Credit Debacle the start of an imminent Recession

[explod]

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.

 

[wavepicker]

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

 

[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

 

[theasxgorilla]

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

 

[dhukka]

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)

 

[wavepicker]

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

 

[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

 

[wayneL]

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.

 

[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.

 

[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.

 

[Bushman]

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.

 

[bean]

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"

 

[wayneL]

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

 

[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).

 

[sassa]

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?

 

[sassa]

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.

 

[sassa]

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.

 

[Mofra]

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.

 

[wayneL]

** 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?

 

[Uncle Festivus]

** 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?