# Credit Debacle the start of an imminent Recession



## lbradman

Due to the recent market volatility, provoked by the sudden "subprime loan debacle" in the US, I'd like to share with you all my personal views on this subject, especially that it is something  I have been watching closely for the last 4 months. But before I go on with this little dissertation I want you to understand that I don't pretend to be an economist, I simply use "basic economics 101", which is something our financial leaders maybe should use. 

I feel the actions from the Fed and central banks worldwide including our own RBA (ie several massive injections of cash into the market to the recent 1/2 point rate cut in the US) was a desperate and hasty move.  This "patch the holes" moves, is rendering the market a great disservice, and it will make things a lot worse for the long term. 

Basically, the Fed is adding water pump to a sinking ship, instead of fixing the holes, and eventually the ship will sink anyway, because nothing has been fixed. But I don't think they care, they need to make the masses feel better now, because they need a happy consumer to keep on buying crap. 

However as harsh as it sounds and as painful as it will be (but not a politically popular move) it is a needed economic cycle, needed to purge the excess and this imbalance that have been created in order to begin a new healthy, and lasting positive economic cycle. The "band aid solution" ( "instant feel better") will only delay the inevitable and once it comes, instead of going thru a "mild and short recession" it will be a lot more painful possibly creating if not a depression but at least a SEVERE long and VERY painful recession . 

This credit debacle is far more serious than most even begin to realize, and here is why I think so: 

I honestly believe that we are at a critical credit and liquidity  imbalance , and it goes all the way down to the low income consumer. Our consumption society as a whole is now mostly based on borrowed money, practically no one nowadays has the discipline to save his cash to buy XYZ item or a car or take a vacation. Most spend more time planning "credit vacation" than they spend planning healthy finances. 

For example I have witnessed in both Europe and the US (I have lived in both continents long enough and have the advantage of knowing both very, very well) and observed consumption habits on both continents and the similarities are very scary, of course the US is by far still the "the leader of the pack". 

In general I have observed that families with medium limited incomes were basically shopping on credit most of the time, either for clothes, cars, food, electronics, and vacation. In my parent's days they saved for everything. But at the end whatever they had in their house was 100% paid for, their vacation was 100% paid for, and they still managed to save some hard cold cash for rainy days. 

Today the people not only don't have a decent nest egg, they just don't have any, but they drive Mercedes, BMW's, have entertainment centers that would make George Lucas look like a hobo.... 

So when it comes to people and real estate, why are we so surprised? It is the same mentality, they have used their overpriced houses like an ATM machine, courtesy of clever and creative financing method to either make some other ludicrous over priced real estate acquisitions they can't afford (hell, they could barely afford the first one in the first place if it had not been for ("creative mortgage facility"), or buying all types of useless adult toys, not to mention extravagant home improvements or vacations. 

They bought into the nonsense of these realtors and the media that real estate would go up indefinitely, these realtors, most of whom are no more than improved shoes salesmen and Tupperware housewives have been taught in an 8 hours seminar learning the cookie cutter classic economic theories why real estate will always go up. The funny thing is I hear the same logic being used in the US and in Europe. They all must attend the same 8 hours seminars, and all become economic experts at the end of it, why not!!! They have certificates of completion to prove it...And the media is basically owned and operated by the ones that want the mass to consume and spend for the benefit of some other companies they own. "The basic Asylum runs by its patients" 

Now you might think what is then the relationship with subprime loan? well here it is in a nutshell: ( I will simplify the process for you): 

This is what Banks, and financial institutions do (which are more worried of making short term money to obtain fat bonuses and fat executive salaries): 

They borrow money in Yen (Japan has the lowest interest rate of all industrialized country) actually at almost 0 %, and they either invest in equity and debt markets around the globe (also creating a bubble on borrowed money, btw), and also they loan that borrowed money to other financial institutions that create all sort of  "exotic mortgages", and "credit facility", you name it. Then some other layers of financial institutions re-package all these different forms of loans into high yield financial instruments to be parceled out and sold back to the financial institutions that had borrowed money in the first place. Basically, they are creating a gigantic credit Ponzi scheme on borrowed money with the consumer as its base for guarantee, and since the consumer himself is over extended, I don't need to tell you what will happen next. 

Of course we try to find an easy typical fall guy "Wall Street" for creating all these derivative instruments, all they did is they found an opportunity and ran with it to make money. The real "crew of culprits "are the highest and also the lowest level on the food chain, the higher ones: well, we vote for them and the mass buy into their self serving demagogic promises and speeches, the lowest one is the consumer gullible naivety, and greed. Almost all financial experts want us to believe that whatever the fed is doing is good. Think again. 

This will not save the people that are about to lose their homes, this will not save the basic overextended consumer, since most all exotic Mortgage and credit companies are closing their doors anyway, and even the conservative ones are now on "survival mode",  they will not cut any slack to the overextended and delinquent  consumer, on the contrary. No matter how much liquidity the FED is pouring and no matter how many times they cut rates. The surviving institutions are now in contraction mode, too busy doing damage control or even saving themselves. The only money they will loan back in the market will be to people that don't need it. 

The only thing you will see will be fake "dead cat bounces" but at the end the real estate is "cooked" (actually it has been cooked for over 2 years , the masses just didn't know it yet and still don't even know it or to what extend it will be cooked). Houses that are sold today for 2 million dollars they will be lucky to get 1 million for it, and if they even get that. Keep in mind that in the next year another $700 billion or so of "adjustable mortgage  are due to reset, that is over $170 billion more than this year, and more adjustable mortgages will be reset  after 2008. 

This massive liquidity and credit imbalance which started over that last 20 years or so is only about to enter a severe readjustment and it has barely just begun. I just don't know how long and how it will play out, but it will play out. Of course the Fed/government will play some of its "voodoo" economic short term magic tricks just in time to benefit some "crooked, lying, greedy, performing monkey ass politicians" election or re election, and it will make the "masses" feel better in short term, just in time to cast their vote, all this trumpeted by their favorite interested (paid off or own) accomplices "cheer leaders", the media. 

Also don't forget, because it is related and will play a major role in this grand skim of things, that  the US is running an unprecedented account deficit , basically in less than 8 years the current US administration have borrowed more money than any other administration put together, so if the country enters a severe recession ( which I think it will ) not only the US government does not have a "nest egg" but it has blown its wad by already overextending itself "debt wise" and  in a period of decent economic time I may add, (for their own benefit btw, but that is another subject all together) . 

So when we finally enter this severe recession the US government has already blown most of its "borrowing options"(during the good times), the only option it has left will be to go much deeper in debt rendering the US dollar as valuable as the pesos, the consequences of that will also be severe, and they will have to raise taxes drastically, just to pay the " bar tab" of the previous administration. So when I hear deficit don't matter they will re think that theory very soon, but of course the "fearless leaders" who left the restaurant with this "orgy tab" will be out of office by then, enjoying their pontificated retirement and collecting book deals, consulting deals, speech deals, and other corporate deals they worked out before, leaving the already over extended US taxpayers to pick up the "orgy bill" (via increased taxes) for decades to come. Hell, the US taxpayers are still paying for the S&L debacle they don't even know it, but trust me there (that was when Mr. Bush senior was VP, interestingly enough, most best S&L debacle asset that went into auctions were picked up at ridiculous bargain prices by some of Mr. Bush Senior's friends .The public was only allowed to bid for the chairs and tables and the bailout package was provided again- courtesy of the taxpayers.


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## wayneL

Another bear... bewdiful.

Welcome to the club.


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## powerkoala

nice reading...
really comforting to know the "real" truth behind the scheme.
hopefully the "destruction" is not happening soon.


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## dhukka

There are any number of threads on this forum that carry the type of arguments you have put forward. Don't take this the wrong way but you haven't offered anything new and quite honestly it falls short of a lot of the commentary put forward in other threads.


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## insider

You know what? The market will collapse only after the presidential elections... That's just a hunch


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## wayneL

insider said:


> You know what? The market will collapse only after the presidential elections... That's just a hunch



Our "presidential" elections, or their's? </ironical_swipe_at_presidential_electioneering>


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## Rob_ee

In the mean time while I am waitng for the market to crash it usually does the opposite to what it should or rather what I expect.

So after last nights debacle the DOW futures are (at the moment) about 40 points higher and maybe it will be a triple digit gain tonight.

A stock I follow PNA has risen 50% from the recent sell off 10 days ago when it droped about 30% intraday and then recovered.
I missed the lot through indecision and waiting for it to get cheaper tomorrow.

Our own market seems to have disconected somewhat from the good old US of A .. only lost 1/2 of what it should have today and yesterday only 7 points down.

Sooner or later the bears will be right but it is a guessing game for someone with my limited experience.

Maybe I should just buy a good quality blue chip and ride this roller coaster out. With an election in the US next year pressumably the fed won't let it fall to far before cutting rates and of coarse the olyimpics might somehow help

I have not traded at all for this past month sitting on the side lines guessing what might happen tomorrow

I have heard/read all about greed and fear.... neither of which affects me.
What I was not prepared for was indecission ?

So what to do ???

Rob


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## insider

wayneL said:


> Our "presidential" elections, or their's? </ironical_swipe_at_presidential_electioneering>




lol... I think you might be getting the idea that they have their preferred candidates...


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## tasmanian

insider said:


> You know what? The market will collapse only after the presidential elections... That's just a hunch




Think you might be right there insider.exactly when is the next US election??

Great post ibradman.alot of effort and thought there.

wayne put me down for a bear as well!!!!!

I cant see the xao making new highs for a few years actually.We will go up and down for possibly a few mths maybe 6.Then i see a nice steady downtrend beginning.Well its already started just trying to fight against atm it will become more obvious when everyone starts to realise.

How long can the fed keep trying to fix the problems with band aids???


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## prawn_86

i'll admit i dont know much about macro issues, but if it got to a severe stage with the amount the US has borrowed (a figure i heard is they are borriwing over $60million per DAY), is it possible that the western economy could or would try to reset itself?

ie - just wipe everyones debts and start again?

like i said just a thought so dont tear me apart too much.


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## explod

dhukka said:


> There are any number of threads on this forum that carry the type of arguments you have put forward. Don't take this the wrong way but you haven't offered anything new and quite honestly it falls short of a lot of the commentary put forward in other threads.






True partly, dont' see what you mean by "...fall short..." and would like your clarification?

What is being said has been repeated but in my view cannot be repeated enough.  This is not gloom and doom this is the actual reality today in the US and some of it will hurt in our land too.  I will repeat part of that statement   "IT IS THE REALITY TODAY IN THE US".  Commentators say be calm but give no qualification.   

Those of us in the know have a duty to warn our family and friends and anyone we can to prepare for the tough times ahead, pull in the belts and relinquish debt if we can.  As with the carry trade and sub-prime margin calls, everyone wanting to suddenly reduce debt here in Australia will begin to unwind together and sadly it also will be when it is too late.


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## robots

hello,

what credit debacle?

business to business is where the trouble is, businesses go down daily across the world in all fields

the main fed rate has not been cut, smarta**se investment bankers have made  "sophisticated" products to on sell to suckers out there (fund managers etc)

have Rams executed all their mortgages and called in the money?

"property has been cooked for 2 years"

thankyou

robots


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## wayneL

robots said:


> hello,
> 
> what credit debacle?



ROTFLMAO!!!!!!

Funny guy.


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## dhukka

explod said:


> True partly, dont' see what you mean by "...fall short..." and would like your clarification?
> 
> What is being said has been repeated but in my view cannot be repeated enough.  This is not gloom and doom this is the actual reality today in the US and some of it will hurt in our land too.  I will repeat part of that statement   "IT IS THE REALITY TODAY IN THE US".  Commentators say be calm but give no qualification.
> 
> Those of us in the know have a duty to warn our family and friends and anyone we can to prepare for the tough times ahead, pull in the belts and relinquish debt if we can.  As with the carry trade and sub-prime margin calls, everyone wanting to suddenly reduce debt here in Australia will begin to unwind together and sadly it also will be when it is too late.




No need to repeat, you're preaching to the converted. After the way the post was introduced I was expecting some grand revelation. I was disappointed by the time I got to the end of it. I had assumed ( perhaps wrongly) that everything in the opening post was well known and didn't need repeating. 

Falling short in the sense that it makes some rather sweeping generalizations without much support except for personal opinion.


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## explod

dhukka said:


> No need to repeat, you're preaching to the converted. After the way the post was introduced I was expecting some grand revelation. I was disappointed by the time I got to the end of it. I had assumed ( perhaps wrongly) that everything in the opening post was well known and didn't need repeating.
> 
> Falling short in the sense that it makes some rather sweeping generalizations without much support except for personal opinion.




Agreed a bit wild.   There is a lot of fear and uncertainty about.  In that light it is hard to keep emotion out and remain objective.   Nothing personal meant.  

Perhaps we need look more at what we can do to insulate ourselves and families, but too late tonight after a big day for me


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## Bushman

I have read elsewhere that when taxi drivers give share tips be fearful. 

I am starting to think that when stock forum posters give economic analysis quoting Economic 101 then be optimistic. 

Nobody knows what is going to happen in the next six months. Uncertainty causes the market to swing on its rusty hinges. Why else would the Dow tank 280 points when...wait for it...consumer confidence is 'measured' and found to be lower in the wake of a month of headlines of impending economic doom. Talk about a self fulfilling prophecy.

Other investors are hell.


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## wayneL

Bushman said:


> I have read elsewhere that when taxi drivers give share tips be fearful.
> 
> I am starting to think that when stock forum posters give economic analysis quoting Economic 101 then be optimistic.



Contrarian analysis is invoked waaaaaaayy too early these days, because everybody knows about it. This effectively rules out it's efficacy. 

A better strategy is to fade the contrarians, it's been working lately.


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## kitehigh

If people are interested in America's finacial stragedy I suggest you download this pdf file.
http://www.michael-hudson.com/books/superimperialism.pdf

Its a long read but quite interesting.

Basically shows how the rest of the world is financing the good old USA.
  They are actually very happy to be running a massive account deficit, as its their financially weapon of mass destruction that they use against the rest of the world. 
  They started running a large deficit in the late 60's due to the Vietnam war, and than once they got rid of the gold standard they worked out they could print money at will and get the rest of the world to buy their bonds and receive some interest on them.
  They achieve this by having the dollar as the reserve currency of the world.  It explains quite well how no other currency can currently threaten the US dollar role as the global reserve currency.  Basically says something along the lines that if one country (or a number of countries) wanted to challenge the US dollar than they would have to go on a massive military buildup and than challenge the US directly in military confrontation.  You have to remember the US didn't get to where it is now in a short period of time.  You only have to look at the US's defence spending to know that they aren't about to let someone else step up to the plate and challenge that dominance. 

Also it actually helps the US when their currency is weak against a back drop of other currencies.  It makes their exports more competative thereby ramping up domestic production and stimulating their domestic economy.  The Fed is well aware of this and have actively driven their currency down, much to the dismay of the Europe, Japan etc.  Its also the reason why china refuses to unpeg its currency from a artificially low level. 

So what does this have to do with the current market.  Well I'm not sure, but I do know I am not smart enough to think that I can predict where the market is heading.  So I can only go on price action.  If the market is moving in a certain direction than I want to try and make sure I am going with it.  If not than I should be standing on the sides protecting my capital.


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## Uncle Festivus

Great post kitehigh.

There are 2 parts to this conundrum - the Yen carry trade unwinding & the US consumer. 

I have been watching the US homebuilders for the key to what direction the US economy will head. If you were an American you could ask yourself "Do I feel wealthier than I did this time last year"? For an ever increasing number the aswer would be no. So this starts to feed into the mindset of the average US consumer who then needs to reduce spending etc. The recent consumer sentiment report alludes to this happening now. What we also have is actual once in a generation type (negative) changes in consumer linked indices and industries eg housing which indicate that the bottom is still a long way off.

Homebuilders are the canary in the coal mine - which one will file for bankruptcy first?

So my take is that the US consumer has already started down the path of a reccession, only the severity is in doubt. We will only know how bad it is when & by how fast the Fed starts dropping interest rates.


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## sassa

dhukka said:


> No need to repeat, you're preaching to the converted. After the way the post was introduced I was expecting some grand revelation. I was disappointed by the time I got to the end of it. I had assumed ( perhaps wrongly) that everything in the opening post was well known and didn't need repeating.
> 
> Falling short in the sense that it makes some rather sweeping generalizations without much support except for personal opinion.



One of the reasons I love being Aussie-freedom of speech(opinion).These forums would be virtually non-existent if it weren't for people's opinions.
So back to the topic-regardless of all the prognostications(opinions) of the economists,fund managers,bank managers et al that the economy is in fine shape and growing worldwide,the U.S.is still number 1(not China or India) in the chain and it is showing signs of being sick.Like a family,if one catches the bug,the rest usually come down with it as well.The cure is medicine and rest.
Just what the overheated markets and economy need a dose of(opinion or fact?)


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## nioka

explod said:


> Those of us in the know have a duty to warn our family and friends and anyone we can to prepare for the tough times ahead, pull in the belts and relinquish debt if we can. .



I like this "those of us in the know" bit. It assumes you are 100% right. What if you are 100% wrong then you are a lemming. Hitler thought he was right. So has every Prime minister I have seen in a long life time. I, for one don't agree. I guess then that according to you then I am not in the know. Remember the definition of expert. X is something that was, a spurt is a drip out of control.Therefore an expert is a drip out of control.


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## explod

nioka said:


> I like this "those of us in the know" bit. It assumes you are 100% right. What if you are 100% wrong then you are a lemming. Hitler thought he was right. So has every Prime minister I have seen in a long life time. I, for one don't agree. I guess then that according to you then I am not in the know. Remember the definition of expert. X is something that was, a spurt is a drip out of control.Therefore an expert is a drip out of control.




I personally know family and friends who have borrowed to the hilt for their bit of Aussie property and the BMW, beyond redemptive value.   Some have a number of investment properties in the same boat.  Any rise in interest rates, fuel and food is going to take them out.   With a world shortage of these essentials is this not going to bite.  It is happending across the US as we discuss.   If that is not roughly in the know, what is?

And if we have some idea, should we not be warning our friends and families of these dangers or just say "stay positive, things will be ok" as Wall Street is so doing with their heads in the sand.   Maybe they are in touch with the guardian angel.   Wont' work for us drips out of control though

Just my humble opinion


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## nioka

explod said:


> I personally know family and friends who have borrowed to the hilt for their bit of Aussie property and the BMW, beyond redemptive value.   Some have a number of investment properties in the same boat.  Any rise in interest rates, fuel and food is going to take them out.   With a world shortage of these essentials is this not going to bite.  It is happending across the US as we discuss.   If that is not roughly in the know, what is?
> 
> And if we have some idea, should we not be warning our friends and families of these dangers or just say "stay positive, things will be ok" as Wall Street is so doing with their heads in the sand.   Maybe they are in touch with the guardian angel.   Wont' work for us drips out of control though
> 
> Just my humble opinion



Anyone buying a BMW with borrowed funds or borrowing for investment should be enough in the know to allow for these things. If not then they are the drips out of control. A good motto is "neither a borrower or a lender be".


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## robots

hello,

http://www.tradingroom.com.au/news_research/index.jsp?page=aap_article.jsp&id=139646

looks like a poor decision on the part from Basis Capital, just like Explod friends & families may make a poor decision by over committing

sure warn them

but keep in mind these CDO or securitized products have lost their value, they have been re-rated

as an example your car goes from 40k in value to 20k in value in say 3-yrs, theses CDO's have gone from 4 bil to 1 mil overnight, some have called it a Ponzi scheme and its becoming more apparent it just may be

interest rates aren't being lifted because we are in a recession!

thankyou

robots


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## KIWIKARLOS

I think there are so many facets to this story nobody really knows whats going to happen. I have a few questions points I would like to raise.

1. "700 Mill of Arms about to adjust" : This 700mill is less than 10% of the total market in the US and of these arms not all of them will fall over.

2. The ability of people to pay their loans as interest rates go up requires JOBS and wage increases which in Aus is the case (hopefully labour won't change that).

3. I think non home load debt could be more of a concern to countries other than the US.

4. The housing market is driven by demand. in aus we are restricted by available and useable land with a still growing economy and population. Thus creating demand. Land is also hard to come by in Europe and UK where house prices are stable.

5. The US is a huge place where land in many areas been very cheap and readily available (large urban centres can be the exception).

6. Big businesses still seem to have enough cash flowing in from sales to acquire businesses and grow without borrowing huge amounts of cash eg woolies, BHP etc.

This brings me to the water in the boat analogy. Sure they are applying bandaid fix now buts thats because they can't afford the fix. If they address the problems in the economy namely China's hugely undervalued cash, trade deficit etc then maybe they can afford to allow corrections to take their coarse when they are economically on a stronger foot?


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## explod

nioka said:


> Anyone buying a BMW with borrowed funds or borrowing for investment should be enough in the know to allow for these things. If not then they are the drips out of control. A good motto is "neither a borrower or a lender be".




That is exactly what too much optimism has done to many people who's education,over 50 years, has come primarily from sitting in front of a television set.   The great consumer society is the norm I am afraid.  Suppose we cannot help the helpless.  Thought is was worth talking about though.

Who made the drips in the first place.   Twenty years ago the world wanted deregulation, after the blame game ends it will be interesting to see the new direction of Government control after the horse has well bolted.


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## nioka

KIWIKARLOS said:


> 6. Big businesses still seem to have enough cash flowing in from sales to aquire businesses and grow without borrowing huge amounts of cash eg woolies, BHP etc.?




Woolies have the answer to borrowing. They sell for cash goods which have a fast turnover, almost daily, yet they stretch payments to suppliers an average of around 57 days. Multiply their daily turnover by at least 45 and that is the amount of free funds they work with. I used to supply woolies but gave up in disgust. Coles were much better and that is why they haven't been able to match woolies. That I believe is changing.
They use their bargaining power to get a good deal on rent so they have little need to borrow for capital outlays.
 It is the suppliers to woolies and coles who will be feeling the pinch and go under unless they find other outlets.


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## KIWIKARLOS

Yeah i have heard about their dodgy practices. The crazy thing is they are bringing out their own credit card next year

My point was that The US economy is Huge and the subprime CDO's make up a tiny part of the whole economy. 

Look at the big defence, oil and mining firms they keep posting huge profits which i can't see been effected by this. Plus they have a massive agricultural industry with heaps of wheat etc. I feel that if the Chinese currency went higher their manufacturing base would start to grow again.

I think their Auto industry dropped the ball htough if they were smart they would be following the Jap lead and making smaller more efficient cars years ago.


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## krisbarry

I simply don't buy into this US sub prime, credit crunch/recession crap!

I find that about every 6 months of so, we get an excuse for why the market needs to correct.

Feb 07 - Chinese Market

July 07 - Sub Prime Credit

Feb 08 - Asteriod Crisis, possibilty of crashing into earth

July 08 - Aliens have landed

Its just garbge, media hype


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## wayneL

Stop_the_clock said:


> I simply don't buy into this US sub prime, credit crunch/recession crap!
> 
> I find that about every 6 months of so, we get an excuse for why the market needs to correct.
> 
> Feb 07 - Chinese Market
> 
> July 07 - Sub Prime Credit
> 
> Feb 08 - Asteriod Crisis, possibilty of crashing into earth
> 
> July 08 - Aliens have landed
> 
> Its just garbge, media hype



So no logical basis for you thoughts then?


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## krisbarry

wayneL said:


> So no logical basis for you thoughts then?




Why do we need logic, when you can almost chart to the month, every 6 months, give or take 1 month, to the next correction.

Just switch to cash or short the market, early next year!

Piece of cake don't you think


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## wayneL

Stop_the_clock said:


> Why do we need logic, when you can almost chart to the month, every 6 months, give or take 1 month, to the next correction.
> 
> Just switch to cash or short the market, early next year!
> 
> Piece of cake don't you think



Oh yeah! Dead easy!


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## krisbarry

wayneL said:


> Oh yeah! Dead easy!




Why do we need to complicate things, it has be proven time and time again, by many members on this board about the 6 month (+/- 1 month) correction theory.

Countless charts have been posted to prove this theory!


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## petervan

My question is this 700mil of credit for housing loans, once all the houses have been sold in default of payment, won,t the losses be minor.Sure the house prices will stall for a while but I,m sure investors will enter the market for cheaper housing for rentals.Bank,s will tighten up there rules a bit but I think they will use Asia a bit more.Expect the fed to cut interest rates and the bull to continue to run. I live in hope


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## wayneL

Stop_the_clock said:


> Why do we need to complicate things, it has be proven time and time again, by many members on this board about the 6 month (+/- 1 month) correction theory.
> 
> Countless charts have been posted to prove this theory!



Look back a bit further than a couple of years.


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## juw177

kitehigh said:


> If people are interested in America's finacial stragedy I suggest you download this pdf file.
> http://www.michael-hudson.com/books/superimperialism.pdf
> 
> Its a long read but quite interesting.




So why dont the other countries just not buy US bonds? Can't they buy another currency? Dont they think about risk of put all eggs into one basket?


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## krisbarry

wayneL said:


> Look back a bit further than a couple of years.





Why...?

We only need to look back over the last couple to get the real truth. The lies and manipulation of the U.S. market.

Speaks volumes to me.

The next announcement is that rates will be cut in the U.S. and we will get a steady rally for the next 5 months.  Then in Jan/Feb/March next year the next pressing issue will be raised, just in time for the next correction.

How ironic


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## explod

Stop_the_clock said:


> Why...?
> 
> We only need to look back over the last couple to get the real truth. The lies and manipulation of the U.S. market.
> 
> Speaks volumes to me.
> 
> The next announcement is that rates will be cut in the U.S. and we will get a steady rally for the next 5 months.  Then in Jan/Feb/March next year the next pressing issue will be raised, just in time for the next correction.
> 
> How ironic




As a mater of fact, and well discussed on this forum, the US dollar is just a whisker away from an all time low.   Any interest rate cut will see that breakdown and there will then be a flight from US dollars into other currencies and prescious metals.   The dollar will then be on the way of the worthless deutschmark, of I think 1917.

It will be interesting to see how your prediction plays out


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## wayneL

Stop_the_clock said:


> Why...?
> 
> We only need to look back over the last couple to get the real truth. The lies and manipulation of the U.S. market.
> 
> Speaks volumes to me.
> 
> The next announcement is that rates will be cut in the U.S. and we will get a steady rally for the next 5 months.  Then in Jan/Feb/March next year the next pressing issue will be raised, just in time for the next correction.
> 
> How ironic



2 separate points here. The Wall St @ssholes will get their rate cut, and we will rally, but that will start the next macrocycle.

Which is why you need to look back further than 2 years. You are looking for the wrong constants.


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## wavepicker

explod said:


> Any interest rate cut will see that breakdown and there will then be a flight from US dollars into other currencies and prescious metals.
> It will be interesting to see how your prediction plays out




Precious metals, you think so?? Those who own Silver don't share your view, it's been tanking it the last 2 weeks, perhaps a precurser to a move in Gold??

As for the Fed giving another rate cut, it will supply only limited fuel for another rally, the Fed was played most of it's cards already from 2000-2003 and has limited space to manoevre. Can they bring back the bubble again?? IMO investors will very cautious this time round.

After the Nikkei started to tank in 1990 the BOJ tried similar tactics effectively taking their rates to almost zero (they may as well have handed out yen), what did that do for the Nikkei??


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## explod

wavepicker said:


> Precious metals, you think so?? Those who own Silver don't share your view, it's been tanking it the last 2 weeks, perhaps a precurser to a move in Gold??
> 
> As for the Fed giving another rate cut, it will supply only limited fuel for another rally, the Fed was played most of it's cards already from 2000-2003 and has limited space to manoevre. Can they bring back the bubble again?? IMO investors will very cautious this time round.
> 
> After the Nikkei started to tank in 1990 the BOJ tried similar tactics effectively taking their rates to almost zero (they may as well have handed out yen), what did that do for the Nikkei??




Again the short term continues to plague discussions.  In 2002 silver was at US$4 an ounce, today it sits as we speak at US$11.90 an ounze and from a technical perspective is still in a strong uptrend.   The US dollar index inversely mirrors this from  $1.20 to just a shade above .80 today.   I know what I would back long and which I would short.    My own fundamental view supports my technical check, but that's my slant you need to follow your own.


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## wavepicker

explod said:


> Again the short term continues to plague discussions.  In 2002 silver was at US$4 an ounce, today it sits as we speak at US$11.90 an ounze and from a technical perspective is still in a strong uptrend.   The US dollar index inversely mirrors this from  $1.20 to just a shade above .80 today.   I know what I would back long and which I would short.    My own fundamental view supports my technical check, but that's my slant you need to follow your own.




fair enough explod, whichever the case it looks there are fireworks in the making over the next 12 months

Good luck with your Gold positions

Cheers


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## robots

hello,

i reckon you're spot on the money stop the clock, you're a legend

back around 6600 or more at end of the year

thankyou

robots


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## theasxgorilla

explod said:


> I personally know family and friends who have borrowed to the hilt for their bit of Aussie property and the BMW, beyond redemptive value.   Some have a number of investment properties in the same boat.  Any rise in interest rates, fuel and food is going to take them out.




I know some people like this, but not as many as those scaremongering would have us believe are out there (current affairs shows are about the worst).  Someone else had a good analogy not so long ago.  If/when the so-called recession/depression/crash/crisis comes, these people will be the bull-bar.

BTW, if you like their taste in cars, boats, home cinema equipment, art etc.  be sure to encourage them to take good care of their stuff, they may need to sell it one day


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## dhukka

wavepicker said:


> As for the Fed giving another rate cut, it will supply only limited fuel for another rally, the Fed was played most of it's cards already from 2000-2003 and has limited space to manoevre. Can they bring back the bubble again?? IMO investors will very cautious this time round.
> 
> After the Nikkei started to tank in 1990 the BOJ tried similar tactics effectively taking their rates to almost zero (they may as well have handed out yen), what did that do for the Nikkei??




Good points wavepicker, remember what happened last time round when the Fed started cutting rates? From the chart below you can see the rally was short-lived. Not saying that this time will be the same but just something to bear in mind. (no pun intended)


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## wavepicker

dhukka said:


> Good points wavepicker, remember what happened last time round when the Fed started cutting rates? From the chart below you can see the rally was short-lived. Not saying that this time will be the same but just something to bear in mind. (no pun intended)




Absolutely, that chart says a lot. 
Many people think the fed has lots of room to bring rates down and keep the US economy inflated. Do lower rates cause a recovery?? No they simply reflect a crashing market for credit. The market makes interest rates rise and fall, the fed's rates typically follow suit.

When the Japanese central bank lowered rates virtually to zero, doing so did not prevent Japanese real estate prices from imploding and the Nikkei from proceeding in it's biggest bear market ever. 

The market in the weeks ahead IMO will be poised for another panic. Confidence has held sway for the last 5 years, during which time investors have once again become utterly unconcerned with risk. They hold a number of misconceptions  that foster such complacency. The day the fed lowers rates again or enginners a major temporary loan and the stock market goes down anyway, is the day that investors will become uncertain of what they beleive about market causality and panic will have no bridle.

Cheers


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## KIWIKARLOS

ok so money is becoming more expensive to borrow that doesn't mean that it won't be available. If anything interest rates are returning to their normal historic average. You have to remember there is still alot of potential for big company profits.

Just because investment banks have some limited exposure to dodgy loans doesn't bring down the whole house. 90% of loans are still very servicable. In conjunction with that the comodity boom isn't really effected by US cnsumers.

The majority of iron ore consumption is for construction and not the construction of houses funded by sub prime morgages. when you look at the urban growth of China and india you relise that it isn't going to stop. Electricty use continues to soar so demand for copper and aluminium will remain. 

Take WA for example with it producing the GDP of a small country and by no way been influenced by sub prime mogages on houses in the US.

If you look at most lower standard morgages in Aus, eur etc the majority of owners can afford an increase in rates. The US problem is that its economy is currently quite week because it makes nothing exports aren't great and coupled with rising rates and very little wage growth = problems. 

The fact is the US is 300 Mill people all be it big consumers but there are still billions of other people in the world with growing consumer appitites.

The fact is Aus in my opinion has an economy which is not directly effected by the US but rather by the comodity consumers of the world. So if china stops wanting Iron ore we can start shipping uranium to india which would be just as large an export if not larger than Iron. Besides that Pilbara iron ore still remains the best quality and cost effective ore in the world


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## wayneL

KIWIKARLOS said:


> ok so money is becoming more expensive to borrow *that doesn't mean that it won't be available.*



Incorrect.

A credit crunch means that the supply of credit dries up, it is not directly connected to the level of interest rates. Already, in these early stages, deals have been postponed or canceled due to the unavailability of credit.

This filters through to all levels. The housebuyer who once had money literally thrown at them, may now not be able to get a loan at all... or only at a hefty premium.

Keep yer credit history clean folks, it will make a BIG difference in the next few years.


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## KIWIKARLOS

hang on you just said it wont be available but what you are really saying is it will only be available to people or companys who are no considered risky investments. How can that be a bad thing.

Many of these postponed or cancelled deals you are speaking of are dodgy anyway. Private equity buyouts are bad news, they take a good healthy company rape it of value for quick returns then on sell it. Sure overall growth in the whole economy might slow if many deals are aborted but growth will continue and probably in a more constructive and sustainable way adding real value to companies as opposed to spec value

I have a scenario for which i would like opinion please.

Say we have company/ private investment fund A: cash loaded with businesses that already make money and looking to aquire new investments

Company B: a smaller but still profitable company 

Does it really matter if company A buys company B is there really that much value added. if company A can't make company B more efficient then realistically it doesn't matter if A and B continue to be separate entites.


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## Uncle Festivus

Sounds like different thread, same discussion. Would it be simpler to describe the last 5 years various booms, including commodities, as the product of the over-reliance on easy money policy? In fact, the recent global prosperity is mostly due to both Japanese zero interest rates coinciding with the low in US interest rates fuelling a derivatives jamboree that has just started to play out in the US housing boom & bust, & maybe just starting to appear in a downward re-rating of (artificially high?) metals commodities prices (& negative contagion to precious metals?).

Except this time the US Fed lowering rates would be like trying to eat spaghetti with a tooth pick - Japanese style stagflation here we come?

If it was simply a matter of some fringe sector going through a rough patch then yes, we would most likely get back to the old 'it always rises' paradigm. If was just sub prime we wouldn't be having the carnage in the home builders profits. 

I's say there are some fancy dealings going on behind closed doors with billions being exchanged to keep some of these high flying hedge funds from becoming the next LTCM or Amaranth. The roller coaster has only just begun.


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## Bushman

KIWIKARLOS said:


> I have a scenario for which i would like opinion please.
> 
> Say we have company/ private investment fund A: cash loaded with businesses that already make money and looking to aquire new investments
> 
> Company B: a smaller but still profitable company
> 
> Does it really matter if company A buys company B is there really that much value added. if company A can't make company B more efficient then realistically it doesn't matter if A and B continue to be separate entites.




If the deal is accretive, delivers economies of scale, and ultimately increases shareholder wealth, then it makes sense for company A to purchase company B. It would be remiss of the Board of company A not to make the deal. It does not matter if it cannot make it more efficient. Efficiency gains would be a bonus to the bottom line. By earnings accretive I mean that the rate of return on an acquisition will be greater than the cost of borrowing.

For many companies, especially those in mature industries ie manufacturing, the only way to grow a business and deliver increased returns to shareholder is by acquisitions. There is nowhere else to turn.  

Now does this benefit the shareholder of company B? Another question all together.


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## bean

explod said:


> Again the short term continues to plague discussions.  In 2002 silver was at US$4 an ounce, today it sits as we speak at US$11.90 an ounze and from a technical perspective is still in a strong uptrend.   The US dollar index inversely mirrors this from  $1.20 to just a shade above .80 today.   I know what I would back long and which I would short.    My own fundamental view supports my technical check, but that's my slant you need to follow your own.




SILVER WILL BE THE BEST PERFORMER even out doing Gold over the next few years.
The low in silver as well as Gold will occur in this next downleg which will be prior to the FED meeting.

The 'subprime' 'credit crunch' is going to be here for a while.
Interest rate in the US will be dropping nearly every Fed meeting for a while.
The Beneficiaries "Gold & Silver"


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## wayneL

KIWIKARLOS said:


> hang on you just said it wont be available but what you are really saying is it will only be available to people or companys who are no considered risky investments. How can that be a bad thing.



It will be a good thing, but will probably cause what is oxymoronically known as negative growth for a time. i.e. recession


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## Uncle Festivus

Cause - 



> TOKYO (AP) - An official at Japan's central bank said Thursday low Japanese interest rates may have contributed to global market jitters stemming from U.S. credit problems.
> In a speech to business leaders in Kofu, west of Tokyo, Bank of Japan policy board member Atsushi Mizuno also said the country's low interest rates may have worsened volatility in the foreign exchange market, Dow Jones Newswires reported.
> "Recent turmoil in the financial markets proves that *keeping rates that aren't in line with economic fundamentals* could lead to risks of destabilizing financial markets," Mizuno was quoted saying.
> Mizuno, considered a hawkish board member, said the recent credit market crisis was caused by a mix of factors, including Japan's low interest rates.



And effect - 



> A $US6.6 billion ($8.16 billion) investment vehicle run by Cheyne Capital, a London hedge fund, yesterday became the latest victim of the crisis in short-term lending markets when it told investors it had breached funding restrictions, forcing an eventual wind-down.



Another acronym to learn & study - structured investment vehicle (SIV).


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## sassa

KIWIKARLOS said:


> hang on you just said it wont be available but what you are really saying is it will only be available to people or companys who are no considered risky investments. How can that be a bad thing.




Let's see what happens with the proposed KKR buyout of First Data Corp for $29b The Wallstreeters will be trying to see if the investors will take on risk again.Will the deal make it to the markets? or will the banks hold the debt?or will the deal fall?


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## sassa

KIWIKARLOS said:


> Just because investment banks have some limited exposure to dodgy loans doesn't bring down the whole house.



This is starting to mean large exposure.
From Times OnlineSeptember 5, 2007

BoE offers £4.4bn to relieve liquidity crisis
The Bank of England has answered a call to help credit-hungry British banks by increasing its funding level by 25 per cent.
The Bank of England this morning came to the rescue of banks suffering liquidity problems, offering to pump an extra £4.4 billion into the system on top of the £17.6 billion already requested for the next month. 
In an operational note issued at 11am, the Bank announced a significant relaxation of the rules governing the way it lends short-term funds to banks. 
As well as honouring requests for £17.6 billion over the next month, it would also supply an additional 25 per cent at a non-penal rate if needed. 
"The increase ... should help to relieve some pressure on interest rates for overnight borrowing which have, at times ... over the past month, been unusually high relative to Bank Rate," it said. 
The crisis sparked by the US sub-prime mortgage disaster has led to a liquidity famine among banks, which have been hoarding their own cash and liquid assets and have been reluctant to lend to one another. 
The three-month interbank interest rate, Libor, has climbed to almost 6.8 per cent, more than a percentage point above the 5.75 per cent base rate. 
The Bank said that the new measures were not intended, nor could be expected, to narrow this gap. "The source of these problems does not ... lie in a lack of central bank liquidity." 
It said that the problem was down to "the difficulty of valuing a variety of asset-backed instruments" ”” a reference hundreds of billions of dollars worth of mortgage-backed securities and related derivatives, whose value may have been impaired by the sub-prime setback.


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## sassa

wayneL said:


> It will be a good thing, but will probably cause what is oxymoronically known as negative growth for a time. i.e. recession




An appropriate article for your statement????????
 Danger: Steep drop ahead
Even if the credit crunch passes without a major catastrophe, the prices of stocks, bonds and real estate have a long way to fall.
By Jeremy Grantham, Fortune
September 5 2007: 9:27 AM EDT
(Fortune Magazine) -- Credit crises have always been painful and unpredictable. The current one is particularly hair-raising because it's occurring amid the first truly global bubble in asset pricing. It is also accompanied by a plethora of new and ingenious financial instruments. These are designed overtly to spread risk around and to sell fee-bearing products that are in great demand. Inadvertently (to be generous), they have been constructed to hide risk and confuse buyers. 

How this credit crisis works out and what price we end up paying has to be largely unknowable, depending as it does on hundreds of interlocking and often novel factors and how they in turn affect animal spirits. In the end it is, of course, the management of animal spirits that makes and breaks credit crises. 


Grantham: Home prices are well above the normal four times family income and will have to come down. 
But even if this crisis is contained, we are facing some near certainties that should be understood. 

First, house prices may move on euphoria in the short term, but long term they depend on family income - the ability to pay mortgages and rent. At levels well above the normal four times family income, the market gradually loses first-time buyers until prices break and fall back to affordable levels. 

House prices are in genuine bubble territory in the U.S., Britain and many other markets. In Britain and in some critical large cities in the U.S., for example, the multiple of family income has risen to over six times from below four times, and in London last year the percentage of first-time buyers was the lowest since records began. 

From these high levels, prices are guaranteed to fall. In doing so, they will reduce consumer borrowing and spending power. They will also increase mortgage defaults, most of which lie ahead, and lower financial profits and confidence. 


Second, profit margins are at record levels around the world. They have lifted stock prices directly alongside the rising earnings. They have served to raise P/E multiples as well, for surprisingly, investors on average reward higher margins with higher P/Es. This is fine for an individual stock, but for the entire market, multiplying boom-time profits by high P/Es is horrific double counting and sends markets far too high in good times (and far too low in bad times). 

Higher margins also indirectly raise prices by providing more cash flow for buybacks and takeovers. So high profit margins offer multiple supports for the market, but they will certainly decline. They are the most dependably mean-reverting series in finance: If high margins do not attract greater competition, then a wheel has fallen off the capitalist machine. For U.S. and developed foreign markets, fair value (defined as normal P/E times normal profit margins) is about one-third below today's level, and for emerging markets it is about 25 percent lower. 

Third, and most important, risk will be repriced. Last year a broad base of risk measures - including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality vs. low-quality stock values - reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk. 

For fixed income, some spreads widened slowly at first this year and then unexpectedly widened rapidly in recent weeks. For equities, though, the process has hardly started. Junkier stocks continued to outperform into June, even as the subprime woes spread. At the end of the cycle, high-quality blue chips will once again sell at normal premiums or better. 

Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth. All of this has been provided. 

These conditions always produce excess and are always extrapolated. Unfortunately, like almost all other investment factors, they eventually move back to normal. 

As wonderfully favorable factors cool off, asset prices will be under broad pressure, and risky assets will be under extreme pressure. If the credit crisis gets out of control, this will happen quickly and painfully. The important point to make here is that even if all works out well on the credit front, it will still happen slowly. 

Jeremy Grantham is chairman of investment firm GMO, where he oversees quantitative products and investment strategies.


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## Mofra

KIWIKARLOS said:


> Just because investment banks have some limited exposure to dodgy loans doesn't bring down the whole house. 90% of loans are still very servicable. In conjunction with that the comodity boom isn't really effected by US cnsumers.



KK, just because a debt is securitised it doesn't mean there are no ongoing funding obligations. As credit becomes more difficult to obtain, the cost of that credit becomes greater - and with such wafer thin profit margins on mortgages already** , a small increase in the cost of funding can cause a dramatic effect on products & services being offered to the market.

** The top 20% of profitable customers at the 4 major banks contribute approx 130% of their profits. Think about it. That makes 80% of bank customers unprofitable loss leaders. The vast majority of fixed rate loans sold by deposit holding organisations are running at a loss, as fixed rate loan are hard to break & offer opportunities for cross selling, and yes deposit holding organisations will also feel the effects of the credit squeeze - which is why Adelaide Bank is one of 4 lenders to increase rates *independant of reserve bank rate movements*.


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## wayneL

Mofra said:


> ** The top 20% of profitable customers at the 4 major banks contribute approx 130% of their profits. Think about it. That makes 80% of bank customers unprofitable loss leaders. The vast majority of fixed rate loans sold by deposit holding organisations are running at a loss, as fixed rate loan are hard to break & offer opportunities for cross selling, and yes deposit holding organisations will also feel the effects of the credit squeeze - which is why Adelaide Bank is one of 4 lenders to increase rates *independant of reserve bank rate movements*.



Wow, what a revelation!

I would never have thought that. Mofra, what types of loans are the most profitable and which are loss leaders and losers?


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## Uncle Festivus

Mofra said:


> ** The top 20% of profitable customers at the 4 major banks contribute approx 130% of their profits. Think about it. That makes 80% of bank customers unprofitable loss leaders. The vast majority of fixed rate loans sold by deposit holding organisations are running at a loss, as fixed rate loan are hard to break & offer opportunities for cross selling, and yes deposit holding organisations will also feel the effects of the credit squeeze - which is why Adelaide Bank is one of 4 lenders to increase rates *independant of reserve bank rate movements*.




To clarify, the top 20% of _profitable_ customers  - as opposed to 80% of profitable customers or 80% of the rest being unprofitable?? Or am I reading it wrong?


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## TheAbyss

I am with you there UF.

The statement indicated that of the banks profitable customers, 20% of those contrubuted 130% of their total profits. 

This does not indicate that the banks lose on 80% of their customers. The % of losers to profitable customers is not able to be calculated from the information given.


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## nioka

TheAbyss said:


> I am with you there UF.
> 
> The statement indicated that of the banks profitable customers, 20% of those contrubuted 130% of their total profits.
> 
> This does not indicate that the banks lose on 80% of their customers. The % of losers to profitable customers is not able to be calculated from the information given.




Nor does it say which customers it finds profitable. Some small customers may be profitable because of the high bank fees and charges whereas some of their larger customers may not be profitable because of the deals they get. Bank staff are also probably included in the unprofitable ones because of the deals they get on fees and loans.
Regardless of where the profit comes from they  make sure they get it from somewhere.


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## sassa

sassa said:


> Let's see what happens with the proposed KKR buyout of First Data Corp for $29b The Wallstreeters will be trying to see if the investors will take on risk again.Will the deal make it to the markets? or will the banks hold the debt?or will the deal fall?




Stumble on Sept.12.Credit Suisse and KKR could not agree on pricing and how much debt lenders will TRY to sell to investors.At the moment there are $390b.in buyouts in the pipeline.This is a true test of the market.


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## Ageo

BUMP!

I was searching some old threads and came across this 1. I think the very 1st post made excellent reading.


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## lumpdum

Ageo said:


> BUMP!
> 
> I was searching some old threads and came across this 1. I think the very 1st post made excellent reading.




The prognostications were interesting. Aaah hindsight!


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