That Was The Week That Was

So, it's Friday evening, about 15 minutes before the Dow truely settles. In the last 90 minutes it's been on a strong upward swing and, just possibly, it may end the day positive. In a week that has seen over one fifth of the value of the FTSE 100 wiped out and people declaring death, doom and disater everywhere, I'm just pleased that it's got as far as it has without riots. Now we are seeing commodities coming well off the stupidly high prices they were commanding, The only problem looks as though it. currently at least resides with th esuper rich who run or have invested in Hedge Funds. Many of these used borrowed money to buy on the basis that the price increase, effectively asset inflation, would be greater than the cost of borrowing the money.

Now they are caught in a two way pinch, firstly they have to keep borrowing the money if they haven't sold on, most of the money was borrowed in the short term market, the one that is currently frozen, secondly, the commodities they have bought, either physically or on the futures market may be worth less now that they were when they were purchased.

I find it very strange that these so called experts can have got so much a our money wrong

Changing times

An interesting night in the life of the credit crunch, 2 things leap out and hit me.

First for Merkel to effectively say that no one will lose money in German banks is a big statement. What about the "Hot Money" that flows around, the Euro will go higher today, if it already hasn't and this will increase the pain in the entire Eurozone, where Spain, Italy and Greece are already having problems, partly due to the high level of the Euro.

Secondly, now that the $700Bn in is the bank, people will be looking and realising that the Brits have already "spent" approx £150Bn which equates to $380Bn. But the problem in the US is bigger than here AND the American economy is also 5 times larger than ours if you look at GDP. On that basis, if the problems in the US were as bad as the problems here, the bailout should have been just under $2,000Bn (yes, $2 Trillion). so there is still not enough to take the toxic crap off the banks and let them rebuild.

Another point about how much the bailout is and how much the US Government will pay for it. My understanding is that the US Treasury originally said that they wanted to pay the "Life of Holding" value of the bonds, meaning that although they may have been priced and sold at $100 in the Market today they are probably worth just $5, but the Treasury would buy them, adding all the Bond payments that would be made before the bond was redeemed, so the Banks would get MORE for the highly toxic crap (CDO's etc) than they would for better quality bonds, and the money the banks would get would certainly exceed Book Value. My problem is, the more they pay for these bonds, the smaller the number of bonds they can buy and $700Bn is NOT going to cover it. If I have that wrong, will someone correct me please?

It will be interesting (now there's an understatement) to see what emerges after this, I think the Financial system may be totally different, I don't know how, just that it may.

Credit Crutch

In the time sine I last posted anything, the "Credit Crunch" has gone from bad through worse to somewhere near disastrous. Banks in the UK and the US have been rescued, Lehman has failed, Morgan Stanley's motto went from "The Thundering Herd" to "The Blundering Nerd" before, themselves, running to be protected by a bigger bank.

Here have a problem, does bigger mean better? And what about Fractional Reserve Banking? Would we be in this mess if we still had local banks and a banking system that held full reserves? I suppose that is in effect the million dollar question. Perhaps we are living in a time that just HAD to happen, because all we have done since 1996 bis postponed the inevitable. I have a feeling that the unproven thesis in economics called the Kondratiev Wave may just have been proved both true. It may also be that the last 10-12 years have been the gold rush they have for the banks for the simple reason that we now have politicians that are beholden to, or perhaps just in awe of big business and rich people.

To understand what the Kondratiev Wave or other long timescale economic cycles are, have a look at this. There are some good links there that will help you understnd what people believe may be happening now. However if one takes a Kondratiev cycle to nominally be 53 years, and recognizing that a wave commenced after the senond world war, say 1946, this means the last cycle should have finished in 1999. It's interesting to note that 1999 was the beginning of the "Dot Com" bust, but while this did have a major effect on the Worlds Stock Markets, but little effect on the man in the street. Perhaps the Intenet did change the paradigm, or at least perhaps distorted it, extending it by seven years to 2007.

It was there that the stupidity of trying to sell houses to people that cannot afford them was finally realised. Since then a new vocabulary has appeared "Sub Prime", "Tier A Capital" and "NINJA" are good examples.

Where do we go from here? I believe the saying "God only knows" may be the closest to reality, but I worry that we are nowhere near that bottom. Stock markets are leading indicators, usually 12 to 18 months, so it would seem we can look forward to a pretty tough 2009, even with where we are now, although some commentators have called the bottom of the bear market I don't believe we are there yet, but only time will tell

Long time no blog

Almost three months in fact. Too much going on, not enough time to talk about it!!

I hope to be rather more regular in my posting from now on.