Do not let the Fed’s cut diversion fool you.

[Sapiens]

Merrill Lynch suffers 'spectacular' losses

http://business.guardian.co.uk/story...rc=rss&feed=24

2.30pm

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Merrill Lynch suffers 'spectacular' losses


Andrew Clark in New York
Wednesday October 24, 2007
Guardian Unlimited


Investment bank Merrill Lynch has disappointed Wall Street with a dismal set of quarterly earnings which includes a larger than expected write-down of $7.9bn (£3.86bn) on mortgage-related losses.

Merrill's continuing operations made a loss of $2.3bn in the third quarter, compared to a $3.1bn profit a year ago.


The figures indicate that the firm suffered more seriously than many of its investment banking peers during the summer's credit crunch, which was sparked by defaults on American subprime mortgages.

This is nothing.

[GRG55]

Re: Merrill Lynch suffers 'spectacular' losses

http://business.guardian.co.uk/story...rc=rss&feed=24



This is nothing.

Looks to me like a slow motion train wreck in the making.

I don't think there's any absolutes Jim. I think a lot of the picture has to be inferred by connecting the dots (unless you are on the inside as Sapiens claims): German banks being bailed out, a run on CFC and Northern Rock, stunningly large injections of liquidity into the banking system let by the ECB then BoJ, Canada, Australia, & Fed, sudden Fed policy reversal between Aug 7 FOMC and Aug 17 discount rate cut, apparent Fed "surprise" at depth of housing downturn and subprime couldn't be contained, mortgage companies collapsing by the score, US comptroller general announces fiscal policies unsustainable, hedge fund blowups all over the Anglo world with Bear and GS (Alpha) the poster children, hedge fund-of-funds geared 10:1 which hold funds geared 10:1 (reminders of the pyramid investment trusts from 1928/29), unprecedented currency vols (1.5% in a day is not uncommon now, and the Yen/AU$ & Yen/NZ$ crosses both moved 5% in one day in August), and finally Hank Paulson's jawboning with "strong dollar", "strong US economy" now falling back to "strong global economy" and most recently "a healthy financial system". None of this is news, but sometimes I have to update my list just to see the full extent - and I am sure I've missed some things.

I would respectfully disagree with Hank; there's not very damn much that is healthy about this financial system. I don't "know" exactly how and when this will play out. But I don't feel alone because I am quite certain neither does Hank, or Ben, or Trichet, or anyone else.

I would love to be proven wrong in the fullness of time, but it is inconceivable to me that the biggest credit bubble in history, which spawned literally trillions of dollars of illiquid credit derivatives (way beyond CDO's with subprime that they want to Super-SIV away), won't be followed by (one of) the biggest credit contractions in history. The risk levels today seem exceptionally high.

[Jim Nickerson]

Re: Merrill Lynch suffers 'spectacular' losses

Looks to me like a slow motion train wreck in the making.

I don't think there's any absolutes Jim. I think a lot of the picture has to be inferred by connecting the dots (unless you are on the inside as Sapiens claims): German banks being bailed out, a run on CFC and Northern Rock, stunningly large injections of liquidity into the banking system let by the ECB then BoJ, Canada, Australia, & Fed, sudden Fed policy reversal between Aug 7 FOMC and Aug 17 discount rate cut, apparent Fed "surprise" at depth of housing downturn and subprime couldn't be contained, mortgage companies collapsing by the score, US comptroller general announces fiscal policies unsustainable, hedge fund blowups all over the Anglo world with Bear and GS (Alpha) the poster children, hedge fund-of-funds geared 10:1 which hold funds geared 10:1 (reminders of the pyramid investment trusts from 1928/29), unprecedented currency vols (1.5% in a day is not uncommon now, and the Yen/AU$ & Yen/NZ$ crosses both moved 5% in one day in August), and finally Hank Paulson's jawboning with "strong dollar", "strong US economy" now falling back to "strong global economy" and most recently "a healthy financial system". None of this is news, but sometimes I have to update my list just to see the full extent - and I am sure I've missed some things.

I would respectfully disagree with Hank; there's not very damn much that is healthy about this financial system. I don't "know" exactly how and when this will play out. But I don't feel alone because I am quite certain neither does Hank, or Ben, or Trichet, or anyone else.

I would love to be proven wrong in the fullness of time, but it is inconceivable to me that the biggest credit bubble in history, which spawned literally trillions of dollars of illiquid credit derivatives (way beyond CDO's with subprime that they want to Super-SIV away), won't be followed by (one of) the biggest credit contractions in history. The risk levels today seem exceptionally high.

GR, generally I feel badly about something or other on most days, but seeing your list is nice work. You must be tough as steel to trouble yourself to keep a list of all this bad stuff. Thanks for recalling it.

Prechter is some book of his I read made a point of the size of the credit bubble and the multiplier effect of leverage, and how if/when it should unwind the "multiplier effect will go into reverse." "Total credit will contract, so bank deposits will contract, all with the same degree of leverage with which they were initially expanded." On and on to a deflationary crash which those who know way more than I ever will say will not be allowed to happen.

My personal opinion, which is truly based in financial igorance, is that I don't think anyone really knows how all this shit is going to settle.

[GRG55]

Re: Merrill Lynch suffers 'spectacular' losses

GR, generally I feel badly about something or other on most days, but seeing your list is nice work. You must be tough as steel to trouble yourself to keep a list of all this bad stuff. Thanks for recalling it.

Prechter is some book of his I read made a point of the size of the credit bubble and the multiplier effect of leverage, and how if/when it should unwind the "multiplier effect will go into reverse." "Total credit will contract, so bank deposits will contract, all with the same degree of leverage with which they were initially expanded." On and on to a deflationary crash which those who know way more than I ever will say will not be allowed to happen.

My personal opinion, which is truly based in financial igorance, is that I don't think anyone really knows how all this shit is going to settle.

I didn't used to be that way. But years of reading the local papers converted me. Every day over breakfast get to read the latest body count from Palestine and last night's horrific local traffic accidents. I don't think they've changed the front page of the paper for years, just the numbers (I cancelled my subscription 3 years ago, but the damage was done).

You and I are in full agreement on your closing sentence. But as bad as things seem now, I have a great deal of optimism that the USA will creatively innovate its way through this latest crisis. Let's hope its a more successful experiment than the innovative crap paper that got us here.

[Jim Nickerson]

Re: Merrill Lynch suffers 'spectacular' losses

I didn't used to be that way. But years of reading the local papers converted me. Every day over breakfast get to read the latest body count from Palestine and last night's horrific local traffic accidents. I don't think they've changed the front page of the paper for years, just the numbers (I cancelled my subscription 3 years ago, but the damage was done).

You and I are in full agreement on your closing sentence. But as bad as things seem now, I have a great deal of optimism that the USA will creatively innovate its way through this latest crisis. Let's hope its a more successful experiment than the innovative crap paper that got us here.

Perhaps, c1ue, you are in a state of denial. If I, and I do mean myself, were younger, I would be more ignorant than I am, and as such coupled with the probability that I would stay alive a longer time I would find it difficult not to be optimistic, as there is no joy in Muddville or pessimism.

All I see with the level of knowledge I have is that over my lifetime though great strides have been made in so many areas that allow a higher quality of life, such has not been the case socioeconomically for so many and certainly not politically for anyone except those who buy politicians.

[c1ue]

Re: Do not let the Fed’s cut diversion fool you.

Perhaps, c1ue, you are in a state of denial. If I, and I do mean myself, were younger, I would be more ignorant than I am, and as such coupled with the probability that I would stay alive a longer time I would find it difficult not to be optimistic, as there is no joy in Muddville or pessimism.

Eh? While you are right - I am extremely pessimistic about the US and its future right now, I'm guessing you are referring to GRG55 in this particular note and quote!

As for choosing ignorance - well - that ain't my thang. I choose to be erudite and also optimistic elsewhere - although I am starting a business here in the US as well.

I like to think my stance is not pessimism, but realism and that my behavior is designed to protect my future from the harsh realities of today.

But as bad as things seem now, I have a great deal of optimism that the USA will creatively innovate its way through this latest crisis.

In a similar vein to my previous response to Jim - I just don't see how the USA will creatively innovate out of this one. The scale is too large - furthermore the problem lies with the systematic stripping of jobs and capital away from the economy in general and the middle classes in particular.

The only way I see out of this is if there is a war sufficient to ruin American economic competitors - and with 3 of 4 BRICs with nuclear weapons, I just don't see this happening.

As I've mentioned before: my view has always been that the grand experiment of the American democratic/capitalist ethic was saved on at least 3 separate occasions by war:

1) Civil War

Roots in the Crisis of 1857-1858

From "The History of the Commercial Crisis, 1857-1858 and the Stock Market Panic" by David Morier Evans

There had been over-trading, too much competition in business, too heavy expenses, too long and large credits, and there was still quite a land speculation in the West

This crash was due to collapse in the railroad stocks - one of the first technology bubbles.

2) WW I (and creation of Fed)

Crash of 1907

US Treasury buys $35M dollars of government bonds to offset market declines. To put this in perspective, the entire US budget in 1910 was $676M, and in 1905 was $544M - or in other words over 5% of the entire federal budget was devoted toward buying bonds to alleviate the financial calamity.

3) WW II

Great Depression (I). 'nuff said.

While the US did not start the war in every instance - in each instance a major economic competitor was destroyed by the conflict and the aftermath provided easy money for American industrialists but also easy growth for the overall nation.

We're long past that - barring discovery of viable fusion power coupled with resource requirements for construction that only the US can provide, even most innovations which might be discovered in the next few years will be built elsewhere, with the financing from the same clique of bankers internationally. Why should these specifically benefit the US?

As a semi-humorous note... there are those conspiracy theorists who believe the true reason for the Civil War was not abolition, but rather the fact that the South was starting to import its labor practices into industry (as opposed to farming).

[Sapiens]

Re: Do not let the Fed’s cut diversion fool you.

My dear friends,

Please do not get caught in the "léger de main" claim of inflation, or as is said in the U.S. “Sleight of hand,” that is being propagandized by the Fed.

Yes, there is presently inflation, but soon we are going to be caught in a debt-deflationary wave of defaults that will make most people wish they were dead.

Preserve your cash (printed currency), stay liquid and you will be wealthier than all your wildest dreams.

-Sapiens

[EJ]

Re: Do not let the Fed’s cut diversion fool you.

My dear friends,

Please do not get caught in the "léger de main" claim of inflation, or as is said in the U.S. “Sleight of hand,” that is being propagandized by the Fed.

Yes, there is presently inflation, but soon we are going to be caught in a debt-deflationary wave of defaults that will make most people wish they were dead.

Preserve your cash (printed currency), stay liquid and you will be wealthier than all your wildest dreams.

-Sapiens

An excerpt from an article I am writing to be published later:

Sir Isaac Newton (1642-1727) was the smartest man who ever lived. I cite as one point of evidence that he once attended a conference where he tried to convince his fellow physicists that planetary orbits are elliptical not circular. But the mathematics he needed to prove his claim–differential calculus–did not yet exist. He went home and, in a few months, invented differential calculus–called it "Theory of Fluxions." He then used the new math to prove his theory of elliptical planetary orbits.

Now that is one smart guy.

Of course, that was only one of many accomplishments which earned him the deepest respect, trust and pride among the British people in his own time. Who better for the British government to award the position of Warden then Master of the Royal Mint.

He went about the job with characteristic brilliance and diligence for 31 years. "It is in the mint reports of Sir Isaac Newton that we see fullest expression of expert official sense of the action of Mint Laws and tariff in steadying and safeguarding the internal currency."

On one occasion when the British government was running out of funds to pay for war, as governments have often done over the centuries, it sought a painless way to pay off its war debts. Gold coinage was the centerpiece of the British financial system for centuries, providing the stability to the currency needed to guarantee the value of payments in international transactions. All money issued by the government was either made of gold or silver coins minted at the Royal mint under Newton's watch or printed and backed by gold in the treasury.

Treasury's gold stocks had been depleted by the war. Repayment of war debts meant either a reducing expenditures, such as payment of salaries to high positions of the court–never popular or politically healthy–or an increase in taxes on a population already restive from high taxes and other burdens of war. Nor did the government have a ready means to earn more gold by a positive balance of trade by increasing exports or reduced imports. The government was in a bind.

As has also often occurred to governments since the first government took on debts it could not repay, if occurred to creative minds within the British government that if it printed money not made of or backed by gold to pay off those debts if could pay off debts without the politically difficult act of cutting payments to workers for the government, raising taxes, or increasing exports or cutting imports, or by any other troublesome method of increasing the quantity of gold in the Treasury.

The Lords Commissioners of His Majesty's Treasury approached Newton for his advice on printing money not made of or backed by gold, in order that the government might repay war debts. Under such an arrangement, they asked, how will the value of this non gold-backed printed money be determined?

The simple and precise reply suited the mathematician who is serious about his duty to steady and safeguard the internal currency. He replied with a question: "What is your unit?"

Let us take the extreme case, the massive debt defaults you expect. My question to you is Newton's: As the defaults mount and debt deflates, what happens to the unit of exchange?

In Europe, where there is no unified euro bond market to put in motion to monetize debt, I see your point; asset price deflation can lead to commodity price deflation. But here in the US that is not a problem. The trick for the US has been to convince the world how scarce dollars are, and in fact to force them to help make dollars scarce. The problem, if the extreme debt deflation case occurs, will be that while government money is printed and assets purchased–some by commercial banks, some outright by the government, but few if any through the bond market–the money that is printed to buy these assets is the same unit (currency) as the money that must also be used by all to paid for, say, imported oil. So while a hoarder of green pieces of paper may be able to buy from a bank or the government a house or a building with a small bundle of them amounting to a few month's salary, a similar pile of them may be required to pay for a single barrel of imported oil. It is the Nth extreme case of what you see today: the government continues to maintain the quantity and velocity of money within in the US economy, but an American traveling abroad will find themselves as poor as church mice, unable to afford much of anything.

Of course, long before that happened foreigners would buy up everything in sight, before their dollars became worthless, if the government allowed them to.

[Sapiens]

Re: Do not let the Fed’s cut diversion fool you.

My question to you is Newton's: As the defaults mount and debt deflates, what happens to the unit of exchange?

An excellent question. And the answer is quite simple really, as defaults mounts, debts do not deflate and they still stand until discharged. As to what happens to the unit of exchange, it depends as to how you are holding it. If you are holding it in printed currency, it gains purchasing power; if you are holding it in securities, it loses purchasing power.

[Jim Nickerson]

Re: Do not let the Fed’s cut diversion fool you.

Eh? While you are right - I am extremely pessimistic about the US and its future right now, I'm guessing you are referring to GRG55 in this particular note and quote!

Sorry, c1ue, I got cornfused, but it served to elicit a worthwhile comment from you. Thanks.

[EJ]

Re: Do not let the Fed’s cut diversion fool you.

An excellent question. And the answer is quite simple really, as defaults mounts, debts do not deflate they still stand until discharged. As to what happens to the unit of exchange, it depends as to how you are holding it. If you are holding it in printed currency, it gains purchasing power; if you are holding it in securities, it loses purchasing power.

Debts are either paid in full, paid in part, or defaulted on, depending on the arrangements made between debtor and creditor.

They are paid out of savings or out of income.

If the debt is secured, then the asset can be accepted by the creditor in payment of the debt. Of course, the resale value of the asset may be considerably lower than the amount of debt. In fact, the value of the asset may be next to nothing, as in the case of some of the SIVs, which is why neither the debtor nor the creditor want to clear a transaction that sets a valuation. (The auditors may or may not let them get away with that as the fiscal year comes to a close.)

If the debt is not secured, the debtor defaults and the creditor writes off the entire loan.

Multiply this by millions of mortgages and other debts, and you have a lot off writing down and writing off going on, and a lot of assets for sale all at the same time, never good for sellers trying to get a good price, especially since at the same time banks are less willing to extend credit, and the pool of credit-worthy borrowers is shrinking.

As you say, a person with cash in hand in is a good position in these circumstances. The question is, what actions will the US government take to ensure that the debt deflation process does not go on to the extent that the system seizes up, to prevent to use the archaic term, a break in the chain of payments?

We already have our answer. The Fed will print money and buy virtually anything. What happens to the exchange value of the dollar in the process? We have our answer there, too. It falls. And that even before the US has had much to resort to buying it's own debt, except perhaps on the "open market" through Caribbean banking centers.

As I write, gold and oil are pricing in the future monetization of US government debt to manage the ongoing debt and asset price deflation processes. It's quite a paradox, really.

[Sapiens]

Re: Do not let the Fed’s cut diversion fool you.

As I write, gold and oil are pricing in the future monetization of US government debt to manage the ongoing debt and asset price deflation processes. It's quite a paradox, really.

Not really, look closer, at a more granular level.

Look at the types of money creation, one is the monetization of bank credit, another is the monetization of government bonds.

Most of the current money is monetized bank credit, (let me look for the reference) $46 Trillion plus, then there is the monetized government bonds $9 Trillion plus.

Most of the bank credit has been secured by monetizing real assets and guaranteed by people’s labor. Most of the US Bonds, have been purchased with that monetized bank credit.

Oil and Gold are rising because people expect the government to print money, yet they don’t realize that debt defaults are going to reduce the monetary aggregates at a faster rate than the government issues new money. But the true reason Gold and Oil will rise faster than any other commodity is because people will flee to them seeking safety from their defaulting securities. Those that are dumping Treasuries will soon after realize their grave mistake.

But to be quite honest, I fear that if we reach that point, WWIII will be upon us.

-Sapiens

[GRG55]

Re: Do not let the Fed’s cut diversion fool you.

Sorry, c1ue, I got cornfused, but it served to elicit a worthwhile comment from you. Thanks.

Well after reading this thread it's clear that my optimism is a definite minority of one. This sort of stuff will have all of us reaching for the kool-aid...

[raja]

Re: Do not let the Fed’s cut diversion fool you.

the monetary aggregates at a faster rate than the government issues new money

If I'm understanding this correctly, deflation in the FIRE and real economy . . .

. . . Ka-Poom theory is wrong!?!?!?!? :eek: :eek: :eek: :eek:

[Sapiens]

Are VISA and MasterCard adding fire to the credit crunch?

http://www.stocktiming.com/Thursday-...rketUpdate.htm

Are VISA and MasterCard adding fire to the credit crunch?

This morning, we are going to have a short discussion about credit contraction, and then move on to the Shanghai Composite Index which fell 4.81% this morning.

David Wessel from the Wall Street Journal made a case for a recession this morning. Basically, he said that we would look back a year from now and see that the recession was caused by credit tightening. Additionally, he contended that "credit lenders will stay in a process of getting a little more cautious and tightening a little more". Many analyst disagree with him, and some think he may be right.

What signs are showing up for an increase in credit tightening?

On Tuesday, we learned first hand of a new one that we had not heard of before. There are many merchants who sell items or services that are technically a "future deliverable". A future deliverable is something that gets delivered over time. In the case of publishers, they traditionally sell 1 year subscriptions to the Wall Street Journal, your home town newspaper, magazines like Business Week, an investment newsletter, or newsletters on various other topics. Selling yearly subscriptions has been a basic to the cash flow of these companies.

It used to be that VISA and MasterCard allowed merchants to take orders for future delivery as far out as 1 year, and sometimes longer. However, quietly ... during the past year, VISA and MasterCard changed the rules and fine print to say that these merchants were no longer allowed such practices.

In fact, their new regulations state that a company may only charge for a period of 90 days or less. Most publishers haven't gotten the message and are continuing with their yearly subscriptions. But, that is all going to end soon, as merchant banks and credit card processors are going to start enforcing this new ruling.

There is a real "credit crunch" affect to all this, and this fits in with what Wessel was saying this morning. For magazine publishers, their monthly cash flows will drop 40% to 50% when they implement the new ruling. This means that they will have to lay off some people, and watch their profits take a hit. (What's the math to this? If a yearly subscription is $100 per year, then a quarterly subscription is $25 per year ... that's a 75% drop in cash flow for a 3 month period on every subscription until it renews again in the fourth month.)

VISA and MasterCard are reducing the chargeable time period on these purchases in order to reduce the liability ceiling. In effect, they are reducing the amount of credit being extended to merchants on their sales. This is a good example of a credit contraction action, and for many, it will have a negative impact on cash flows, profits, and layoffs.

On Tuesday, our merchant company called and told us that we would have to comply with the new VISA and MasterCard regulations. So, before November 11th., we will stop offering any one year subscription that is paid with a charge card. In the future, the maximum subscription time for those using a charge card for any subscription based product or future deliverable will be 3 months.

There is always a solution to things like this, although it may be less appealing to consumers. In our case, we will continue to offer one year subscriptions, but they will be through the use of a "mailed check", or an instant transaction on the internet through an echeck or icheck merchant service. Along with that, we will offer 1 and 3 month subscriptions payable through VISA, MasterCard, American Express, or Discover.

For the merchants who just stop offering one year options, they will obviously suffer economically. For those who use creative solutions, their business will go on as usual. In the long run, VISA and MasterCard will reduce their total revenues. The harm they are creating with this "credit crunching" tactic will hurt their merchants ... and in the end, it will hurt VISA and MasterCard as well.

P.S. I wouldn't be surprised to suddenly see VISA and MasterCard issue some "exceptions" to large companies like the Wall Street Journal and Business Week.