Imminent and severe market correction

[prawn_86]

(NB, Why does "Nineteen Eighty Four" keep coming to mind?)

Man, i have thought that so many times myself in the last 6 months or so.

Such a classic book, but scary at the same time... :bad:

 

[Trembling Hand]

TH, If you are correct, could you please explain where the money has gone??
You know that it is zero sum game, the money goes somewhere, both sides cannot be losers unless the money goes somewhere else.

Granted that some may have spent theoretical profits they don't have, but that does not change the fact that the money is not destroyed.

OK. As I said,

This ain't true if a company defaults the zero sum game becomes one of loses all round. The margin or assets put up by both sides is gone in loses or to creditors. Not sure how you figure the counterparty only loses paper profit.

Company A is a Bank.
Company B are Widget makers.

Company A is Bullish Widgets.
Company B is needing cash to cover the loss making Widgets factory.
Company A buys a 100 widgets contract (Derivative) from Company B at $100

Company A expects to sell Widget contract later for $110.
Company B needs to supply 100 Widgets or buy back the contract.

Company B gets $100 cash.
Company A gets a contract that is valued @ $100.

Company B directors are idiots and piss that $100 by paying old dept and then declare bankrupt.
Company A doesn't get the widgets and cant sell the contract back to company B.

Where did the money go? to the suppliers of widget company B for products already delivered.

What can the bank do?? Nothing write off the money.

Not a two party zero sum game the money had already been spent. To get your Zero sum game you must add the third party.

 

[brty]

Hi,

Thanks for the explanation TH, but I hope you can see my point that the money is not destroyed in your example, it has just been spent elsewhere. It is also a contract, not a derivative.

At some estimations the world GDP is around $55 trillion give or take a few 't'. If the derivative exposure is the $500 trillion claimed by some, where is the money?
Simple answer is it does not exist in the first place, therefore it is very hard to 'lose'.

Let's look at a simple futures contract $A/$US. With my margin I buy $100,000 at 91cents. Someone (say a bank) takes up the other side with their margin.

This is a new $100,000 derivative. $100,000 has not been created. If the other side goes bust, what they lose is not $100,000 but the difference in value between their sell price and their buy price. If they or their liquidator has to buy back at 92 cents, they only lose $1,000.

I only gain $1000. The clearing house gives me my margin back and my $1000 out of the other sides margin. I have not lost anything.

Looking at bigger derivatives contracts outside of the markets, say between 2 banks, for $100 billion (say a currency swap), there is no difference, except that there is no clearing house, therefore when one bank goes bust, there is no profit for the other side to collect, but they don't lose.

There is a definate lack of understanding both in this forum and by journalists as to what derivatives are. They seem to be bundled together with/as bad debts, when they are totally separate.

bye

brty

 

[Whiskers]

As I said, regardless of whether it was reasonable or sustainable, the assumption by those conducting the business was that it was sustainable.

But dhukka, you are not getting the point. I've already said the assumption of the business owners was already flawed. The point is not what they thought, but rather an objective assessement (by a third party - conventional wisdom or text book management if you like) of the way they managed their business.

Whether or not the business lasts for 75 years is accedamic for a host of reasons including takeovers, mergers and progress... eg 75 years ago blacksmiths were common, but you will struggle to find one today. Conversely, computer programers and IT companies are everywhere today... 75 years ago they were unheard of.

I've already said the whole objective of most of the 'subsidiary' companies was to bundle up the financial products and pass them on quickly for a quick buck, but the music stopped and some were caught still holding before they were dispersed enough to minimise/spread the risk. They knew the true value and risks and that they could not hold them long term as a sustainable business model.

Not from you I don't, I've got a big enough collection of bumper stickers already thanks.

Yes well, you are hostile to me. Not an enviornment conducive to learning. That is why I highlighted that you will have to discover for yourself... because you have an emotional block to what I say.

" The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred.
The biggest problem which all dealers have known about since Day 1 is that there is no way to hedge a CDS."
http://www.nakedcapitalism.com/2008/04/soros-lambasts-paulson-call-for.html

I see your concern sassa. But I do believe that the articles author's assumption that a fall in house prices is virtually a bottomless pit is excessive and a bit far outside the range of probabilities for my estimation.

Plumeting house values are not nation wide. I believe California and Florida are the worst affected. Parts of the NE are not near as bad and some, I think Manhatten was one that has been reported rising.

For me the steps taken to stabalise the markets will pay dividends in returning stocks and commodities to growth and provide some degree of cash flow and asset protection against CDS's. In the main the concern for CDS defaults are contingent on house prices continuing to fall and high/increasing rates of mortgage defaults. There is no doubt a risk, but as I said for me the probabilities of catastrophic CDS failures is becoming less likely.

A point re apparent higher savings to meet mortgage commitments I made in the gold thread recently...

In summary there has been a lot of focus on what is wrong with the US economy and the fear of what if this and that collapsed, but little focus on the main macro international influences that also play a part in driving or turning the USD and consequently the flight for safety in gold.

PS. Probably a lot has to do with what people see in the numbers. As an example, recently US personal income rose a healthy bit but consumer spending didn't rise in proportion. The headlines were doom amd gloom that consumers weren't spending and the economy will get worse because they aren't spending. For me it was a good sign that people were starting to save a bit more which would give them the ability to service their existing debts better and lessen the amount of foreclosures, bankruptcies etc... which would have far stronger positive impact on the direction of the economy/markets than a bit less consumer spending would have a negative effect. https://www.aussiestockforums.com/forums/showthread.php?p=279044#post279044

 

[Kauri]

Bayern LB(Germany's second largest bank) has just announced writedowns of $6.7b.This should be worth a 1-2% rise in European markets tonight as the bank has come clean.Shares to rise 6-8%?Not joking,if the market follows the script.

and are bapparently casting about for a white knight to help them out..

 

[dhukka]

But dhukka, you are not getting the point. I've already said the assumption of the business owners was already flawed. The point is not what they thought, but rather an objective assessement (by a third party - conventional wisdom or text book management if you like) of the way they managed their business.

On the contrary, I understand your point completely, its just that you don't have a valid one. There has been no objective assessment, just your opinion that mortgage brokers going out of business doesn't constitute real casualties of the credit crunch in which they followed the conventional wisdom that house prices would continue to rise indefintely.

Whether or not the business lasts for 75 years is accedamic for a host of reasons including takeovers, mergers and progress... eg 75 years ago blacksmiths were common, but you will struggle to find one today. Conversely, computer programers and IT companies are everywhere today... 75 years ago they were unheard of.

I've already said the whole objective of most of the 'subsidiary' companies was to bundle up the financial products and pass them on quickly for a quick buck, but the music stopped and some were caught still holding before they were dispersed enough to minimise/spread the risk. They knew the true value and risks and that they could not hold them long term as a sustainable business model.

It's precisely because noone knows the true value that we continue to go through this protracted process of price discovery.

Yes well, you are hostile to me. Not an enviornment conducive to learning. That is why I highlighted that you will have to discover for yourself... because you have an emotional block to what I say.

That's hilaroius, I'll have to show that to my boss who hired me a couple of years ago as a learning advisor. More likely that you have an emotional block to reality.

 

[Whiskers]

On the contrary, I understand your point completely, its just that you don't have a valid one. There has been no objective assessment, just your opinion that mortgage brokers going out of business doesn't constitute real casualties of the credit crunch in which they followed the conventional wisdom that house prices would continue to rise indefintely.

Not conventional wisdom, I'm afraid. Certainly not held by everyone. That they followed, rests my case.

It's precisely because noone knows the true value that we continue to go through this protracted process of price discovery.

But the original mortgage brokers and companies initiating the financial products and the pass the parcel racket certainly knew at the time the mortgages were valued at 100% and then some of valuation and at that point in time were of dubiuous value.

That's hilaroius, I'll have to show that to my boss who hired me a couple of years ago as a learning advisor. More likely that you have an emotional block to reality.

As I said dhukka, my sparring partner mate , you have an emotional block with me. I didn't say or imply anyone else or everyone... your emotionalism misconstrued/misinterpreted what I said.

D & G re jobless claims rising a bit last week, but shouldn't have been too surprising for a little longer yet.

ISM Non-Mfg Survey came in at 52.2, much higher than expected.

 

[dhukka]

Not conventional wisdom, I'm afraid. Certainly not held by everyone. That they followed, rests my case.

You never had a case to rest.

But the original mortgage brokers and companies initiating the financial products and the pass the parcel racket certainly knew at the time the mortgages were valued at 100% and then some of valuation and at that point in time were of dubiuous value.

I've read this garbled paragraph 4 times and still cannot make out anything coherent. You shouldn't drink and type.

As I said dhukka, my sparring partner mate , you have an emotional block with me. I didn't say or imply anyone else or everyone... your emotionalism misconstrued/misinterpreted what I said.

There you go thinking that you're special again, you get no special treatment from me.

D & G re jobless claims rising a bit last week, but shouldn't have been too surprising for a little longer yet.

ISM Non-Mfg Survey came in at 52.2, much higher than expected.

Rising jobless claims shouldn't be a surprise but they will be to the plethora of myopic Wall Street economists who can't look past last week's data.

Non manufacturing ISM came in at 49.6. slightly higher than expected. Time to put down the bottle Whiskers.

 

[refined silver]

Remember the stock market went up in the Weimar Republic, and the fastest rising stock market in the world currently is Zimbabwe.

 

[Whiskers]

I've read this garbled paragraph 4 times and still cannot make out anything coherent. You shouldn't drink and type.

Keep at it mate... you'll get it soon.

How on earth did you get the idea I was drinking! I rarely drink for your information.

There you go thinking that you're special again, you get no special treatment from me.

Of course I'm special. There's a book by Bert Weir, You were born specialbeautiful and wonderful - What Happened?. See if you can get hold of a copy for a read.

Rising jobless claims shouldn't be a surprise but they will be to the plethora of myopic Wall Street economists who can't look past last week's data.

Non manufacturing ISM came in at 49.6. slightly higher than expected. Time to put down the bottle Whiskers.

Not drinking dhukka, but now that you mention it I might pop a cork on some champayne on the weekend. :

Yeah dhukka, sure the services sector didn't out perform, but on balance it was more good news. The business activity component rose 1.4 points to 52.2, the second consecutive month of growth and the new orders index increased modestly. A gain is a gain is better than a kick in the pants any day.

There is still a bit of a concern with rising costs. Inventories, employment and deliveries are generally running down. Thats predictable and prudent and will probably turn around sharply when the economy turns out to be in less imminent trouble than wide believed, to build up inventories again.

 

[Whiskers]

Remember the stock market went up in the Weimar Republic, and the fastest rising stock market in the world currently is Zimbabwe.

Thanks for that little piece of trivia RS.

I wonder what the currency conversion is now?

Ironically if Mugabbe is rolled then it most likely will fall... even though the country will be in (hopefully) better hands.

 

[Whiskers]

Digressing for a moment, to an area I have previously ticked as an imminent problem for the US economy is a survey currently on CNNMoney asking... Are you in favor of universal health care?

55% say yes.

If politicans are forced to take it up, there goes another big hole in the budget.

 

[Trembling Hand]

I only gain $1000. The clearing house gives me my margin back and my $1000 out of the other sides margin. I have not lost anything.

Brty you are assuming the small margin that retail traders put up to their broker and/or clearing house is the end story. But that is where you have it wrong. In futures trading clearing happens at the end of the day for trading from brokers and in the case of the ASX T3.

What happens if MF global goes bust tonight. 50% of the funds/margin for today's SPI contracts will be locked up by administrators. The SFE will have to but up the $$ diff to counter parties or the system collapses. There is your zero sum game gone wrong.

That's why a bank going belly up stuffs up the zero sum game. Why GSachs couldn't of been let go bust.

For another example see what happened when Tricom couldn't settle asx trading. Counter-parties would of lost assets or $ unless they could of fixed it.

Your confusing retail margins swapping for a banking system.

Even if the system doesn't collapse the problem with defaults is working capital, mostly from the banks, that the economy needs to pay for tomorrows work gets spent on previous economic activity. Without a return to and a loss to the bank. Sure it doesn't disappear but its in the wrong hands.

 

[ithatheekret]

Thanks for that little piece of trivia RS.

I wonder what the currency conversion is now?

Ironically if Mugabbe is rolled then it most likely will fall... even though the country will be in (hopefully) better hands.

It would add a twist to it all , better add vodka too though .

I noted Archbishop Desmond Tutu and his rolling comments on Muganybody , stating he should be remembered for the good he did .

I didn't know he'd jumped under a bus .

I think the Archbishops on some good whoopy weed , if not something more colourful .

 

[dhukka]

Keep at it mate... you'll get it soon.

How on earth did you get the idea I was drinking! I rarely drink for your information.

The only explanation for the previous paragraph is that you were drinking, that you are a non-native English speaker, that you are just not that bright or a combination of the above 3 factors. I know which one I think it is.

Of course I'm special. There's a book by Bert Weir, You were born specialbeautiful and wonderful - What Happened?. See if you can get hold of a copy for a read.

This could be the source of your delusion. You aren't special, never were and never will be. That's nothing to do with you, we're all in the same boat.

Yeah dhukka, sure the services sector didn't out perform, but on balance it was more good news. The business activity component rose 1.4 points to 52.2, the second consecutive month of growth and the new orders index increased modestly. A gain is a gain is better than a kick in the pants any day.

You are ridiculous, you state in a previous post that the Non Mfg ISM was 52.2. It was not, it was 49.6, that is the headline number. The components were:

Business Activity Index at 52.2%
New Orders Index at 50.2%
Employment Index at 46.9%

Misrepresenting data just erodes your credibility even further.

There is still a bit of a concern with rising costs. Inventories, employment and deliveries are generally running down. Thats predictable and prudent and will probably turn around sharply when the economy turns out to be in less imminent trouble than wide believed, to build up inventories again.

Again just wish washy supposition supported by nothing but a false sense of optimism.

 

[Bushman]

It would add a twist to it all , better add vodka too though .

I noted Archbishop Desmond Tutu and his rolling comments on Muganybody , stating he should be remembered for the good he did .

I didn't know he'd jumped under a bus .

I think the Archbishops on some good whoopy weed , if not something more colourful .

Mugabe, as a younger man, was the heroic guerilla leader who freed Zimmers from the yoke of Ian Smith's puppet colonial government, thus 'eliminating' the evil legacy of Cecil John Rhodes (founder of 'Rhodesia', what a meglamaniac) amongst others.

He was a god to the ordinary folk but he promised the world to those who waged the guerilla war, a brutal affair by all accounts, and hence the land redistribution that has crippled the Zim economy, leading to the printing presses running hot.

So it is fair to say that Tutu and Mugabe were brethren back in the heady activist days of the 70s. No boozing and coke sniffing like Dubya for these fighters.

Back to Zim, if they ever manage to rid themselves of Robert and their land assets of his corrupt croneys, they should be thriving as they truely were the bread basket of Africa back in the day. It is a sad country to visit these days. I remeber as a kid that Harare was thriving and that was in the mid to late 80s.

I wonder how long before South Africa slips into the abyss. Another country where attaining the 'fruits of the revolution' have been delayed? Ironically the poverty has been excacerbated by a flood of Zimbabwean refugees. Would be good for good old Aussie gold and agricultural stock if the Rainbow Nation finds a pot of lead at the end of its promise laden and well trodden path.

Will that lead to an 'imminent and severe' correction? Probably not so maybe this should be on the 'Old Fighters Gone Daft' or 'Tin Pot Dictators in the Making' thread. Zuma, the Zulu warrior, certainly has dictator written all over him.

 

[Whiskers]

You are ridiculous, you state in a previous post that the Non Mfg ISM was 52.2. It was not, it was 49.6, that is the headline number. The components were:

Business Activity Index at 52.2%
New Orders Index at 50.2%
Employment Index at 46.9%

Misrepresenting data just erodes your credibility even further.

Er hum. This is what I said.

D & G re jobless claims rising a bit last week, but shouldn't have been too surprising for a little longer yet.

ISM Non-Mfg Survey came in at 52.2, much higher than expected.

This is what my sources said.

Bloomberg http://www.bloomberg.com/markets/ecalendar/index.html

ISM Non-Mfg Survey

Consensus - 49

Actual - 52.2

Econoday http://fidweek.econoday.com/reports...facturing_napm/year/2008/yearly/04/index.html

ISM Non-Mfg Survey

Consensus - 49

Actual - 52.2

The business activity index from the ISM non-manufacturing survey surprisingly showed some moderate improvement in February, reaching back up into positive territory at 50.8 from January's 41.9.

New orders posted a similar gain but just falling short of breakeven at 49.5,

 

[brty]

Hi,

TH, Good choice of broker, just happens to be mine.

MF would have put up the margin for yesterdays new positions, and the day befores etc.


The new positions today (or changes to margin requirements) that a sudden bankruptcy would not cover, is not a huge percentage of the total. The clearing house can and would cover it, or as you say the system would collapse.

How safe is the clearing house? With the following from the asx site, I would say pretty safe.

SFE Clearing, ASIC and the Reserve Bank of Australia (RBA) are co-regulators of the clearing and settlement facility operated by SFE Clearing.

Also remember that if I opened a new position today through MF, that the funds for margin come from the cash management trust account, not from MF funds, hence they should not be frozen by the sudden appointment of an administrator to MF (but I think I will go check that).
Of course if MF are trading their own account and have another rogue trader, then it will be messy, but not the end of the world.

bye

brty

 

[dhukka]

Er hum. This is what I said.

Originally Posted by Whiskers
D & G re jobless claims rising a bit last week, but shouldn't have been too surprising for a little longer yet.

ISM Non-Mfg Survey came in at 52.2, much higher than expected.

This is what my sources said.

Yes I know what you said and it was wrong. It might pay to look beyond the media headlines and go straight to the source - The Institute of Supply Management.

 

[explod]

Family just back from the States. Houses for sale signs everywhere and people losing their jobs en masse.

The doom we are picking up is the reality. And it must have its effects here as we go down the track a bit.