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Wednesday, February 13, 2008

The Derivatives Disaster Is Upon Us

I don't know the full name of the guy that wrote this, but I believe every word of it because I see it happening right now. I saw it today over on Lemetropole Cafe.
Today, Warren Buffet disclosed bids he made to Ambac, and MBIA. These bids were solely for the muni bond insurance, not credit default swaps, not CDO's, nothing to do with mortgages. He wants the profitable crown jewels. He doesn't want the toxic waste that will ultimately bankrupt these companies, not to mention the entire "fiat" system. Wall Street applauded the deal because they may not have to sell Billions $ of munis because they are no longer AAA rated. Buffet is not a stupid man. He is getting in line to scoop up this portion of the business when the insurers get/go downgraded or bankrupt. Both stocks were beaten like redheaded stepchildren in today's market. In some cases, uninsured bonds are trading higher in price than insured bonds. The bottom line here is; a recession is going to blow out the federal deficit, state and municipal deficits, over-leveraged corporations, homeowners, and consumers. Even if Mr. Buffet succeeds in getting the "muni bonds contract" it's all a joke anyway. Either these bonds can stand on their own or they cannot. No company, Central bank, or combination of the two can stop what is coming down the tracks. We are talking TRILLIONS! There are $750 Trillion of derivatives outstanding. 3/4 of a QUADRILLION DOLLARS! A Quadrillion. I can't believe we are using the "quadrillion" number. This monster just got too big.

We currently are experiencing 2 different markets in mortgages. Jumbo rates are about a point higher than conventional rates. Advertised rates are different from available rates. Many applications are turned down for poor credit, others because the appraisals don't stand up, re-fi's for too little or negative equity. We have 2 different sets of interest rates. One being the government declared rates, the other being market rates. Guess which rate is more important? That's right, the EFFECTIVE rates used in the real world. Real world rates have not come down anywhere near as much as "Fed" rates. Also there is a total lack of liquidity where it is needed. If you need money, you can't get it. If you don't need it, it is plentiful.

I wrote back in June and July about the prospective credit crunch. I also wrote that "if you don't know what derivatives are, you will within 6-12 months". Well, derivatives have bankrupted the system. No ifs, ands, or buts. The situation is systemic. I do not profess to know the exact outcome, but I do know the world will look and feel completely different a year from now. The last six months we have seen denial, we have heard it was "contained", we heard "ok, now that the banks and brokers have taken writedowns the decks have been cleared". That was after the first round of writedowns, we heard it again after the second round. We are now in the third round of writedowns, and I submit the surface has not even been scratched. Nothing is being marked to market yet in the credit markets. All it would take is to have JUST ONE sector marked to market and we will witness panic. We have credit default swaps, CDO's, SIV's, interest rate derivatives, ARM corporates and municipals. And on and on. If just one sector were truly marked to market, the banking system will not survive 10 days. Possibly not 10 hours, meaning they won't open the next day. That is how serious this is. This will end in a panic that will put 1929 to shame. I say this because the system will change dramatically, whereas after 1929 it was all about getting back to the way it was before the crash. This time we cannot go back to the past, the currencies must change. They must be backed by something. I am not smart enough to know exactly what the aftermath will look like. I am smart enough to know that precious metals will serve as the foundation to money in some way shape or form. They have for some 5000 years. The opportunity to become a "charter" member of the next banking system is now. Either have wealth in real money or lose your wealth in today's' paper currencies! Regards, Bill H.

So...do you have/own some real money...i.e gold & silver? If not, you'd better call me and I'll go over with you some of the ways to position yourself for this environment.


  • At 11:29 AM, Anonymous Anonymous said…

    Very interesting info. I don't see
    how this would be bullish for gold
    & silver. Looks like a deflationary
    scenario to me.


  • At 1:44 PM, Blogger Allan Bartlett said…

    Chaz, the trend is your friend in investing. In this case, just follow the uptrend in gold and silver. We have had huge inflation that is just recently starting to show up in the physical commodities. Let me put it to you this way...would you rather hold leveraged credit default swaps & CDOs on mortages that are under water or hold physical gold & silver that is paid for and has no counter party risk? If you answer the former, I will pray for you.

  • At 12:32 AM, Anonymous Recession Stock Trading said…

    I very much enjoy your posts. Please keep it up!

    What is 'Recession Proof'?

    You can almost hear the wallets snapping shut. Folks are cutting back on their spending every way they can. According to those who know, we are either in a recession, or are about to be. I would hate to be trying to sell real estate or new cars right now. Talk about hitting your head against the wall. Ouch!

    That got me to thinking of what businesses make sense during a recession. Certainly health care does. Baby boomers are going to need every kind of health care imaginable. For all I know, economic bad times makes people sick too.

    Other types of businesses that should be recession proof include vital home repairs, like plumbing, electrical, and roofing. Folks can't put off fixing a clogged toilet or a leaking roof just because they're a little short on cash.

    And you know what they say about death and t.ax.es. A well-run funeral home or a tax consulting business shouldn't be hurt by an economic downturn.

    But all these jobs require training, and even certification. And that takes time. By the time you've learned one of these trades, the recession may well be over. That got me to thinking about one business that's truly recession-proof, and you can get started almost immediately: Day Trading.

    Day Trading refers to the buying and selling of stocks within the same trading day. I know what you're thinking: how can a day trader be successful when the stock market is down, day after day? Well, day traders profit from volatility - when there are big swings in stock prices, there is money to be made.

    It used to be that Day Trading was only done by financial institutions with access to technology and information. Now, almost anyone with Internet access can become a day trader, if they know what to do.

    Manny Backus

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