is they must announce what they paid for these crap sandwiches within I believe its 48 hours. This was written into the bill.
So for example, lets say the Treasury goes to a bank and buys $50 billion of subprime sandwiches at .65 on the dollar. They will be forced to tell us exactly what they paid for them within a couple days.
Now lets suppose they hold an auction and receive no bids for the paper at .65 on the dollar. Lets say the best offer they receive is .30. What in the heck does the Treasury then do?
Do they tell the banks "no deal" and risk holding onto these securities as the economy continues to spiral downward, or do they sell them at a huge loss? If the the Treasury decides to sell them at .30 and take a huge loss, they will see torches and pitchforks outside their windows because the taxpayer will know they got bent over.
If they decide to hold onto the securities thinking they can get a better price, we are right back where we were with zero transparency and no clue what their value is except with one exception: The Treasury(US taxpayers) now owns the bad debt. So my question is how does this solve anything in the long run?
The way I see it its a lose/lose proposition for the Treasury. Either they take the loss and Americans start rioting in the streets, or they hold onto them which does nothing to solve the transparency problem and potentially end up taking huge losses down the road as the economy worsens.
This is why this plan was plain stupid. Now of course we all know why this was done. China and Europe basically threatened to stop buying treasuries unless they got some of their money back for the sh*t sandwiches that we packaged up and sold to them by the pigs on Wall St.
Take a look at this article from The USA Today:
"BEIJING — Wang Jun has been reading up on the U.S. financial crisis. Books on the subprime mortgage meltdown are hot sellers here in the Chinese capital.
But until recently, Wang, 33, had seen the debacle as a long-distance drama. Now, out house-shopping with his wife, he's worried that Wall Street's woes will force the Chinese government to impose new mortgage regulations and possibly drive the cost of a home beyond his reach. "The crisis seemed so far away," says Wang, who works for a Beijing publishing house. "But sometimes it's so near."
Despite his worries, Wang is sure about one thing: China shouldn't help bail out flailing U.S. banks and investment firms. "I don't think China has the financial power to help America," he says. "We have our own problems. To look after our own business first is the best policy."
Brimming with cash — a world-leading $1.8 trillion in foreign exchange reserves — China looks like a potential white knight for Wall Street's distress. But the Chinese are wary, burned over the past year on investments in U.S. financial firms and caught in the quicksand of a sinking dollar. Few analysts expect China to be a leader rescuing the U.S. financial system.
The value of Chinese acquisitions in the U.S. is down 73% so far this year — to $914 million from $3.4 billion in the first nine months of 2007, according to Thomson Reuters. The 2007 figure was inflated by the Blackstone deal.
China could play another role in Wall Street's rescue: buying the Treasury securities the U.S. government will auction off to pay for the $700 billion bailout.
China is already a big investor in the Treasury market. China owned $518.7 billion in Treasury securities on July 31, second only to Japan's $593.4 billion. Investors have been fleeing to the safety of U.S. Treasuries amid the turmoil on Wall Street, driving the prices up and yields down.
"Asian investors are rushing into U.S. Treasuries because they have been extremely risk-averse," says Chi Lo, head of investment research at Hong Kong-based Ping An of China Asset Management. "The $700 billion rescue is a new matter."
Europe's bonds a better deal
Lo says Chinese and other Asian investors — governments, banks, firms and individuals — will be reluctant to finance the Treasury bailout plan without higher interest rates as a sweetener. For now, Europe's top-rated bonds look like a better bargain: "U.S. bill and bond yields will have to go up to attract Asian buyers," Lo says. He sees yields on the benchmark 10-year Treasury bond rising to 4.3% from less than 3.7% now."
Final Take:
As you can see, China is already using the bailout as leverage and the bill hasn't even been passed yet!
Being an owner of half a trillion dollars in treasuries gives China a lot bargaining power. This is why this bailout was passed folks. Without China buying treasuries, we can't afford finance our debt and the game is over. China also happens to own huge amounts of the bad mortgage debt pie that Wall St. baked up.
IMO this was a $700 billion diplomatic solution that ensures China will continue to buy our treasuries. This gives us more time to continue to play musical chairs with our debt.
The problem here is the "musical chair" game is about over and there are two people left and one chair.
Bottom Line:
The reaction to the passing of this bill couldn't have been worse. UBS Trader Art Cashin(a man who I deeply respect) said on CNBC this morning that the "worst case scenario" later today would be if the bounce we saw this morning got sold off aggressively into the close.
He explained if we see this, the stage is possibly setup for a major plunge on Monday or Tues.
That exactly what we saw folks. Stay extremely conservative over the next two days. Lets see how the credit and stock markets digest the Paulson Plan. Today was the knee jerk reaction. Lets see how we trade when things settle down. My gut tells me that its not going to be pretty.
I wouldn't be surprised to see a Fed cut if we start to tank. The market and government are in a complete panic right now. They are running out of options, and nothing they have tried to do has fixed the problems. Expect the Paulson Plan to be a complete disaster.
Our financial Tsunami is gaining huge momentum, and I don't know what can be done to stop it.
Lets all give The Fed's a big round of applause for saving the market! Nothing like a 500 point reversal into the RED after passing the largest bailout in the history of the US.
Does anyone feel like their 401k should be renamed a 201k? I actually am surprised the reversal was so violent today. I thought we would at least get a 1 day rally out of this.
Anyone notice how each Bailout rally is getting smaller and smaller. Bear Stearns stoked a two month rally. The Fannie/Freddie nationalization gave us a couple day bounce. The AIG "bailout" lasted about one day. The Paulson plan monster rally was what? A few hours? Yikes!
I thought this bailout was going to stabilize the markets and help restore investor confidence? Hank, you promised us this would settle things down! NOT! The bailout seemed to have the exact opposite effect. This plan will create more intervention into the markets which will do nothing for confidence in the markets. The Treasury will be buying securities without having a clue as to what their true value is.
I can't see any distressed buyers stepping up to the plate and buying mortgage debt right now as the economy implodes. I mean look at the jobs report today. Who on earth wants to buy any bad debt right now unless its sold at distressed prices? The whole economy is tanking!
This will continue to lower the value of houses. No distressed buyer is going to stick their toes in the water right now until things stabilize, or the price is right which means pennies on the dollar!
The problem for the taxpayer is we all know the Treasury has announced they plan on overpaying for these subprime sandwiches. Thanks guys! Enjoy pissing my taxdollars down the drain!
They have really backed themselves into a corner here. Why? IMO, the Treasury will have to give these securities away in order to set true market prices, and we will know about it based on the on the plan was written.
Let me explain:
The problem the Fed has with this particular plan is they must announce what they paid for these crap sandwiches within I believe its 48 hours. This was written into the bill.
So for example, lets say the Treasury goes to a bank and buys $50 billion of subprime sandwiches at .65 on the dollar. They will be forced to tell us exactly what they paid for them within a couple days.
Now lets suppose they hold an auction and receive no bids for the paper at .65 on the dollar. Lets say the best offer they receive is .30. What in the heck does the Treasury then do?
Do they tell the banks "no deal" and risk holding onto these securities as the economy continues to spiral downward, or do they sell them at a huge loss? If the the Treasury decides to sell them at .30 and take a huge loss, they will see torches and pitchforks outside their windows because the taxpayer will know they got bent over.
If they decide to hold onto the securities thinking they can get a better price, we are right back where we were with zero transparency and no clue what their value is except with one exception: The Treasury(US taxpayers) now owns the bad debt. So my question is how does this solve anything in the long run?
The way I see it its a lose/lose proposition for the Treasury. Either they take the loss and Americans start rioting in the streets, or they hold onto them which does nothing to solve the transparency problem and potentially end up taking huge losses down the road as the economy worsens.
This is why this plan was plain stupid. Now of course we all know why this was done. China and Europe basically threatened to stop buying treasuries unless they got some of their money back for the sh*t sandwiches that we packaged up and sold to them by the pigs on Wall St.
Take a look at this article from The USA Today:
"BEIJING — Wang Jun has been reading up on the U.S. financial crisis. Books on the subprime mortgage meltdown are hot sellers here in the Chinese capital.
But until recently, Wang, 33, had seen the debacle as a long-distance drama. Now, out house-shopping with his wife, he's worried that Wall Street's woes will force the Chinese government to impose new mortgage regulations and possibly drive the cost of a home beyond his reach. "The crisis seemed so far away," says Wang, who works for a Beijing publishing house. "But sometimes it's so near."
Despite his worries, Wang is sure about one thing: China shouldn't help bail out flailing U.S. banks and investment firms. "I don't think China has the financial power to help America," he says. "We have our own problems. To look after our own business first is the best policy."
Brimming with cash — a world-leading $1.8 trillion in foreign exchange reserves — China looks like a potential white knight for Wall Street's distress. But the Chinese are wary, burned over the past year on investments in U.S. financial firms and caught in the quicksand of a sinking dollar. Few analysts expect China to be a leader rescuing the U.S. financial system.
The value of Chinese acquisitions in the U.S. is down 73% so far this year — to $914 million from $3.4 billion in the first nine months of 2007, according to Thomson Reuters. The 2007 figure was inflated by the Blackstone deal.
China could play another role in Wall Street's rescue: buying the Treasury securities the U.S. government will auction off to pay for the $700 billion bailout.
China is already a big investor in the Treasury market. China owned $518.7 billion in Treasury securities on July 31, second only to Japan's $593.4 billion. Investors have been fleeing to the safety of U.S. Treasuries amid the turmoil on Wall Street, driving the prices up and yields down.
"Asian investors are rushing into U.S. Treasuries because they have been extremely risk-averse," says Chi Lo, head of investment research at Hong Kong-based Ping An of China Asset Management. "The $700 billion rescue is a new matter."
Europe's bonds a better deal
Lo says Chinese and other Asian investors — governments, banks, firms and individuals — will be reluctant to finance the Treasury bailout plan without higher interest rates as a sweetener. For now, Europe's top-rated bonds look like a better bargain: "U.S. bill and bond yields will have to go up to attract Asian buyers," Lo says. He sees yields on the benchmark 10-year Treasury bond rising to 4.3% from less than 3.7% now."
Final Take:
As you can see, China is already using the bailout as leverage and the bill hasn't even been passed yet!
Being an owner of half a trillion dollars in treasuries gives China a lot bargaining power. This is why this bailout was passed folks. Without China buying treasuries, we can't afford finance our debt and the game is over. China also happens to own huge amounts of the bad mortgage debt pie that Wall St. baked up.
IMO this was a $700 billion diplomatic solution that ensures China will continue to buy our treasuries. This gives us more time to continue to play musical chairs with our debt.
The problem here is the "musical chair" game is about over and there are two people left and one chair.
Bottom Line:
The reaction to the passing of this bill couldn't have been worse. UBS Trader Art Cashin(a man who I deeply respect) said on CNBC this morning that the "worst case scenario" later today would be if the bounce we saw this morning got sold off aggressively into the close.
He explained if we see this, the stage is possibly setup for a major plunge on Monday or Tues.
That exactly what we saw folks. Stay extremely conservative over the next two days. Lets see how the credit and stock markets digest the Paulson Plan. Today was the knee jerk reaction. Lets see how we trade when things settle down. My gut tells me that its not going to be pretty.
I wouldn't be surprised to see a Fed cut if we start to tank. The market and government are in a complete panic right now. They are running out of options, and nothing they have tried to do has fixed the problems. Expect the Paulson Plan to be a complete disaster.
Our financial Tsunami is gaining huge momentum, and I don't know what can be done to stop it.
Thursday, October 2, 2008
Global Panic/Credit Freeze
Good evening everyone!
Quite a day today wasn't it? The stock market plummeted over 3% today as credit continues to tighten globally. I saw fear and panic in the eyes of the traders today as they practically got on their hands and knees and begged Congress to pass the rescue plan.
I think you saw the market sell off big for three main reasons today:
#1 The credit markets are virtually shut down.
#2 Many believe the rescue plan is too little and too late.
#3 The continued financial meltdown in Europe.
I also think the markets sold off because they wanted to send a strong signal to Congress that they seriously need help.
Credit Markets
The credit markets are flat out ugly folks. You practically need a crowbar to pry money away from a bank right now. Corporate lending has almost come to a complete halt. How bad is it?
Well lets put it this way: Last month was the worst month ever for corporate credit despite the world's central banks pumping an unprecedented $1 trillion dollars into the financial system:
"Oct. 2 (Bloomberg) -- Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world.
The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.
``It's going to get much, much worse,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The credit markets are effectively shut, the CP market, which there's not enough focus on, is under complete duress. That can't be sustained, as that's the lifeblood of corporations funding themselves.''
The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low."
Quick Take:
What can I say folks. This is terrifying. The credit markets are how many companies fund themselves for things like payroll and buying inventory for things like the holiday season. If they have no availability to credit, they can no longer operate.
There is practically no money out there folks. Zero. Zilch. Squadoosh. The central banks pumped $1 trillion dollars into the banks and it did nothing to free up lending. This leads me to a little question here: If a $1 trillion liquidity injection did nothing to cure this problem, how in the hell is our measly $700 billion rescue plan gonna help?
Take a Look at this additional piece of data on Fed loans to the banks:
"Oct. 2 (Bloomberg) -- Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze.
Loans to commercial banks through the traditional discount window rose about $10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today. The total surpassed the previous record after the 2001 terrorist attacks."
One week borrowing from the banks was nearly half the amount of the bailout bill! This "rescue plan" is like giving a guy a twenty when he is short $1000.
The problem in the credit markets is two fold. One, the banks have no money to fund the credit markets because they are sitting on too much debt. Two, they don't trust each other. Every bank is afraid they are lending to another bank because they are worried they are insolvent. As a result, they refuse to lend and hoard the cash to take care of their own funding issues.
The problem with the Paulson plan is its not enough money to rid the world's banks of their mortgage debts, and it does nothing to restore trust. Regardless, I fully expect Congress to pass this bill after watching what happened in the credit markets this week. Its not going to work, and this little blogger can't wait to write about it when it fails!
European Slowdown
Just a couple stories here from Europe. Take a look at the ECB's Trichet's comments today. He was much more dovish on interest rates. Inflation worries look to be off the table. Expect rate cute across the pond folks. Currencies will be interesting to watch over the next few weeks. The dollar soared today today based on Trichet's comments and further signs of European weakness.
How bad is it in Europe? Take a look at the bank runs that are occurring in Greece:
""The Greek government has issued a blanket guarantee of all bank deposits after panic withdrawals by customers in Athens and Thessaloniki, creating an unstoppable stampede across Europe for an EU-wide bail of the financial system."
Yikes!
Bottom Line:
Be prepared for a Japan like classic deflationary death spiral folks. I hate to say it but the signs are everywhere. Gold and commodities were pummeled again today. This is a classic deflationary signal. Houses, cars, and all other assets continue to drop in price and value. Students are unable to get school loans. Expect education long term to also drop in price as a result. These are all signs of deleveraging and deflation. Its going to be painful process, but it is inevitable.
We simply don't make enough money to afford the level at which it costs to live. Something has to give and its going to be prices via deflation.
My advice is to get out of debt as fast as you can. If you have wealth, deflation actually will make you richer because everything drops in price and the world will be on sale when we come out of this. Make sure you protect your wealth in safe investments like treasuries and bank CD's. When we come out of this economic reset, you will then have money, and you will be sitting pretty.
Let me close by warning everyone that the deflation thesis can always be taken off the table if the government decides to print. All bets are off then folks. However, I highly doubt our government is that stupid, but if it gets bad enough they may consider some form of it.
Watch the vote tomorrow from a short term trading perspective. I think the market could move violently up or down tomorrow if the plan is approved. Confidence in the plan seems to be lacking so we could see a "sell the news" drop in the markets. However, never underestimate the "bubble boys" and how they love to take the market higher on bailout news!
I plan on entering some more short positions on any bounce from our FANTASTIC, WONDERFUL "RESCUE PLAN"! What a joke.
Always remember folks, when the government knocks on your door and says "hi we're from the government and we're here to help you" , lock the door and run as fast as you can!
Quite a day today wasn't it? The stock market plummeted over 3% today as credit continues to tighten globally. I saw fear and panic in the eyes of the traders today as they practically got on their hands and knees and begged Congress to pass the rescue plan.
I think you saw the market sell off big for three main reasons today:
#1 The credit markets are virtually shut down.
#2 Many believe the rescue plan is too little and too late.
#3 The continued financial meltdown in Europe.
I also think the markets sold off because they wanted to send a strong signal to Congress that they seriously need help.
Credit Markets
The credit markets are flat out ugly folks. You practically need a crowbar to pry money away from a bank right now. Corporate lending has almost come to a complete halt. How bad is it?
Well lets put it this way: Last month was the worst month ever for corporate credit despite the world's central banks pumping an unprecedented $1 trillion dollars into the financial system:
"Oct. 2 (Bloomberg) -- Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world.
The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.
``It's going to get much, much worse,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The credit markets are effectively shut, the CP market, which there's not enough focus on, is under complete duress. That can't be sustained, as that's the lifeblood of corporations funding themselves.''
The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low."
Quick Take:
What can I say folks. This is terrifying. The credit markets are how many companies fund themselves for things like payroll and buying inventory for things like the holiday season. If they have no availability to credit, they can no longer operate.
There is practically no money out there folks. Zero. Zilch. Squadoosh. The central banks pumped $1 trillion dollars into the banks and it did nothing to free up lending. This leads me to a little question here: If a $1 trillion liquidity injection did nothing to cure this problem, how in the hell is our measly $700 billion rescue plan gonna help?
Take a Look at this additional piece of data on Fed loans to the banks:
"Oct. 2 (Bloomberg) -- Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze.
Loans to commercial banks through the traditional discount window rose about $10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today. The total surpassed the previous record after the 2001 terrorist attacks."
One week borrowing from the banks was nearly half the amount of the bailout bill! This "rescue plan" is like giving a guy a twenty when he is short $1000.
The problem in the credit markets is two fold. One, the banks have no money to fund the credit markets because they are sitting on too much debt. Two, they don't trust each other. Every bank is afraid they are lending to another bank because they are worried they are insolvent. As a result, they refuse to lend and hoard the cash to take care of their own funding issues.
The problem with the Paulson plan is its not enough money to rid the world's banks of their mortgage debts, and it does nothing to restore trust. Regardless, I fully expect Congress to pass this bill after watching what happened in the credit markets this week. Its not going to work, and this little blogger can't wait to write about it when it fails!
European Slowdown
Just a couple stories here from Europe. Take a look at the ECB's Trichet's comments today. He was much more dovish on interest rates. Inflation worries look to be off the table. Expect rate cute across the pond folks. Currencies will be interesting to watch over the next few weeks. The dollar soared today today based on Trichet's comments and further signs of European weakness.
How bad is it in Europe? Take a look at the bank runs that are occurring in Greece:
""The Greek government has issued a blanket guarantee of all bank deposits after panic withdrawals by customers in Athens and Thessaloniki, creating an unstoppable stampede across Europe for an EU-wide bail of the financial system."
Yikes!
Bottom Line:
Be prepared for a Japan like classic deflationary death spiral folks. I hate to say it but the signs are everywhere. Gold and commodities were pummeled again today. This is a classic deflationary signal. Houses, cars, and all other assets continue to drop in price and value. Students are unable to get school loans. Expect education long term to also drop in price as a result. These are all signs of deleveraging and deflation. Its going to be painful process, but it is inevitable.
We simply don't make enough money to afford the level at which it costs to live. Something has to give and its going to be prices via deflation.
My advice is to get out of debt as fast as you can. If you have wealth, deflation actually will make you richer because everything drops in price and the world will be on sale when we come out of this. Make sure you protect your wealth in safe investments like treasuries and bank CD's. When we come out of this economic reset, you will then have money, and you will be sitting pretty.
Let me close by warning everyone that the deflation thesis can always be taken off the table if the government decides to print. All bets are off then folks. However, I highly doubt our government is that stupid, but if it gets bad enough they may consider some form of it.
Watch the vote tomorrow from a short term trading perspective. I think the market could move violently up or down tomorrow if the plan is approved. Confidence in the plan seems to be lacking so we could see a "sell the news" drop in the markets. However, never underestimate the "bubble boys" and how they love to take the market higher on bailout news!
I plan on entering some more short positions on any bounce from our FANTASTIC, WONDERFUL "RESCUE PLAN"! What a joke.
Always remember folks, when the government knocks on your door and says "hi we're from the government and we're here to help you" , lock the door and run as fast as you can!
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