Economy ???

[krush]

KudBLOW....sorry as I vomit. "Bush having a good year"? you crazy.

[Genesis]

Kudlow?!

Hehehehehee.... ok.

[mike]

Yep.

By the way, this isn't 1929. Its far worse.

The amount of leverage in the system is 20-50x (depending on who's stats you're using) as existed in '29.

The cause of this is not "too low interest rates" or any such nonsense, as many preach.

It was a pure regulatory failure.

Permitting firms to write OTC derivatives with zero margin supervision, including listed companies, is the cause of it at the root.

Look at any of the "monoline" (e.g. Ambac, etc) carriers. These guys write bond insurance, basically. Well, they have inherent leverage in their book at more than 100:1. Look at their cash on hand .vs. the face value of swaps and bonds they insure.

How is this allowed? You're not allowed to do it - not without a nightly mark to the market (if in the FX markets) and nowhere else at any price. The maximum in the futures pits is 20:1, and you're marked nightly.

Yet these guys have run for years with obscene leverage ratios. And they're the conservative ones! The Hedgies in the Caymans were even worse, with some geared up at 200:1 or more.

What almost nobody realizes is that the reason that the banks have taken "only" single-digit billions in charges thus far is that their positions are allegedly "protected" by this insurance, and thus, they do not have to recognize the losses since "according to contract" when the bond defaults they can turn it over to the insurer and get paid the face value. To date, none of these CDS policies have actually been paid in cash.

None.

The reason is simple - there is no cash, and the first capital call that goes out bankrupts the insurer and starts a cascade failure. All these guys in the game KNOW THIS; they are dribbling out the losses instead of demanding swap payments because they know what happens if they pony up to the bar and say "pay me!"

The problem is that we know, for a fact, that losses are 2, 3, or even 5x that which were modelled in these deals. There is not a snowball's chance in hell that these monolines can pay the claims. Effectively, all of these CDS policies are worthless. All of them.

That would be bad. But what's worse is that the folks buying these policies from these firms are large percentage owners in the firms! The investment banks have huge equity positions in these companies from whom they're buying the swaps!

This is like buying hurricane insurance from an insurance company you own! Its a pure circle jerk - you pay premium to them (which is really paying it to you) but when there are losses taken you are really the one who takes the loss!

But wait - didn't you allegedly buy that protection for your position? Uh......

Ah, the wonders of accounting games.....

There is almost zero understanding of this among main street and there sure isn't any discussion of it in the "mainstream financial media."

If there was, there'd be panic. And if you talk to people who really are plugged into the credit markets, there is. They know. This is why the AAA-BBB corporate spread is at a historic premium in terms of percentages when viewed .vs. treasuries. In the last 45 years it has never been higher.

Without this scam these deals could have never happened. The banks could not have carried back the equity and CDO components as their capital ratios would never have permitted it in the volume that this business was undertaken. We would not have had the housing bubble, and we would not be in this mess.

There is no fix for it other than the deflationary credit collapse that has already begun and will accelerate in the next year or so. The real cost of money will shoot the moon as hard cash will be hoarded. Again, this is already starting - the latest Federal Reserve report released last week showed that vault cash rose in a near-vertical trajectory in the latest period among banks, while reserves are now below statutory minimums. Huh? Simple - the banks ain't lending, they're stashing the money. Real money - cash. They are trying to squirrell away enough nuts to avoid dying in the cold, hard winter, everyone else be damned. Even the Federal Reserve is de-leveraging its balance sheet and has been for the last six months!

There is a lesson in here for you and I; everything you need to know about how those who have access to all the data and can see it first-hand are trying to deal with this.

Do you think you're smarter than they are, when they've got the information first hand, and you're not being told the truth by the likes of CNBC, or where to go find it (yes, for the most part it IS there, but you have to know where to look!)

Hmmmm....

$6.5 trillion was taken out in MEW's alone and spent in the last four years. That money is gone. At least 1/3rd of this will default over the next two to three years, and once the claims start against the monolines and the banks are forced to discard the worthless hedges the writedowns will come $10s of billions at a time.

The total damage, conservatively, will approach $1 trillion in the US credit markets alone (not counting the destruction of stock market index wealth.) If we get unlucky and things go sideways it could easily be three to four times that bad. Other nations will get it worse than us; we did them the favor of selling this garbage to them, and showing them how to do it on their own soil!

"Rate cuts" have nothing to do with this - either as the cause or the fix. If you're worried that the guy you're being asked to lend to might blow up tomorrow, it doesn't matter how cheap the money is.

That's the problem, in a nutshell.

Given all of the above is true and a deflationary spiral happens..... What would you do to protect yourself in a protracted down turn? Move to cash? Move to other currencies, and or hedges such as gold or other precious metals? Cash out of real estate now, or hold? I am very worried about the viability of the dollar in such a downward cycle esp against other currencies. Remember 1997, when the Asian crash happened,.... it came on fast and was very deep, .... so I believe we need to have an executable plan in advance of a massive sell off. Like you, I am very concerned about the near term prospects, and therefore would like your thoughts on a reasonable protection strategy. I am too old to start over. Tx, mike

[Genesis]

Given all of the above is true and a deflationary spiral happens..... What would you do to protect yourself in a protracted down turn? Move to cash? Move to other currencies, and or hedges such as gold or other precious metals? Cash out of real estate now, or hold? I am very worried about the viability of the dollar in such a downward cycle esp against other currencies. Remember 1997, when the Asian crash happened,.... it came on fast and was very deep, .... so I believe we need to have an executable plan in advance of a massive sell off. Like you, I am very concerned about the near term prospects, and therefore would like your thoughts on a reasonable protection strategy. I am too old to start over. Tx, mike

Get out of equities right now.

Look, if this doesn't happen, you miss what - 5, perhaps 10% appreciation? If it DOES, you miss 30, 40, maybe 50% DEpreciation. Or worse.

You'll know within six months. By June it will be evident that there is no "bottom" in housing and its all coming apart on the consumer side - or it won't. So at worse you're missing six months of appreciation.

I have gone into the short end of the Treasury curve. Do not go anywhere near the LONG end, because if interest rates on the long end shoot the moon (and I think they will) you're going to get killed there. The short end is far more immune to those shenanigans.

Foreign currencies and commodities (including metals) will get smashed. We've got it bad, they've got it worse. Demand destruction will nail commodities. Metals have a huge speculative premium in them and that will all come out.

This is not local to the US. In fact, other nations have it worse than we do. The dollar is likely to actually appreciate; in any event, this much I do know - you can't be sure who will get destroyed in this in terms of currencies, but you can bet that the other nations won't escape unscathed, which means trying to hide in a foreign currency is a bet on their economy .vs. ours. That's a bet I'm not going to take.

Metals are unsafe primarily due to the huge runup they've had in the last 3-4 years. What is the intrinsic value of an ounce of gold? You can't eat it or keep yourself warm with it. It is only worth what someone will give you. If we deflate then asset prices will come down - including metals - and the speculative premium will come out. Gold could wind up in the $200/oz range. If you buy here at $800...... THere is no way to predict whether it will be anywhere near that bad, but a bet on metals here is a bet on hyperinflation - I'm not going to take that bet as I believe that credit is going to default at a rate that will preclude any attempt to inflate out of it and further, the banks don't WANT hyperinflation. Finally, contrary to what some "gold bug" sites are saying the Fed and ECB have not been injecting money into the system - those are loans and the net liquidity change in the system is in fact quite small in terms of the total monetary base. Its just not material and sure as heck isn't hyperinflationary.

If you're aggressive you can be short the indices but this is somewhat of a high-wire act. I'm a trader as much as I am an investor, so I'm willing to do it. You might not be. I also have a nice quantity of "lotto ticket" PUTs; if we get a huge selloff those will pay BIG.

The real key here is that debt will kill, especially if you're uncertain of the cash flow to service it, and many who think their cash flow is secure will find out that it is not. Jobs are not a guarantee. Cash is king in such a collapse as assets that default can be bought very cheaply, and for those who have the cash and can move on them the deals will be immense.

[Paul45c]

Kudlow?!

Hehehehehee.... ok.

C'mon, if CNBC can trust him, can't you?! (tongue planted firmly in cheek).

Ok, ok...Kramer's a twinkie, no doubt, but it was just so refreshing to see someone go out on a limb for old Georgie like that. But hey, didn't W bring his approval ratings up at least higher than Congress's?!

Pretty soon we're gonna have to call this joint the BEAR's DEN. Grrrrr....

[Genesis]

On the contrary; I go with what I see.

For the last several years I've been bullish as all get-out. I knew the housing mess would eventually end badly, but in the meantime you take the money!

The problem here is that the data continues to deteriorate - today's economic data is yet another example; it was HORRIBLE.

[hyperfishing]

In answer to worried questions above, Swiss bank deposits (except _ _ _) are ALWAYS a good place to go in troubled times. Dubai and Bermuda (Ross Perot is there) are likely also good places to stash your cash.

In short, any country that does not have a lot of debt.

With Pakistan additionally on the verge of meltdown, can someone call Kramer for an optimistic take on the prospects for the Dow? <gg>

[Genesis]

My concern with Pakistan is that the more-radical elements over there get their hands on one of the "boom booms" and see that as the solution to "their problems."

That would change things in the world in ways that none of us would like.

At all.

[Paul45c]

That's always been my biggest fear about Pakistan, but I heard something that mollified my fears considerably. As part of the very in-depth WarOnTerror cooperation and overall U.S. aid to the country, we have many specialists at the key nuke locations who basically have one job -- render the nukes useless in the event of a coup.

[Genesis]

Well I'm sure we're there.

How sure are we that we can get all of them?

I hope the answer is "very sure", because I'm quite certain that AlQuaida's desire to obtain one is "very sure" as well.