As shown below, the average cost of a home nationwide dropped 52% from 1930 to 1935, and it took 18 years to fully recover. It's also interesting that average wages dropped 21% from 1930 to 1933, then steadily increased. And the cost of a gallon of gasoline never dropped, but held steady for ten years and then increased 60% over the next nine years.
1. I am refinancing my mortgage and taking money out.
2. By stretching out a 15 year mortgage to a 30 year mortgage, I will increase cash flow 800 dollars a month to be put in savings.
3. Will place it in FDIC short term CDs.
4. At the proper time ,I will place a big chunk of it in Vanguard, spread in Mid, small cap , overseas, emerging markets and Windsor II. Perhaps some REITS.
5. Thinned out my So Called Dollars and keeping the most valuable and nicest ones
4. Have bought some really super type coins that I will leave to my estate.
5. Will hunker down until things settle down a bit. No body really knows just how long that may be.
Although things are a bit messy, the markets will ultimately right themselves. They are likely far more resilient than the extreme pessimists understand.
Two questions -- one rather specific, and one more conceptual.
(1) When you say that equities are massively overpriced -- how do you define massively? 50 %? More than this? Although quite a few financial firms are in fact highly leveraged, the average corporation is not. The leverage in the financial sector has not tremendously affected equity prices (as, for example, in Japan in the late 1980s). Equity prices seem to be returning to historical norms. From here, it is easy to imagine, for example, a 20 % further drop in prices, but at this point equities by almost any measure would start to look cheap. It is hard to view this as massively overpriced.
(2) What do you see as the mechanism that takes us from the severe inflation you envision, to depression.
“Nonetheless, I am holding physical gold and silver, paper gold, and the following stocks: AUY, MFN, SLW, PAL, AZK, IVN, IAG, GRS, GBN, FCX, ECU, CALVF, SA, RR, TDC and CALVF. I also hold TELOZ and CHK for oil and natural gas positions.”
Thanks John,
Sinclair keeps saying that the juniors are the place to be the next couple of years, and even says he has $23 million in one junior, but never says which one.
He says the GDX stocks are way over valued as the big funds are loaded up in those, and that many of the juniors will be take over targets, and good movers, as the bull gets back into action.
It looks like you have been doing your homework in this area, which of the above are your favorites?
Personally I am just keeping my long positions in my favorite stocks and riding the down trends, without selling, trying to add some in the dips. This market is so volatile I do not want to be trying to trade bottoms and tops, and get caught out of the market with a move up. I am trying to pick up a few bucks buying calls in GDX, PAAS, GFI, and some of the larger companies on the dips, and selling once they move, that seems to work well, but the PE’S are very high in these bigger companies and I think Jim is right on the juniors.
These big drops in shares make all of us in these markets a little nervous, but every time there is one of these moves down I ask myself, WHAT HAS CHANGED? Since we started this thread everything has continued to deteriorate, and nothing has changed this week, so there is no reason to sell off our good holdings, either in shares, coins, or PM’S in hand.
The mind is a funny creature, when the price is high we wish we had bought more, but when the price falls, we wish we had sold, HA HA
<< <i>(1) When you say that equities are massively overpriced -- how do you define massively? 50 %? More than this? Although quite a few financial firms are in fact highly leveraged, the average corporation is not. The leverage in the financial sector has not tremendously affected equity prices (as, for example, in Japan in the late 1980s). Equity prices seem to be returning to historical norms. From here, it is easy to imagine, for example, a 20 % further drop in prices, but at this point equities by almost any measure would start to look cheap. It is hard to view this as massively overpriced. >>
I would say conservatively they are 25% overpriced right now. Here is where we disagree. You think prices are returning to historical norms. I dont think so. What are you measuring your norms by? P/E is the best and they are not at norms. Getting better based on stock prices, but wait until the earnings for Q1 come out.
You also dont think that leverage has affected stock prices. When banks and hedge funds with combined trillions of dollars are leveraged on AVERAGE 20:1 all the way up to 32:1, that is going to artificially raise stock prices. That is why they can control prices with massive buys or with massive shorts. The black boxes run this market and trust me, they are overvalued.
As far as the mechanism that will go from hyperinflationary to deflationary? I think most necessities will be inflationary, especially energy due to fed intervention and world demand. Energy adds inflation to everything. It will get to the point that all income goes to shelter/food/water/energy. There wont be anything left for the massive consumption we have had in this country the last 20 years. That will of course be deflationary. No growth. I think that the jury is still out on how this could happen. I am not saying it has to happen either. But it is an election year, and politicians want votes....they will have their hands in everything...and it isnt going to improve our chances.
GS,
My favority juniors are ECU and GBN. I also like the potential for RR and Tyhee. They are all risky bets however. Rainy River I got in at 4.4$...sold at 5$. Got in at 4.75$ and am now waiting for it come back up. It was at 5.5 or a bit more for a while. GBN really looks to be taking off. I have been trading lots of 1000 shares. Trading ranges of 3.25 to 3.75$ allow for easy pick off moves. I have always kept my core though.
I read and analyze with about the same frequency you do, several hours per day on average, with half of that on weekends. Been doing that since late 2002. I'm happy if I can take a position on major moves and ride the wave. Like you I also just started dabbling in metal stocks in a trading account. My 401K has had 50% metal stocks in it since 2004. On Monday I get to deploy fresh funds into beat back miner stocks. In summation, I doubt I can offer any different insights than you have already discussed. The Armagedon deflationist that you subscribe too sure has one end of the spectrum covered. That depresses even me! But he balances off the hyper-inflationist types that are predicting $6000+ gold. The truth should be somewhere in between as Sinclair and Puplava call it. This commodities bull has to run its course. And to those that think it just completed the run....what was just fixed in the credit and housing markets to end the run?? More easy credit? Lower interest rates?
Will this market right itself? Not likely. The FED and Friends (or Fiends?) have their hands full juggling all the various credit and debt issues. It is an unsolvable problem - all $550 TRILLION of it. The vast majority of banks in the country have some exposure to it. Even my local bank has $55 MILL of OTC risk at about a 5% ratio to $2.5 BILL in assets (all OTC interest rate contracts). Without FED monopoly money intervention the banking mechanism would have already ceased to function. BSC was just the first shot on goal and the first save. Many more to come. But the problem was just shifted to another bank (JPM) where all the risk still exists. JPM "improved" their 55:1 leverage to 65:1 with the BSC pickup (figure $14 TRILL of derivatives leveraged against $1.5 BILL in assets...ie their building). This was not much different than BOA taking on insolvent Country Wide to cancel out each others OTC-D risk. The sheeple felt that the FED saved the day this past week, they only prolonged the pain. The system cannot right itself. The FED's only recourse is to shift and mask the problem to give as many banks and brokerages the time to bail out as many of their assets as they can. In the meantime, these monopoly money infusions are the final mechanism of a large inflation. The previous 12 years of 10-15% M3 increases have already gotten the ball rolling around the world. But that was only the appetizer. The Dow/gold chart shows the way to the future. Until that is broken, we are headed to 1:1 Dow/gold. Somewhere between $2000 dow/$2000 gold or $10,000 Dow/$10,000 gold is where it ends. It didn't just end at a 12:1 ratio this past weekend (now at 13:1). Following the inflationary push by the FED and Co., comes the final deflationary act. Whether that's a Great Depression 2, a Japanese 20 year deflation, or a severe multi-year recession remains to be seen. Cash and other basic assets survive in all of those scenarios. I'm not sure why many do not think gold or silver survive as well. After all, you can't eat them. Likewise you can't eat wood, small arms, bullets, dirt, copper, or oil either. Wheat, sugar, coffee, soybeans, and pork bellies you can eat. Bon appetit.
Referencing Japan's 1980's inflation/deflation woes is not comparable to today's situation because since then banks have leveraged up another factor of 10-50X. OTC Derivatives were essentially non-existant in size in the late 1980's. Even by 2002 the total derivatives market was only around $150 TRILL. Today's $550 TRILL gorilla looms large over the market. That's the mechanism that trumps everything. The relatively few banks /brokerages that hold 90% of these derivatives trump the 1,000's of legit companies who are light on derivatives. No matter, the liquidity issues connect them all together. Insolvent big banks will affect everyone along the food chain. Nothing beats a trump card.
Sinclair's $23 MILLION in junior mining companies is probably mostly represented by his own stake in Tan Range (TRE) of which he is CEO. Makes sense to me that he is investing his own blood in the company he believes in. Nothing better than to have 1st hand knowledge of all aspects of an operation. He might have some other holdings in other juniors but he has publically mentioned putting a million or more at times into his company. It did pretty well on price increases on the final stage of this gold top.
Nothing has changed. Other banks are primed to fail. The FED is trying to keep a wrap on this through November 2008. JP6 reads the news after each FED intervention and thinks, "yup that was it, the FED just saved the day and we are headed back to prosperity." And each time J6P fails to realize that he's been scammed each time this happens. The big banks force a rally and get out quick pocketing their billions. J6P is left to pick up the pieces and wait for the next rally to buy into. And it does make sense that the FED has to try and bring this King Kong-sized beast slowly down over several years. No one wants an overnight destruction of the markets. But in the end it's all chump change. The $550 TRILL is not going away and if anything it's still only increasing. What's the difference if you bet the financial world on $550 TRILL or $1000 TRILL. You can only destroy it one time....and $20-$50 TRILL in losses is probably all the ammo you need. This is why it is different this time and no FED/PPT bail out can ultimately succeed. Or as "Dalton" says in roadhouse: "For now, be nice.....until it's not time to be nice." In other words inflate....until it's not time to inflate (ie deflate).
<< <i>Equity prices seem to be returning to historical norms. From here, it is easy to imagine, for example, a 20 % further drop in prices, but at this point equities by almost any measure would start to look cheap. It is hard to view this as massively overpriced. >>
For sure, equity prices aren't nearly as bloated as they were in early 2000. Anyone who thought such valuations were sustainable, IMO, needed a reality check. While I don't think stocks are massively overvalued -- I think they are close to fair value if a tad on the high side historically -- markets tend to overcorrect to the upside and the downside due to the twin emotions of greed and fear.
As a result, it wouldn't surprise me to see a market which may be 10-20% overvalued panic down to 20-30% undervalued. At that point, depending on the circumstances which triggered the selloff, it could be a fantastic time to buy unless you're wearing a tinfoil hat.
Nevertheless, I personally think we're entering a period where the markets are going to be volatile and mostly rangebound. As a result the recent bear market could give way to a "stock picker's market" where the market overall may run in place, but there will still be plenty of individual winners and losers. I have no reason other than gut feeling and observation of recent action to suspect this, as I'm not axactly a market gooroo. But I can guarantee that stocks will be lower on Monday. Unless they rise or finish the day mostly flat to mixed.
You have all your eggs in one basket. That is OK just make sure you watch that basket. Everyone keeps saying prices are going higher and higher, while that may be true over some time, it is never true over the long haul, and in many cases equity prices reflect expectations of the business environment 2 years out. Since no one can predict the future, be careful in any crystal ball theories.
This is going to be inflationary as Chindia is like a crack addict when it comes to oil. They want more and more and more
This is true to a point. But remember the costs to them will be greater also and they WILL slow down. Case in point is Cisco Systems. There busines is bigger than it was in 2000 yet the stock is trading at 80% of its value 8 years ago. Everything the analysts said about the internet 10 years ago has come true, yet not many have profited from it. There is no doubt that China and India will grow, but expections may already be reflected.
We already have the technology to be energy independant, it just takes a few politicians will balls to make it happen. IMHO, we could cure all our ills by building 300 coal gasification plants in the USA. This would put millions of people to work, increase tax receipts, and free monetary rescources to meet our entitlements.
The most important thing to remember is "The best cure for high prices is high prices". After a time the high costs of doing business kills business. Inflation in equities was defeated in 2000, inflation in real estate was defeated in 2006, and inflation in fertilizer, copper, aluminum, et al, will also be defeated in time. The precious metals are a different beast as they play into emotion more than economics, but a company like FCX could see all its profits from mining gold evaporate into the losses they suffer from mining copper. These companies--especially fertilizer-- in many instances are priced to perfection. And unfortunately we live in an imperfect world.
Man, I just do not understand very well what is taking place with the system. I fully understand the talk about how the market is a good buy, traditionally it will bounce back, don't sell, etc.... More or less, this has always been true. BUT... seems every one of these advice givers are ignoring the fact that multiple financial organizations are on the brink of going under. So to me, these are not 'normal' times, and 'normal' expectations cannot be relied upon.
I also do not fully understand the unlimited? borrowing machine the FED is now giving to the financial organization. Just where is this money coming from?? Does it make the problem of the bad real estate loans go away?? Is the FED just printing the money to demand?? The financials are borrowing an average of 13.4 BILLION daily during this past week. Goldman Sachs, Lehman Brothers, Morgan Stanley. And what kind of position is JPMorgan Chase now in with the bad Bear Stearns paper?
I'm not sure what the $550 trillion figure represents -- can you give a fairly precise definition, with some breakdown by category? Most derivative securities have a legitimate purpose. If two parties enter into an interest rate swap, some notional amount of derivative securities has increased, but this has no impact on the overall leverage in the system. In fact, in many cases, the overall risk profile of the system will decrease.
Regarding gold to Dow ratios, presumably over time the ratio of the price of gold to the Dow will decrease, since gold reflects the price of "real" money, and the Dow should correlate with the size of the real economy. Going back to 1790 (and almost certainly to Colonial times), there has been no seven year period when real GDP did not increase. When you are projecting gold to Dow ratios, I assume you are factoring in GDP growth?
(Regarding investments -- if equities drop by more than 20 % -- certainly possible, I will be a major buyer. I suspect this would also be true of others with cash -- the market certainly has a floor not much below that. )
JPMorgan is in far worse shape than they were a week ago. But realistically, they were insolvent last week and are now an additional $14 TRILLION beyond the previous insolvency point. the FED will defend JPMorgan and Goldman Sachs to the bitter end. But Lehman, Merrill, Wachovia, and some others can easily be tossed to the curb as the big boys did to "little" Bear Stearns. Not only did they toss old bear to the ground, but stomped and kicked the old guy as well. They don't play nice. And the other banks better play along or the big guys will toss them to the fishes as well. Every fish for themselves as they say. It's called let the biggest fish survive, even if that fish is decayed and bankrupt. Barrick gold (Carlyle Group pawn) is doing the same thing in the mining sector. They are swallowing up smaller fish even if for now, their total financial picture is not that rosy. But by eating healthier little fish with real assets, they prolong their market gourging. The end game is to be the last one left with all the money and gold.
I agree, and am more than ready to take my eggs out and put them elsewhere if the times change. I must say that I am quite happy (so far) that my eggs are in this basket. A mixed basket would have you in negative territory right now...and with more to go.
In "free markets" I agree with your inflation arguement. Keep in mind that China is still communist. Prices might slow them down, but their gov will play with prices and subsidize (sic). Demand will remain.
Not to mention that the have 1.3 billion people. If those people lived even 1 tenth as well as us, demand would be through the roof.
China is going through an industrial revolution as is India and to a lesser extent the maritime continent and IndoChina. I would argue that you are thinking very domestically....when we are now fully global. The rest of the world will not give the U.S. a break. We become less and less important economically because we are not the industrial giant we once were! We are the consumer!! We are the debtor...we just happen to have large guns.
I was reading Proverbs this morning. A couple of verses struck me as being very relevant to our current situation.
Proverbs 22:7 -- The rich rule over the poor, and the borrower is servant to the lender.
Proverbs 22:22-23 -- Do not exploit the poor because they are poor and do not crush the needy in court, for the LORD will take up their case and will plunder those who plunder them.
Christian or not, this is wisdom... many Americans, politicians and Helicopter Ben should take heed.
<< <i>The world’s largest gold producer, Barrick Gold, will invest a record $10-billion in new mines during the next five to seven years amid record gold prices, CEO Gregory Wilkins estimates. >>
<< <i>TextBarrick is developing projects in countries including Tanzania and Argentina and is studying the viability of others in South Africa and the US. >>
Robert Scot: Engraving Liberty - biography of US Mint's first chief engraver
I'm not sure what the $550 trillion figure represents -- can you give a fairly precise definition, with some breakdown by category? Most derivative securities have a legitimate purpose. If two parties enter into an interest rate swap, some notional amount of derivative securities has increased, but this has no impact on the overall leverage in the system. In fact, in many cases, the overall risk profile of the system will decrease.
That's the banker's biased definition of what is supposed to happen, yet most have no clue how derivatives work or how to value them. They created them, sliced them up, and sold them as caviar to other banks and funds who did not understand them. Goldman understood them enough to short mortgage derivatives in 2007. Nice move GS! Even Bernanke needed a crash course from his bank buds on how this game is played by the pros. Using JPM as an example. They just ate $14 TRILL of BSC's derivative book to take them to $91 TRILLION total. Of that, about 2/3 are interest rate based. You tell me why you need over $50 TRILL in interest rate O-T-C contracts with other players when you only own < $2 TRILLION in real assets (65:1 leverage)? The Bank for International Settlements breaks down these numbers further and by bank. Notional amount is the amount owed if the deal goes sour and the loser cannot pay up. On a $1 BILL contract, JPM would be stiffed by that amount if say BSC owed them that money. Hence, a good reason to buy BSC and continue the fantasy that OTC derivatives are sound investment practice. How many of those bad BSC TRILLIONs were with the other leading banks? With JPM holding about 15% of world wide derivatives, they don't want anyone thinking those could be at risk of default. With $550 TRILL in total derivatives contracts out there, who will pay on them if even 10% of them fail? Or 5%? What if they all take a 20-30% haircut? Bottom line, that $550 TRILL represents the full value of those formerly rated AAA contracts assuming the counterparties go under and cannot pay. I don't know if they are legitimate. I believe they were written to make obscene commissions for the brokers and high % returns for the buyers. None of them ever gave thought to actually having to perform on them. A lot of these have 3 to 5+ year lives. The money was too easy to take w/o thinking of the consequences. And if the investor is getting 8-12% interest on an illiquid asset he's not going to complain until it's time to sell that asset into a market where no one knows what's it's worth, or wants it.
Regarding gold to Dow ratios, presumably over time the ratio of the price of gold to the Dow will decrease, since gold reflects the price of "real" money, and the Dow should correlate with the size of the real economy. Going back to 1790 (and almost certainly to Colonial times), there has been no seven year period when real GDP did not increase. When you are projecting gold to Dow ratios, I assume you are factoring in GDP growth?
1790? The world changed in 1913 when the FED got the reigns of the world economy. From then on gold and how it has reacted has changed. And in 1974 it changed for good. Can't compare 1790 gold money with 2008 fiat money. Our experiment is just 34 years old now. The final chapters are not yet written. We've only had 2 full chapters so far: 1. Equities languish, gold and commodities fly 2. Equities fly for 30 years 3. (in progress) Equities sink and commodities fly. Not a whole lot of history here to bank on.
Forget GDP growth based on the stats posted. The rate of inflation is critical to that calculation so if that's not right, then neither is GDP. To me, GDP is already a net negative, no growth in the overall economy. Whether this continues for a total of 7 yrs remains to be seen. The President doesn't want his constituents to see a negative GDP, large CPI, nor negative jobs growth. Like Clinton and Rubin did, I'd see the logic with cooking the books to keep foreign investors on board. What worked for Bill works just as well for W.
Not sure if there is a true floor under any market these days. We are in unchartered waters....and the S.S. Minnow appears lost. But Skipper Ben and Gilligan Paulson are still at the helm guiding her out of the storm.
"The FED's only recourse is to shift and mask the problem to give as many banks and brokerages the time to bail out as many of their assets as they can."
Reasonable strategy. You can probably assume that the managers at those banks and brokerages are reaching for the pull ring as well.
I only met a few people in this business who have called the right shots over the years, and one guy in particular who has been fking right each and every time. From Pennsylvania, sold everything the week BEFORE the collapse of the coin and metals market in 80's heyday. Took a bunch of that money and bought baseball cards ( I'm not telling what kind ) and real estate. Then a few years ago when 1799 eagles ( just giving one example ) in AU-58 were 7-12K, he sold baseball cards which he paid 30 bucks for and sold for 3,000, then bought a bunch of early eagles.
Now I'm sorry but I saw on one guys website, 1799 Eagles in AU-55 for $27,500.00. Hahahaha.
Sorry, I can't continue this post.....................
The world’s largest gold producer, Barrick Gold, will invest a record $10-billion in new mines during the next five to seven years amid record gold prices, CEO Gregory Wilkins estimates.
That's the kind of talk I'd expect them to make to keep the money flowing in. With the escalating costs of mining today I'd think Barrick's efforts will be in acquiring worthwhile junior and exploration companies as they come in. This puts more of the risk on the other guy. I don't see too many of the big gold producers out there finding mines. The political environments around the world are risky at best (sovereign takeovers and inconsistent permitting). We already have most of the mines with us today when this gold market eventually peaks considering it takes 5-10 years to bring a fresh mine to market. Record gold prices in 5-7 years? That's a big risk, even for Barrick which has Saudi oil and the Bush/Carlyle group behind them.
Jim Halperin called the peak of the coin market in 1980 and got his rare coin fund to market before the whole thing imploded. James Sinclair sold all his gold at $850+ in 1980 and got out of the gold market for decades. A pair of good calls indeed.
wow some great discussion on the previous pages....i know of a few who subscribe to this thread as their only "contact" with CU...
i will go back and digest all of it starting with yesterday evening...
here is something about the Olympics....and the problems which may happen....this may have world repercussions, or just a blip, I haven't a clue but it is something to consider in a world market econonmy (IHO)
From Peter Schiff of Euro Pacific Capital....pigs with lipstick exit strategy:
In the early stages of the biggest credit crunch in U.S. history, buying shares in Visa, a company that derives its revenues based on transaction fees from credit card purchases, qualifies as a particularly ill- timed investment. Perhaps buyers of these shares didn’t get the memo, but the days of Americans using credit cards to buy products they cannot afford are about to come to an end. For all its flaws, Wall Street does possess an extraordinary ability to apply lipstick on any pig. For the formerly private owners of Visa, this is perhaps one the best exit strategies ever engineered, on par with the Hail Mary orchestrated by Blackstone last year (shares of Blackstone are now trading for half their IPO price).
From Daniel Amerman, CFA on Financial Sense:
First, you need to very seriously think about cutting your ownership of financial assets. The type of disaster scenario we are talking about could devastate stock and bond markets for a generation. If you are investing for retirement and your portfolio gets taken down by just such a scenario, then you may never have the chance to replace it. For these reasons, there is a powerful, powerful case for moving a substantial portion of your assets into tangible assets. Good examples of tangible assets include gold, silver, commodities, real estate, farmland and energy.
A CFA and former banker advocating gold and silver? What's the world coming to? Can't he lose his certification?
seems every one of these advice givers are ignoring the fact that multiple financial organizations are on the brink of going under. So to me, these are not 'normal' times, and 'normal' expectations cannot be relied upon.
The expectation built into the market now is that the Fed will finance the major banks' mismanagement until it is no longer necessary to do so.
I am having trouble making a comparison of today's situation vs. 1929. Regarding the possibility of deflation, one question:
In order to keep the banks afloat, I see the Fed continuing to create more money and credit, in spite of the Bear Stearns debacle. How can deflation occur when so many dollars are already out there, and more to come?
In order for cash to go up, everything else must go down. During the depression, everything went down due to lack of demand. We now have that occuring in housing. What other dynamics must occur in order to make cash the preferred investment vehicle? I still don't see it. What I do see is hyperstagflation - until the Fed stance changes.
What say you? (whoops, that was several questions)
Q: Are You Printing Money? Bernanke: Not Literally
<< <i>seems every one of these advice givers are ignoring the fact that multiple financial organizations are on the brink of going under. So to me, these are not 'normal' times, and 'normal' expectations cannot be relied upon.
The expectation built into the market now is that the Fed will finance the major banks' mismanagement until it is no longer necessary to do so.
I am having trouble making a comparison of today's situation vs. 1929. Regarding the possibility of deflation, one question:
In order to keep the banks afloat, I see the Fed continuing to create more money and credit, in spite of the Bear Stearns debacle. How can deflation occur when so many dollars are already out there, and more to come?
>>
Nobody understands derivatives but it is logical to assume that for every dollar lost that there was a dollar made. Yes, the FED will support the banks and their idiot losses and their overpaid CEO's and CPA's but the huge profits are out there somewhere (first place to look might be the aforementioned foreign bank accounts).
No matter how you cut it all the money going into the market is new money and is inflationary.
Regarding Gold versus Dow -- regardless of the measure of GDP (and it is profoundly obvious that US GDP has grown dramatically in the last 30 years) -- the expected ratio of gold to Dow will drop over time.
Regarding "Notional amount is the amount owed if the deal goes sour and the loser cannot pay up." This is not correct. The notional amount is far greater than the amount that would be owed if a deal goes soar. A few examples:
(1) If I write new call options on 100 shares of stock with a strike price of 100, the notional amount is 10,000, but the amount at risk depends only on the difference between the strike price and the actual price. Many options expire with no value. The risk is only a fraction of the notional amount.
(2) In an interest rate swap, the notional amount is based on the principal amount of the instruments, but the risk depends on the difference between the rates being "swapped" -- again, only a tiny fraction of the notional amount.
(3) For some derivative securities, such as CMOs backed by a portfolio of good quality mortgages (ie, most mortgages, in spite of the sub prime publicity), the notional amount would be the amount at risk if there were no collateral. However, the amount at risk needs to be reduced by the collateral (net of expense), and the loss that will be incurred in reality is the default rate times this amount.
The bottom line -- if the $ 550 trillion figure often quoted here is the notional amount on US (or global) derivative securities, the amount at risk is a small fraction of this (eg - 1 %), and the expected loss is this amount at risk, times the probability that a loss reallt occurs. So, even in a severe situation, the loss we would be seeing would be measured in basis points times $ 550 trillion, not major portions thereof.
The bottom line -- if the $ 550 trillion figure often quoted here is the notional amount on US (or global) derivative securities, the amount at risk is a small fraction of this (eg - 1 %), and the expected loss is this amount at risk, times the probability that a loss really occurs. So, even in a severe situation, the loss we would be seeing would be measured in basis points times $ 550 trillion, not major portions thereof.
Again, that's the banker's definition and their calculations, not worst case, and we are indeed heading towards worse cases. The banks want to think that the amount at risk is only a fraction of the notional amount. And what are their possibilities of a loss....<1% more than likely. In this environment it's probably closer to 100% than it is to 1%, and with losses starting at 20% of that 100%. Sinclair has already pegged the number in the starting gate at $20 TRILLION (just for credit and default derivatives...there's another $350 TRILL in interest rate derivatives sitting behind those). He's being kind just as he does when he states $1650 gold is in the bank. Not being an expert in derivatives, I'd defer to his estimate. Since JS constantly states that notional amount is contractual amount in the event the loser goes belly up. I defer to his wisdom. Personally, I cannot fathom why $550 TRILL of anything dollar related is under contract. If we were discussing the number of grains of sand on a beach, this number would make more sense.
Derivative Characteristics (from the Jim Sinclair web site)
Behind the curtain of silence the sub prime loan problem, better described as a global meltdown of credit and default derivatives, continues. The reason for this condition is an attempt to value that for which there is no value. It is spreading globally as you have seen.
Keep in mind that over the counter derivatives generally have the following characteristics:
-Without regulation. -Without listing on public exchanges. -Without standards. -Therefore not in the least bit transparent. -Therefore without an open market of the bid/ask type. -Dealt in by private treaty negotiations. -Without a clearinghouse. -Unfunded without financial guarantee of any kind. -Functioning as contracts of specific performance. -Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement. -Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions. -Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value. -Notional value becomes REAL VALUE when the agreement is forced to find a real market for ending the obligation which is how one says sell it. ......this is what the bankers don't count on. Hence basis points become real dollar losses. As long as they sit on the books, basis points apply.
holy crap, I just read the last three pages and now I'm going to go slit my wrists.....
...here in the Seattle area where housing prices have remained strong (not AS strong as a few years ago but still strong), I don't know if we're smoking crack or what? Quite possibly! I just sold a 1942 house that required a lot of maintenance and purchased a brand new townhouse that has a warranty and a smaller mortagage, but I'm still thinking now I should have just rented for a year or two to see what happens......well, I'm into it now so that is what it is.....
RR, regarding "more than likely. In this environment it's probably closer to 100% than it is to 1%" -- sorry, but that is not even close to being true, and demonstrably so. Look at the $ 350 trillion in interest rate derivatives you described. The risk here relates to the difference between two rates. To approach 100 % on an instrument like this, you would need to have one interest rate at nearly 100 %, and the other near zero.
It may be hard to know if the risk is near 50 bp, or nearer 200 bp -- both it is no where near 100 % -- this is not banker speak, simply understanding what these instruments represent.
Until those interest rate contracts are put up for sale or unwound, we really won't know what they are worth. I'd have to assume that the contracts are for $350 TRILL total value or total risk, otherwise why would the BIS list them as such? The banking system certainly doesn't want to make any entries appear to be more risky than they really are. Until a derivatives expert joins our forum I have to side wit "who brung me to this dance." If you didn't notice, very few bankers publically agree with Sinclair on anything related to derivatives and their risks. Does it mean the majority is correct? To date, how often have the bankers been right about their risks? Their track record...or lack of it....speaks for itself.
Any derivatives traders out there? I did post a link above by Amerman who did spend some time in the deriatives business. His article does hint to some of the exposure.
No matter, we still have $50 TRILLION in credit and default swaps to wade through before tackling the other $350 TRILL in interest rate bets........that is once interest rates finally start heading up. Until then, it doesn't matter.
Another article in apparent disagreement on what notional value means:
Morgan Adds to Derivatives Muscle By Serena Ng and David Reilly Wednesday, March 19, 2008
"The immediate counterparty problem we tried to avert is tabled for now," said Carlos Mendez, a senior managing director at Institutional Credit Partners, a boutique investment firm in New York. "However, widespread credit problems persist, and no solutions are on the table."
With J.P. Morgan Chase & Co.'s rescue of Bear Stearns Cos., a behemoth in the complex world of derivatives trading has become even bigger, and the business is now more concentrated.
J.P. Morgan has a derivatives portfolio that is the largest by far among U.S. commercial banks. At the end of last year, its portfolio hit $77 trillion in "notional value," which is the value of the assets underlying these contracts, according to its regulatory filings.
2. No one and I mean no one, really knows what the underlying value may be. It is all speculation and a game of musical chairs. This has been the machine to pay high dividends until the music stops.
If derivatives are the underlying foundation to the well being of the financial market and its institutions, the we are all in a very great deal of trouble. Even the US Government may not be big enough for a bail out if confidence cracks on these instruments. It is akin to eating the mystery meat at the cafeteria. It is done on the belief that it wont kill you.
For derivatives, notional value is the amount on which interest and other payments are based. Notional value does not change hands; it is simply a quantity used to calculate payments.
Edited to add. There are rare instances in which notional value could change hands, hard to imagine but possible.
Four men decide to have a poker game in a gymnasium and each invites 100 friends.
The Four men each have ten thousand dollars to bet and each place their money on the table. Each player sits down at a four-sided table in the middle of the gym.
Behind each man sits one hundred men and women, and the game begins.
As the game starts a man behind player one leans over to a man behind player three and says, “I will bet you $10 that the guy behind you loses to the guy behind me.
The guy behind player two leans over and says, “I will take half of that bet”
Then six people back behind player number four a lady yells out , “No way the man I am sitting behind will win the bet, and I bet $100 on that”
After the second cards are dealt to the four players at the table, a large cowboy some fifty seats back yells out, “ I think there will be a draw between players three and four and I will bet $1,000.
Suddenly a nerdy looking lady with a calculator says,” call me crazy, but I will bet that the storm outside will cause a power outage and I will bet $10,000 that this game will not finish today”
Within 3 hours of the start of the game there are hundreds of people calling out all kinds of bets, some bet on the players, some bet on the weather effecting the game, some take a percent of other peoples bets, some agree to a penalty or interest if they borrow money to make the bets, some have even moved completely away from the game and are betting on which one of the betters might win or lose the most.
Now the funny thing about this game is that all of the invited guest really did not bring any money. They are all upstanding citizens, and expect everyone in the group to trust that they can pay for their bets, but can they?
Within a very short amount of time is seems that there have been $5,000,000 dollars worth of various wagers from the guests, and the only real cash money in the gym is the $40,000 the players brought, all the rest are derivatives of the original game.
If the game keeps going forever then the entire $5 million, or a large part thereof, might never really have to be paid, but alas no game last forever!
Here's an interest rate swap derivative that supports what Allegri and Higashiyama stated. The leverage in this example is 8:1. So for the $350 TRILL in OTC interest rate contracts it appears to come down to whether the contract buyer gets his interest rate payments from the originator. In this example it's $1.2 MILL based on a notional amount of $10 MILL. It is clear to me in this example that $10 MILL is only a marker and the originator only promises to pay the 8 payments towards $1.2 MILL. If the originator goes belly up like Bear Stearns, then they are out some portion of the $1.2 MILL. Since these swaps can be 5 yrs or longer, that's a lot of quarterly payments to lose. Note that there is pre-payment in this case exactly as opening a savings account.
To be read only by the most insatiable of derivative enthusiasts. But it is a good example to define the process.
Derivatives Implementation Group Statement 133 Implementation Issue No. A23 Title: Definition of a Derivative: Prepaid Interest Rate Swaps Paragraph references: 6, 9, 13 Date cleared by Board: July 30, 2003 Date revision posted to website: February 28, 2007 Affected by: FASB Statement No. 157, Fair Value Measurements Revised September 15, 2006
Note:The guidance in this Issue supersedes the guidance in Statement 133 Implementation Issue No. A9, "Prepaid Interest Rate Swaps."
QUESTION
How does Statement 133 affect the accounting for a prepaid interest rate swap contract?
BACKGROUND
A prepaid interest rate swap contract, as that term is used in this Issue, obligates one party to make periodic payments to another party that are based on a variable interest rate applied to an effective notional amount. It is characterized as an at-the-money interest rate swap contract for which the fixed leg has been fully prepaid, with the result that the party that receives the variable-leg-based payments has no obligation whatsoever to make any future payments under the contract. Under that characterization, the fair value of the fixed leg and the fair value of the variable leg are equal and offsetting because the at-the-money interest rate swap contract has an overall fair value of zero.
The following is an example of a prepaid interest rate swap:
Example 1 Entity A pays $1,228,179 to enter into a prepaid interest rate swap contract that requires the counterparty to make quarterly payments based on a $10,000,000 effective notional amount and a variable interest rate equal to 3-month US$ LIBOR. The prepaid interest rate swap contract is characterized as an at-the-money 2-year, interest rate swap with a $10,000,000 notional amount, a fixed interest rate of 6.65 percent, and a variable interest rate of 3-month US$ LIBOR (that is, the same terms as the swap in Example 5 of Statement 133, which has a zero fair value at inception), for which the fixed leg has been fully prepaid. The amount of $1,228,179 is the present value of the 8 quarterly fixed payments of $166,250 [$10,000,000 × LIBOR swap rate1 of 6.65 percent / 4]; the present value2 is based on the implied spot rate for each of the 8 payment dates under the assumed initial yield curve in that example.
The prepaid interest rate swap contract could also be characterized as a 2-year, structured note ("contract") with a principal amount of $1,228,179 and loan payments based on a formula equal to 8.142 times 3-month US$ LIBOR. (Note that 8.142 = 10,000,000 / 1,228,179.) The terms of the structured note specify no repayment of the principal amount either over the two-year term of the structured note or at the end of its term. The 8.142 leverage factor causes the effective notional amountof the structured note also to be $10,000,000, pursuant to footnote * to paragraph 8, as amended by FASB Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
_____________________ 1The LIBOR swap rate is defined in paragraph 540 of Statement 133 (as amended) as follows:
The fixed rate on a single-currency, constant-notional interest rate swap that has its floating-rate leg referenced to the London Interbank Offered Rate (LIBOR) with no additional spread over LIBOR on that floating-rate leg. That fixed rate is the derived rate that would result in the swap having a zero fair value at inception because the present value of fixed cash flows, based on that rate, equate to the present value of the floating cash flows. 2The examples in this Issue assume both parties to the contract have the same AA credit rating. If the party that is obligated to make the variable payments has a different credit rating (such as BBB), the effect of that different creditworthiness should be reflected in the discount rate used to determine the present value of the amounts payable by that party under the contract.
The prepaid interest rate swap contract meets the characteristic of a derivative in paragraph 6(a) of Statement 133 because it has an underlying and an effective notional amount. It also meets the characteristic of a derivative in paragraph 6(c) of Statement 133 because neither party is required to deliver an asset that is associated with the underlying and that has a principal amount, stated amount, face value, number of shares, or other denomination that is equal to the notional amount (refer to paragraph 9(a)). At issue is whether the prepaid interest rate swap contract meets the characteristic of a derivative described in paragraphs 6(b) and 8 related to the initial net investment in a contract.
Interesting that in this example you give up $1.23 MILL in prepayment to get $1.33 MILL back in 2 years assuming the party doesn't default first Isn't this akin to Wimpy asking if I can give you $2 next Tuesday for your hamburger today?
Wouldn't it be safer to stick it into FDIC insured CD's? Sure but you wouldn't get the higher interest rates.
Credit Default Swaps and CDO's are next but they are far more complicated.
Morgan Stanley and Goldman Sachs Group Inc. said yesterday that they borrowed to "test'' the new (FED) lending facility, while Lehman Brothers Holdings Inc.'s financial chief said the company was using the facility to "show some leadership.'' The Fed report today showed that the lending averaged $13.4 billion in the week ended yesterday. Isn't this positive spin just wonderful? Will these "loans" ever be repaid and with interest or just rolled over every 28 days for the next 10 years?.....can I test this out at my local bank to show some "leadership" too?
It is like when you go into the hospital and evey doctor that has ever worked in that hospital sends you a bill...for a piece of the pie!! Everyone wages a bet against the bet! In the end Who is resposible for it! So they just shove it under the rug until one day someone trips and breaks their neck and has to be taken to the horsepital and it start all over again.
A couple of days ago there was an interesting interview(in the LA Times) with the ass't Secratary of the Treasury(name unpronouncable) of Japan during the Yen crisis.
He suspects that the yen may go well above 80/dollar and Japan's core industrial companies will not be adversely effected.
I wish I could reprint the article but I do not have permission.
"Behind the curve" is how he described our FED and suggessted they DO MORE----------(((((((((NOW)))))))).
He recalled that in Japan...............they found that whatever they did.............it wasn't enough and it wasn't fast enough. I got the impression that he would support the recent FED actions.
4. Federal purchase of mortgages to go hand in hand with regulation of mortgage qualifying requirement.
5..Cease the outsourcing of military servicing such as food, water purification construction of military bases or transfortation within combat zones.
6. Cancel the NAFTA Corridor from Mexico thru Texas
7.Renegotiate International trade compacts in order to protect the US Consumer and American Labor.
8. Outlaw the importation of foods, food ingredients, medicinals, ingredients or precursers of prescriptions or OTC products from countries that do not meet the strict USA standards.Further, preclude the importation of above items that are assembles, packaged or produced in foreign factories that do not meet the standards of the USA.
9. All essential parts or finished items for military use, shall be produced and assembled in factories owned and operated in America by American Companies.
10. Increase the size and budget of the FDA to adequately perform its duty to protect the American Public. The director should be appointed thru Civil Service rather then thru political appointment.
11. Give tax breaks to all companies that operate factories that produce, fabricate, assemble and sell services or products in America by American labor.
12. close tax loopholes for companies that utilize offshore banks and headquarters in order to avoid or reduce taxation.
13. Strengthen regulation that prohibits foreign control of air and seaports , critical electronic and computer companies or other such companies essential to National security.
4. Federal purchase of mortgages to go hand in hand with regulation of mortgage qualifying requirement.
5..Cease the outsourcing of military servicing such as food, water purification construction of military bases or transfortation within combat zones.
6. Cancel the NAFTA Corridor from Mexico thru Texas
7.Renegotiate International trade compacts in order to protect the US Consumer and American Labor.
8. Outlaw the importation of foods, food ingredients, medicinals, ingredients or precursers of prescriptions or OTC products from countries that do not meet the strict USA standards.Further, preclude the importation of above items that are assembles, packaged or produced in foreign factories that do not meet the standards of the USA.
9. All essential parts or finished items for military use, shall be produced and assembled in factories owned and operated in America by American Companies.
10. Increase the size and budget of the FDA to adequately perform its duty to protect the American Public. The director should be appointed thru Civil Service rather then thru political appointment.
11. Give tax breaks to all companies that operate factories that produce, fabricate, assemble and sell services or products in America by American labor.
12. close tax loopholes for companies that utilize offshore banks and headquarters in order to avoid or reduce taxation.
13. Strengthen regulation that prohibits foreign control of air and seaports , critical electronic and computer companies or other such companies essential to National security. >>
Perhaps we can have a "patriotic youth group" advise the police on any Parent who seems "suspicious" too? They could wear little insignia's or armbands indicating they've completed a course in this patriotism. Parents can have ( some already do ) bumper stickers that state "Proud parent of a patriotic corp course ".
Sorry but whenever I see words like "outlaw this ) or that, these are the kinds of things that come to mind although I WILL agree that socialism should be outlawed. Only trouble with that is most Americans subscribe to that idea and actually whine and snivel for more and more of it so I don't think it's a possibility at this point
A great deal of what's wrong will straighten itself out if we allow it.
There might need to be federal action required to limit the ability of corporate officers to raid the till. There certainly is federal action needed to stop companies from putting themselves out of business for profit. Most of what's needed in terms of change in course is to enforce the laws; especially laws against colusion and price fixing. There is no earthly reason that large parts of the sale of every new car should go to Madison Avenue and sports stars.
The feds need to step in and see what's going on with the financial regulators. There needs to be an unwinding of many of the new instruments and their derivatives. There are areas where heads should roll, and mostly this is about enforcing law not writing new law.
If they do want to write some new laws then the place to start is waste. There are huge amounts of waste built into most of our systems. There is no accountability and no responsibility. Millions are spent for equipment that isn't tended. It's easier to ignore something than to have anyone responsible for it.
Comments
siliconvalleycoins.com
As shown below, the average cost of a home nationwide dropped 52% from 1930 to 1935, and it took 18 years to fully recover. It's also interesting that average wages dropped 21% from 1930 to 1933, then steadily increased. And the cost of a gallon of gasoline never dropped, but held steady for ten years and then increased 60% over the next nine years.
Feds & Real Estate: What Did I Just Read?
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
1. I am refinancing my mortgage
and taking money out.
2. By stretching out a 15 year mortgage
to a 30 year mortgage, I will increase cash
flow 800 dollars a month to be put in savings.
3. Will place it in FDIC short term
CDs.
4. At the proper time ,I will place a
big chunk of it in Vanguard, spread
in Mid, small cap , overseas, emerging
markets and Windsor II. Perhaps some REITS.
5. Thinned out my So Called Dollars and
keeping the most valuable and nicest ones
4. Have bought some really super type coins
that I will leave to my estate.
5. Will hunker down until things settle down
a bit. No body really knows just how long that
may be.
Camelot
Although things are a bit messy, the markets will ultimately right themselves. They are likely far more resilient than the extreme pessimists understand.
Two questions -- one rather specific, and one more conceptual.
(1) When you say that equities are massively overpriced -- how do you define massively? 50 %? More than this? Although quite a few financial firms are in fact highly leveraged, the average corporation is not. The leverage in the financial sector has not tremendously affected equity prices (as, for example, in Japan in the late 1980s). Equity prices seem to be returning to historical norms. From here, it is easy to imagine, for example, a 20 % further drop in prices, but at this point equities by almost any measure would start to look cheap. It is hard to view this as massively overpriced.
(2) What do you see as the mechanism that takes us from the severe inflation you envision, to depression.
Thanks John,
Sinclair keeps saying that the juniors are the place to be the next couple of years, and even says he has $23 million in one junior, but never says which one.
He says the GDX stocks are way over valued as the big funds are loaded up in those, and that many of the juniors will be take over targets, and good movers, as the bull gets back into action.
It looks like you have been doing your homework in this area, which of the above are your favorites?
Personally I am just keeping my long positions in my favorite stocks and riding the down trends, without selling, trying to add some in the dips. This market is so volatile I do not want to be trying to trade bottoms and tops, and get caught out of the market with a move up. I am trying to pick up a few bucks buying calls in GDX, PAAS, GFI, and some of the larger companies on the dips, and selling once they move, that seems to work well, but the PE’S are very high in these bigger companies and I think Jim is right on the juniors.
These big drops in shares make all of us in these markets a little nervous, but every time there is one of these moves down I ask myself, WHAT HAS CHANGED? Since we started this thread everything has continued to deteriorate, and nothing has changed this week, so there is no reason to sell off our good holdings, either in shares, coins, or PM’S in hand.
The mind is a funny creature, when the price is high we wish we had bought more, but when the price falls, we wish we had sold, HA HA
<< <i>(1) When you say that equities are massively overpriced -- how do you define massively? 50 %? More than this? Although quite a few financial firms are in fact highly leveraged, the average corporation is not. The leverage in the financial sector has not tremendously affected equity prices (as, for example, in Japan in the late 1980s). Equity prices seem to be returning to historical norms. From here, it is easy to imagine, for example, a 20 % further drop in prices, but at this point equities by almost any measure would start to look cheap. It is hard to view this as massively overpriced. >>
I would say conservatively they are 25% overpriced right now. Here is where we disagree. You think prices are returning to historical norms. I dont think so. What are you measuring your norms by? P/E is the best and they are not at norms. Getting better based on stock prices, but wait until the earnings for Q1 come out.
You also dont think that leverage has affected stock prices. When banks and hedge funds with combined trillions of dollars are leveraged on AVERAGE 20:1 all the way up to 32:1, that is going to artificially raise stock prices. That is why they can control prices with massive buys or with massive shorts. The black boxes run this market and trust me, they are overvalued.
As far as the mechanism that will go from hyperinflationary to deflationary? I think most necessities will be inflationary, especially energy due to fed intervention and world demand. Energy adds inflation to everything. It will get to the point that all income goes to shelter/food/water/energy. There wont be anything left for the massive consumption we have had in this country the last 20 years. That will of course be deflationary. No growth. I think that the jury is still out on how this could happen. I am not saying it has to happen either. But it is an election year, and politicians want votes....they will have their hands in everything...and it isnt going to improve our chances.
GS,
My favority juniors are ECU and GBN. I also like the potential for RR and Tyhee. They are all risky bets however. Rainy River I got in at 4.4$...sold at 5$. Got in at 4.75$ and am now waiting for it come back up. It was at 5.5 or a bit more for a while. GBN really looks to be taking off. I have been trading lots of 1000 shares. Trading ranges of 3.25 to 3.75$ allow for easy pick off moves. I have always kept my core though.
John
siliconvalleycoins.com
I read and analyze with about the same frequency you do, several hours per day on average, with half of that on weekends. Been doing that since late 2002. I'm happy if I can take a position on major moves and ride the wave. Like you I also just started dabbling in metal stocks in a trading account. My 401K has had 50% metal stocks in it since 2004. On Monday I get to deploy fresh funds into beat back miner stocks. In summation, I doubt I can offer any different insights than you have already discussed. The Armagedon deflationist that you subscribe too sure has one end of the spectrum covered. That depresses even me! But he balances off the hyper-inflationist types that are predicting $6000+ gold. The truth should be somewhere in between as Sinclair and Puplava call it. This commodities bull has to run its course. And to those that think it just completed the run....what was just fixed in the credit and housing markets to end the run?? More easy credit? Lower interest rates?
Will this market right itself? Not likely. The FED and Friends (or Fiends?) have their hands full juggling all the various credit and debt issues. It is an unsolvable problem - all $550 TRILLION of it. The vast majority of banks in the country have some exposure to it. Even my local bank has $55 MILL of OTC risk at about a 5% ratio to
$2.5 BILL in assets (all OTC interest rate contracts). Without FED monopoly money intervention the banking mechanism would have already ceased to function. BSC was just the first shot on goal and the first save. Many more to come. But the problem was just shifted to another bank (JPM) where all the risk still exists. JPM "improved" their 55:1 leverage to 65:1 with the BSC pickup (figure $14 TRILL of derivatives leveraged against $1.5 BILL in assets...ie their building). This was not much different than BOA taking on insolvent Country Wide to cancel out each others OTC-D risk. The sheeple felt that the FED saved the day this past week, they only prolonged the pain. The system cannot right itself. The FED's only recourse is to shift and mask the problem to give as many banks and brokerages the time to bail out as many of their assets as they can. In the meantime, these monopoly money infusions are the final mechanism of a large inflation. The previous 12 years of 10-15% M3 increases have already gotten the ball rolling around the world. But that was only the appetizer. The Dow/gold chart shows the way to the future. Until that is broken, we are headed to 1:1 Dow/gold. Somewhere between $2000 dow/$2000 gold or $10,000 Dow/$10,000 gold is where it ends. It didn't just end at a 12:1 ratio this past weekend (now at 13:1). Following the inflationary push by the FED and Co., comes the final deflationary act. Whether that's a Great Depression 2, a Japanese 20 year deflation, or a severe multi-year recession remains to be seen. Cash and other basic assets survive in all of those scenarios. I'm not sure why many do not think gold or silver survive as well. After all, you can't eat them. Likewise you can't eat wood, small arms, bullets, dirt, copper, or oil either. Wheat, sugar, coffee, soybeans, and pork bellies you can eat. Bon appetit.
Referencing Japan's 1980's inflation/deflation woes is not comparable to today's situation because since then banks have leveraged up another factor of 10-50X. OTC Derivatives were essentially non-existant in size in the late 1980's. Even by 2002 the total derivatives market was only around $150 TRILL. Today's $550 TRILL gorilla looms large over the market. That's the mechanism that trumps everything. The relatively few banks /brokerages that hold 90% of these derivatives trump the 1,000's of legit companies who are light on derivatives. No matter, the liquidity issues connect them all together. Insolvent big banks will affect everyone along the food chain. Nothing beats a trump card.
Sinclair's $23 MILLION in junior mining companies is probably mostly represented by his own stake in Tan Range (TRE) of which he is CEO. Makes sense to me that he is investing his own blood in the company he believes in. Nothing better than to have 1st hand knowledge of all aspects of an operation. He might have some other holdings in other juniors but he has publically mentioned putting a million or more at times into his company. It did pretty well on price increases on the final stage of this gold top.
Nothing has changed. Other banks are primed to fail. The FED is trying to keep a wrap on this through November 2008. JP6 reads the news after each FED intervention and thinks, "yup that was it, the FED just saved the day and we are headed back to prosperity." And each time J6P fails to realize that he's been scammed each time this happens. The big banks force a rally and get out quick pocketing their billions. J6P is left to pick up the pieces and wait for the next rally to buy into. And it does make sense that the FED has to try and bring this King Kong-sized beast slowly down over several years. No one wants an overnight destruction of the markets. But in the end it's all chump change. The $550 TRILL is not going away and if anything it's still only increasing. What's the difference if you bet the financial world on $550 TRILL or $1000 TRILL. You can only destroy it one time....and $20-$50 TRILL in losses is probably all the ammo you need. This is why it is different this time and no FED/PPT bail out can ultimately succeed. Or as "Dalton" says in roadhouse: "For now, be nice.....until it's not time to be nice." In other words inflate....until it's not time to inflate (ie deflate).
FDIC Uniform Bank Performance Report (UBPR) - off balance sheet items - pg 5/5a
roadrunner
<< <i>Equity prices seem to be returning to historical norms. From here, it is easy to imagine, for example, a 20 % further drop in prices, but at this point equities by almost any measure would start to look cheap. It is hard to view this as massively overpriced. >>
For sure, equity prices aren't nearly as bloated as they were in early 2000. Anyone who thought such valuations were sustainable, IMO, needed a reality check. While I don't think stocks are massively overvalued -- I think they are close to fair value if a tad on the high side historically -- markets tend to overcorrect to the upside and the downside due to the twin emotions of greed and fear.
As a result, it wouldn't surprise me to see a market which may be 10-20% overvalued panic down to 20-30% undervalued. At that point, depending on the circumstances which triggered the selloff, it could be a fantastic time to buy unless you're wearing a tinfoil hat.
Nevertheless, I personally think we're entering a period where the markets are going to be volatile and mostly rangebound. As a result the recent bear market could give way to a "stock picker's market" where the market overall may run in place, but there will still be plenty of individual winners and losers. I have no reason other than gut feeling and observation of recent action to suspect this, as I'm not axactly a market gooroo. But I can guarantee that stocks will be lower on Monday. Unless they rise or finish the day mostly flat to mixed.
You have all your eggs in one basket. That is OK just make sure you watch that basket. Everyone keeps saying prices are going higher and higher, while that may be true over some time, it is never true over the long haul, and in many cases equity prices reflect expectations of the business environment 2 years out. Since no one can predict the future, be careful in any crystal ball theories.
This is going to be inflationary as Chindia is like a crack addict when it comes to oil. They want more and more and more
This is true to a point. But remember the costs to them will be greater also and they WILL slow down. Case in point is Cisco Systems. There busines is bigger than it was in 2000 yet the stock is trading at 80% of its value 8 years ago. Everything the analysts said about the internet 10 years ago has come true, yet not many have profited from it. There is no doubt that China and India will grow, but expections may already be reflected.
We already have the technology to be energy independant, it just takes a few politicians will balls to make it happen. IMHO, we could cure all our ills by building 300 coal gasification plants in the USA. This would put millions of people to work, increase tax receipts, and free monetary rescources to meet our entitlements.
The most important thing to remember is "The best cure for high prices is high prices". After a time the high costs of doing business kills business. Inflation in equities was defeated in 2000, inflation in real estate was defeated in 2006, and inflation in fertilizer, copper, aluminum, et al, will also be defeated in time. The precious metals are a different beast as they play into emotion more than economics, but a company like FCX could see all its profits from mining gold evaporate into the losses they suffer from mining copper. These companies--especially fertilizer-- in many instances are priced to perfection. And unfortunately we live in an imperfect world.
Knowledge is the enemy of fear
We are living below our means but suffering as those around us that have conspicuous consumption. Where they get it from is a bit of a mystery.
Turn off lights you are not using. Unplug all of your TVs other type electronics as they draw power even when you are not using them.
Insulate your home. Check for any leaks.
Stay aware. Shop at Costco, BJ's or other type markets.
Buy things on sale and store.
Be prepared.
Keep flashlights next to every bed, batteries, candles, water, wood to burn in fireplace. Don't be wasteful.
I also do not fully understand the unlimited? borrowing machine the FED is now giving to the financial organization. Just where is this money coming from?? Does it make the problem of the bad real estate loans go away?? Is the FED just printing the money to demand?? The financials are borrowing an average of 13.4 BILLION daily during this past week. Goldman Sachs, Lehman Brothers, Morgan Stanley. And what kind of position is JPMorgan Chase now in with the bad Bear Stearns paper?
FED loan machine
I'm not sure what the $550 trillion figure represents -- can you give a fairly precise definition, with some breakdown by category? Most derivative securities have a legitimate purpose. If two parties enter into an interest rate swap, some notional amount of derivative securities has increased, but this has no impact on the overall leverage in the system. In fact, in many cases, the overall risk profile of the system will decrease.
Regarding gold to Dow ratios, presumably over time the ratio of the price of gold to the Dow will decrease, since gold reflects the price of "real" money, and the Dow should correlate with the size of the real economy. Going back to 1790 (and almost certainly to Colonial times), there has been no seven year period when real GDP did not increase. When you are projecting gold to Dow ratios, I assume you are factoring in GDP growth?
(Regarding investments -- if equities drop by more than 20 % -- certainly possible, I will be a major buyer. I suspect this would also be true of others with cash -- the market certainly has a floor not much below that. )
roadrunner
I agree, and am more than ready to take my eggs out and put them elsewhere if the times change. I must say that I am quite happy (so far) that my eggs are in this basket. A mixed basket would have you in negative territory right now...and with more to go.
In "free markets" I agree with your inflation arguement. Keep in mind that China is still communist. Prices might slow them down, but their gov will play with prices and subsidize (sic). Demand will remain.
Not to mention that the have 1.3 billion people. If those people lived even 1 tenth as well as us, demand would be through the roof.
China is going through an industrial revolution as is India and to a lesser extent the maritime continent and IndoChina. I would argue that you are thinking very domestically....when we are now fully global. The rest of the world will not give the U.S. a break. We become less and less important economically because we are not the industrial giant we once were! We are the consumer!! We are the debtor...we just happen to have large guns.
I was reading Proverbs this morning. A couple of verses struck me as being very relevant to our current situation.
Proverbs 22:7 -- The rich rule over the poor, and the borrower is servant to the lender.
Proverbs 22:22-23 -- Do not exploit the poor because they are poor and do not crush the needy in court,
for the LORD will take up their case and will plunder those who plunder them.
Christian or not, this is wisdom... many Americans, politicians and Helicopter Ben should take heed.
John
siliconvalleycoins.com
<< <i>The world’s largest gold producer, Barrick Gold, will invest a record $10-billion in new mines during the next five to seven years amid record gold prices, CEO Gregory Wilkins estimates. >>
<< <i>TextBarrick is developing projects in countries including Tanzania and Argentina and is studying the viability of others in South Africa and the US. >>
That's the banker's biased definition of what is supposed to happen, yet most have no clue how derivatives work or how to value them. They created them, sliced them up, and sold them as caviar to other banks and funds who did not understand them. Goldman understood them enough to short mortgage derivatives in 2007. Nice move GS! Even Bernanke needed a crash course from his bank buds on how this game is played by the pros. Using JPM as an example. They just ate $14 TRILL of BSC's derivative book to take them to $91 TRILLION total. Of that, about 2/3 are interest rate based. You tell me why you need over $50 TRILL in interest rate O-T-C contracts with other players when you only own < $2 TRILLION in real assets (65:1 leverage)? The Bank for International Settlements breaks down these numbers further and by bank. Notional amount is the amount owed if the deal goes sour and the loser cannot pay up. On a $1 BILL contract, JPM would be stiffed by that amount if say BSC owed them that money. Hence, a good reason to buy BSC and continue the fantasy that OTC derivatives are sound investment practice. How many of those bad BSC TRILLIONs were with the other leading banks? With JPM holding about 15% of world wide derivatives, they don't want anyone thinking those could be at risk of default. With $550 TRILL in total derivatives contracts out there, who will pay on them if even 10% of them fail? Or 5%? What if they all take a 20-30% haircut? Bottom line, that $550 TRILL represents the full value of those formerly rated AAA contracts assuming the counterparties go under and cannot pay. I don't know if they are legitimate. I believe they were written to make obscene commissions for the brokers and high % returns for the buyers. None of them ever gave thought to actually having to perform on them. A lot of these have 3 to 5+ year lives. The money was too easy to take w/o thinking of the consequences. And if the investor is getting 8-12% interest on an illiquid asset he's not going to complain until it's time to sell that asset into a market where no one knows what's it's worth, or wants it.
Regarding gold to Dow ratios, presumably over time the ratio of the price of gold to the Dow will decrease, since gold reflects the price of "real" money, and the Dow should correlate with the size of the real economy. Going back to 1790 (and almost certainly to Colonial times), there has been no seven year period when real GDP did not increase. When you are projecting gold to Dow ratios, I assume you are factoring in GDP growth?
1790? The world changed in 1913 when the FED got the reigns of the world economy. From then on gold and how it has reacted has changed. And in 1974 it changed for good. Can't compare 1790 gold money with 2008 fiat money. Our experiment is just 34 years old now. The final chapters are not yet written. We've only had 2 full chapters so far: 1. Equities languish, gold and commodities fly 2. Equities fly for 30 years 3. (in progress) Equities sink and commodities fly. Not a whole lot of history here to bank on.
Forget GDP growth based on the stats posted. The rate of inflation is critical to that calculation so if that's not right, then neither is GDP. To me, GDP is already a net negative, no growth in the overall economy. Whether this continues for a total of 7 yrs remains to be seen. The President doesn't want his constituents to see a negative GDP, large CPI, nor negative jobs growth. Like Clinton and Rubin did, I'd see the logic with cooking the books to keep foreign investors on board. What worked for Bill works just as well for W.
Not sure if there is a true floor under any market these days. We are in unchartered waters....and the S.S. Minnow appears lost. But Skipper Ben and Gilligan Paulson are still at the helm guiding her out of the storm.
roadrunner
Reasonable strategy. You can probably assume that the managers at those banks and brokerages are reaching for the pull ring as well.
Now I'm sorry but I saw on one guys website, 1799 Eagles in AU-55 for $27,500.00. Hahahaha.
Sorry, I can't continue this post.....................
Hahahahahahahahaha I'm losing it. Hahahahaha
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
That's the kind of talk I'd expect them to make to keep the money flowing in. With the escalating costs of mining today I'd think Barrick's efforts will be in acquiring worthwhile junior and exploration companies as they come in. This puts more of the risk on the other guy. I don't see too many of the big gold producers out there finding mines. The political environments around the world are risky at best (sovereign takeovers and inconsistent permitting). We already have most of the mines with us today when this gold market eventually peaks considering it takes 5-10 years to bring a fresh mine to market. Record gold prices in 5-7 years? That's a big risk, even for Barrick which has Saudi oil and the Bush/Carlyle group behind them.
Jim Halperin called the peak of the coin market in 1980 and got his rare coin fund to market before the whole thing imploded. James Sinclair sold all his gold at $850+ in 1980 and got out of the gold market for decades. A pair of good calls indeed.
roadrunner
"contact" with CU...
i will go back and digest all of it starting with yesterday evening...
here is something about the Olympics....and the problems which may happen....this may have world repercussions, or just a blip, I haven't a clue but it is something to consider in a world market econonmy (IHO)
http://finance.sympatico.msn.ca/investing/jimjubak/article.aspx?cp-documentid=6535423
There you go 57loaded. An interesting read.
From Peter Schiff of Euro Pacific Capital....pigs with lipstick exit strategy:
In the early stages of the biggest credit crunch in U.S. history, buying shares in Visa, a company that derives its revenues based on transaction fees from credit card purchases, qualifies as a particularly ill- timed investment. Perhaps buyers of these shares didn’t get the memo, but the days of Americans using credit cards to buy products they cannot afford are about to come to an end. For all its flaws, Wall Street does possess an extraordinary ability to apply lipstick on any pig. For the formerly private owners of Visa, this is perhaps one the best exit strategies ever engineered, on par with the Hail Mary orchestrated by Blackstone last year (shares of Blackstone are now trading for half their IPO price).
From Daniel Amerman, CFA on Financial Sense:
First, you need to very seriously think about cutting your ownership of financial assets. The type of disaster scenario we are talking about could devastate stock and bond markets for a generation. If you are investing for retirement and your portfolio gets taken down by just such a scenario, then you may never have the chance to replace it. For these reasons, there is a powerful, powerful case for moving a substantial portion of your assets into tangible assets. Good examples of tangible assets include gold, silver, commodities, real estate, farmland and energy.
A CFA and former banker advocating gold and silver? What's the world coming to? Can't he lose his certification?
Amerman link - subprime is just getting started - you do the math
roadrunner
The expectation built into the market now is that the Fed will finance the major banks' mismanagement until it is no longer necessary to do so.
I am having trouble making a comparison of today's situation vs. 1929. Regarding the possibility of deflation, one question:
In order to keep the banks afloat, I see the Fed continuing to create more money and credit, in spite of the Bear Stearns debacle. How can deflation occur when so many dollars are already out there, and more to come?
In order for cash to go up, everything else must go down. During the depression, everything went down due to lack of demand. We now have that occuring in housing. What other dynamics must occur in order to make cash the preferred investment vehicle? I still don't see it. What I do see is hyperstagflation - until the Fed stance changes.
What say you? (whoops, that was several questions)
I knew it would happen.
<< <i>seems every one of these advice givers are ignoring the fact that multiple financial organizations are on the brink of going under. So to me, these are not 'normal' times, and 'normal' expectations cannot be relied upon.
The expectation built into the market now is that the Fed will finance the major banks' mismanagement until it is no longer necessary to do so.
I am having trouble making a comparison of today's situation vs. 1929. Regarding the possibility of deflation, one question:
In order to keep the banks afloat, I see the Fed continuing to create more money and credit, in spite of the Bear Stearns debacle. How can deflation occur when so many dollars are already out there, and more to come?
Nobody understands derivatives but it is logical to assume that for every dollar
lost that there was a dollar made. Yes, the FED will support the banks and their
idiot losses and their overpaid CEO's and CPA's but the huge profits are out there
somewhere (first place to look might be the aforementioned foreign bank accounts).
No matter how you cut it all the money going into the market is new money and is
inflationary.
Regarding "Notional amount is the amount owed if the deal goes sour and the loser cannot pay up." This is not correct. The notional amount is far greater than the amount that would be owed if a deal goes soar. A few examples:
(1) If I write new call options on 100 shares of stock with a strike price of 100, the notional amount is 10,000, but the amount at risk depends only on the difference between the strike price and the actual price. Many options expire with no value. The risk is only a fraction of the notional amount.
(2) In an interest rate swap, the notional amount is based on the principal amount of the instruments, but the risk depends on the difference between the rates being "swapped" -- again, only a tiny fraction of the notional amount.
(3) For some derivative securities, such as CMOs backed by a portfolio of good quality mortgages (ie, most mortgages, in spite of the sub prime publicity), the notional amount would be the amount at risk if there were no collateral. However, the amount at risk needs to be reduced by the collateral (net of expense), and the loss that will be incurred in reality is the default rate times this amount.
The bottom line -- if the $ 550 trillion figure often quoted here is the notional amount on US (or global) derivative securities, the amount at risk is a small fraction of this (eg - 1 %), and the expected loss is this amount at risk, times the probability that a loss reallt occurs. So, even in a severe situation, the loss we would be seeing would be measured in basis points times $ 550 trillion, not major portions thereof.
Again, that's the banker's definition and their calculations, not worst case, and we are indeed heading towards worse cases. The banks want to think that the amount at risk is only a fraction of the notional amount. And what are their possibilities of a loss....<1% more than likely. In this environment it's probably closer to 100% than it is to 1%, and with losses starting at 20% of that 100%. Sinclair has already pegged the number in the starting gate at $20 TRILLION (just for credit and default derivatives...there's another $350 TRILL in interest rate derivatives sitting behind those). He's being kind just as he does when he states $1650 gold is in the bank. Not being an expert in derivatives, I'd defer to his estimate. Since JS constantly states that notional amount is contractual amount in the event the loser goes belly up. I defer to his wisdom. Personally, I cannot fathom why $550 TRILL of anything dollar related is under contract. If we were discussing the number of grains of sand on a beach, this number would make more sense.
Derivative Characteristics (from the Jim Sinclair web site)
Behind the curtain of silence the sub prime loan problem, better described as a global meltdown of credit and default derivatives, continues. The reason for this condition is an attempt to value that for which there is no value. It is spreading globally as you have seen.
Keep in mind that over the counter derivatives generally have the following characteristics:
-Without regulation.
-Without listing on public exchanges.
-Without standards.
-Therefore not in the least bit transparent.
-Therefore without an open market of the bid/ask type.
-Dealt in by private treaty negotiations.
-Without a clearinghouse.
-Unfunded without financial guarantee of any kind.
-Functioning as contracts of specific performance.
-Financial character or ability to perform is totally dependent on
the balance sheet of the loser in the arrangement.
-Evaluated by computer assumptions made by geek, non market
experienced mathematicians who assume religiously that all
markets return to their normal relationships regardless of
disruptions.
-Now in the credit and default category alone considered by
accepted authorities as totaling more than USD$20 trillion in
notional value.
-Notional value becomes REAL VALUE when the agreement is forced to find a real market for ending the obligation which is how one says sell it. ......this is what the bankers don't count on. Hence basis points become real dollar losses. As long as they sit on the books, basis points apply.
roadrunner
...here in the Seattle area where housing prices have remained strong (not AS strong as a few years ago but still strong), I don't know if we're smoking crack or what? Quite possibly!
It may be hard to know if the risk is near 50 bp, or nearer 200 bp -- both it is no where near 100 % -- this is not banker speak, simply understanding what these instruments represent.
Until those interest rate contracts are put up for sale or unwound, we really won't know what they are worth. I'd have to assume that the contracts are for $350 TRILL total value or total risk, otherwise why would the BIS list them as such? The banking system certainly doesn't want to make any entries appear to be more risky than they really are. Until a derivatives expert joins our forum I have to side wit "who brung me to this dance." If you didn't notice, very few bankers publically agree with Sinclair on anything related to derivatives and their risks. Does it mean the majority is correct? To date, how often have the bankers been right about their risks?
Their track record...or lack of it....speaks for itself.
Any derivatives traders out there? I did post a link above by Amerman who did spend some time in the deriatives business. His article does hint to some of the exposure.
No matter, we still have $50 TRILLION in credit and default swaps to wade through before tackling the other $350 TRILL in interest rate bets........that is once interest rates finally start heading up. Until then, it doesn't matter.
Another article in apparent disagreement on what notional value means:
Morgan Adds to Derivatives Muscle
By Serena Ng and David Reilly
Wednesday, March 19, 2008
"The immediate counterparty problem we tried to avert is tabled for now," said Carlos Mendez, a senior managing director at Institutional Credit Partners, a boutique investment firm in New York. "However, widespread credit problems persist, and no solutions are on the table."
With J.P. Morgan Chase & Co.'s rescue of Bear Stearns Cos., a behemoth in the complex world of derivatives trading has become even bigger, and the business is now more concentrated.
J.P. Morgan has a derivatives portfolio that is the largest by far among U.S. commercial banks. At the end of last year, its portfolio hit $77 trillion in "notional value," which is the value of the assets underlying these contracts, according to its regulatory filings.
roadrunner
1. They are leveraged out to 100X or more times.
2. No one and I mean no one, really knows what
the underlying value may be. It is all speculation
and a game of musical chairs. This has been the
machine to pay high dividends until the music stops.
If derivatives are the underlying foundation to the well
being of the financial market and its institutions, the we
are all in a very great deal of trouble. Even the US Government
may not be big enough for a bail out if confidence cracks
on these instruments. It is akin to eating the mystery meat at
the cafeteria. It is done on the belief that it wont kill you.
Camelot
Edited to add. There are rare instances in which notional value could change hands, hard to imagine but possible.
The Texas explanation of the derivatives market!
Four men decide to have a poker game in a gymnasium and each invites 100 friends.
The Four men each have ten thousand dollars to bet and each place their money on the table. Each player sits down at a four-sided table in the middle of the gym.
Behind each man sits one hundred men and women, and the game begins.
As the game starts a man behind player one leans over to a man behind player three and says, “I will bet you $10 that the guy behind you loses to the guy behind me.
The guy behind player two leans over and says, “I will take half of that bet”
Then six people back behind player number four a lady yells out , “No way the man I am sitting behind will win the bet, and I bet $100 on that”
After the second cards are dealt to the four players at the table, a large cowboy some fifty seats back yells out, “ I think there will be a draw between players three and four and I will bet $1,000.
Suddenly a nerdy looking lady with a calculator says,” call me crazy, but I will bet that the storm outside will cause a power outage and I will bet $10,000 that this game will not finish today”
Within 3 hours of the start of the game there are hundreds of people calling out all kinds of bets, some bet on the players, some bet on the weather effecting the game, some take a percent of other peoples bets, some agree to a penalty or interest if they borrow money to make the bets, some have even moved completely away from the game and are betting on which one of the betters might win or lose the most.
Now the funny thing about this game is that all of the invited guest really did not bring any money. They are all upstanding citizens, and expect everyone in the group to trust that they can pay for their bets, but can they?
Within a very short amount of time is seems that there have been $5,000,000 dollars worth of various wagers from the guests, and the only real cash money in the gym is the $40,000 the players brought, all the rest are derivatives of the original game.
If the game keeps going forever then the entire $5 million, or a large part thereof, might never really have to be paid, but alas no game last forever!
of the derivative game, that I have ever read.
Well done!
Camelot
I knew it would happen.
To be read only by the most insatiable of derivative enthusiasts. But it is a good example to define the process.
Derivatives Implementation Group
Statement 133 Implementation Issue No. A23
Title: Definition of a Derivative: Prepaid Interest Rate Swaps
Paragraph references:
6, 9, 13
Date cleared by Board: July 30, 2003
Date revision posted to website: February 28, 2007
Affected by: FASB Statement No. 157, Fair Value Measurements
Revised September 15, 2006
Note:The guidance in this Issue supersedes the guidance in Statement 133 Implementation Issue No. A9, "Prepaid Interest Rate Swaps."
QUESTION
How does Statement 133 affect the accounting for a prepaid interest rate swap contract?
BACKGROUND
A prepaid interest rate swap contract, as that term is used in this Issue, obligates one party to make periodic payments to another party that are based on a variable interest rate applied to an effective notional amount. It is characterized as an at-the-money interest rate swap contract for which the fixed leg has been fully prepaid, with the result that the party that receives the variable-leg-based payments has no obligation whatsoever to make any future payments under the contract. Under that characterization, the fair value of the fixed leg and the fair value of the variable leg are equal and offsetting because the at-the-money interest rate swap contract has an overall fair value of zero.
The following is an example of a prepaid interest rate swap:
Example 1
Entity A pays $1,228,179 to enter into a prepaid interest rate swap contract that requires the counterparty to make quarterly payments based on a $10,000,000 effective notional amount and a variable interest rate equal to 3-month US$ LIBOR. The prepaid interest rate swap contract is characterized as an at-the-money 2-year, interest rate swap with a $10,000,000 notional amount, a fixed interest rate of 6.65 percent, and a variable interest rate of 3-month US$ LIBOR (that is, the same terms as the swap in Example 5 of Statement 133, which has a zero fair value at inception), for which the fixed leg has been fully prepaid. The amount of $1,228,179 is the present value of the 8 quarterly fixed payments of $166,250 [$10,000,000 × LIBOR swap rate1 of 6.65 percent / 4]; the present value2 is based on the implied spot rate for each of the 8 payment dates under the assumed initial yield curve in that example.
The prepaid interest rate swap contract could also be characterized as a 2-year, structured note ("contract") with a principal amount of $1,228,179 and loan payments based on a formula equal to 8.142 times 3-month US$ LIBOR. (Note that 8.142 = 10,000,000 / 1,228,179.) The terms of the structured note specify no repayment of the principal amount either over the two-year term of the structured note or at the end of its term. The 8.142 leverage factor causes the effective notional amountof the structured note also to be $10,000,000, pursuant to footnote * to paragraph 8, as amended by FASB Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
_____________________
1The LIBOR swap rate is defined in paragraph 540 of Statement 133 (as amended) as follows:
The fixed rate on a single-currency, constant-notional interest rate swap that has its floating-rate leg referenced to the London Interbank Offered Rate (LIBOR) with no additional spread over LIBOR on that floating-rate leg. That fixed rate is the derived rate that would result in the swap having a zero fair value at inception because the present value of fixed cash flows, based on that rate, equate to the present value of the floating cash flows.
2The examples in this Issue assume both parties to the contract have the same AA credit rating. If the party that is obligated to make the variable payments has a different credit rating (such as BBB), the effect of that different creditworthiness should be reflected in the discount rate used to determine the present value of the amounts payable by that party under the contract.
The prepaid interest rate swap contract meets the characteristic of a derivative in paragraph 6(a) of Statement 133 because it has an underlying and an effective notional amount. It also meets the characteristic of a derivative in paragraph 6(c) of Statement 133 because neither party is required to deliver an asset that is associated with the underlying and that has a principal amount, stated amount, face value, number of shares, or other denomination that is equal to the notional amount (refer to paragraph 9(a)). At issue is whether the prepaid interest rate swap contract meets the characteristic of a derivative described in paragraphs 6(b) and 8 related to the initial net investment in a contract.
roadrunner
I knew it would happen.
Wouldn't it be safer to stick it into FDIC insured CD's? Sure but you wouldn't get the higher interest rates.
Credit Default Swaps and CDO's are next but they are far more complicated.
Morgan Stanley and Goldman Sachs Group Inc. said yesterday that they borrowed to "test'' the new (FED) lending facility, while Lehman Brothers Holdings Inc.'s financial chief said the company was using the facility to "show some leadership.'' The Fed report today showed that the lending averaged $13.4 billion in the week ended yesterday.
roadrunner
roadrunner
<< <i>Hey, we didn't even celebrate post 6000.
roadrunner >>
WHOOHOO!!!!!
6000!!!!
And here is to 6000 more.
The big brokers can borrow money from the FED at 2.25%. They would be fools not to "test".
Knowledge is the enemy of fear
A couple of days ago there was an interesting interview(in the LA Times) with the ass't Secratary of the Treasury(name unpronouncable) of Japan during the Yen crisis.
He suspects that the yen may go well above 80/dollar and Japan's core industrial companies will not be adversely effected.
I wish I could reprint the article but I do not have permission.
"Behind the curve" is how he described our FED and suggessted they DO MORE----------(((((((((NOW)))))))).
He recalled that in Japan...............they found that whatever they did.............it wasn't enough and it wasn't fast enough. I got the impression that he would support the recent FED actions.
1. Restore Glass Stegall
2. Restore up tick rule
3. Outlaw or regulate hedge funds
4. Federal purchase of mortgages
to go hand in hand with regulation
of mortgage qualifying requirement.
5..Cease the outsourcing of military servicing such as food, water purification
construction of military bases or transfortation within combat zones.
6. Cancel the NAFTA Corridor from Mexico thru Texas
7.Renegotiate International trade compacts in order to
protect the US Consumer and American Labor.
8. Outlaw the importation of foods, food ingredients, medicinals, ingredients
or precursers of prescriptions or OTC products from countries
that do not meet the strict USA standards.Further, preclude the importation of
above items that are assembles, packaged or produced in foreign factories that
do not meet the standards of the USA.
9. All essential parts or finished items for military use, shall be produced and assembled
in factories owned and operated in America by American Companies.
10. Increase the size and budget of the FDA to adequately perform its duty
to protect the American Public. The director should be appointed thru Civil Service
rather then thru political appointment.
11. Give tax breaks to all companies that operate factories that produce, fabricate,
assemble and sell services or products in America by American labor.
12. close tax loopholes for companies that utilize offshore banks and headquarters
in order to avoid or reduce taxation.
13. Strengthen regulation that prohibits foreign control of air and seaports , critical
electronic and computer companies or other such companies essential to National
security.
Camelot
items on the list that you agree with.
Camelot
I knew it would happen.
<< <i>This is what must come to pass
1. Restore Glass Stegall
2. Restore up tick rule
3. Outlaw or regulate hedge funds
4. Federal purchase of mortgages
to go hand in hand with regulation
of mortgage qualifying requirement.
5..Cease the outsourcing of military servicing such as food, water purification
construction of military bases or transfortation within combat zones.
6. Cancel the NAFTA Corridor from Mexico thru Texas
7.Renegotiate International trade compacts in order to
protect the US Consumer and American Labor.
8. Outlaw the importation of foods, food ingredients, medicinals, ingredients
or precursers of prescriptions or OTC products from countries
that do not meet the strict USA standards.Further, preclude the importation of
above items that are assembles, packaged or produced in foreign factories that
do not meet the standards of the USA.
9. All essential parts or finished items for military use, shall be produced and assembled
in factories owned and operated in America by American Companies.
10. Increase the size and budget of the FDA to adequately perform its duty
to protect the American Public. The director should be appointed thru Civil Service
rather then thru political appointment.
11. Give tax breaks to all companies that operate factories that produce, fabricate,
assemble and sell services or products in America by American labor.
12. close tax loopholes for companies that utilize offshore banks and headquarters
in order to avoid or reduce taxation.
13. Strengthen regulation that prohibits foreign control of air and seaports , critical
electronic and computer companies or other such companies essential to National
security. >>
Perhaps we can have a "patriotic youth group" advise the police on any Parent who seems "suspicious" too? They could wear little insignia's or armbands indicating they've completed a course in this patriotism. Parents can have ( some already do ) bumper stickers that state "Proud parent of a patriotic corp course ".
Sorry but whenever I see words like "outlaw this ) or that, these are the kinds of things that come to mind although I WILL agree that socialism should be outlawed. Only trouble with that is most Americans subscribe to that idea and actually whine and snivel for more and more of it so I don't think it's a possibility at this point
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
I knew it would happen.
U.S. Type Set
There might need to be federal action required to limit the ability of corporate officers
to raid the till. There certainly is federal action needed to stop companies from putting
themselves out of business for profit. Most of what's needed in terms of change in course
is to enforce the laws; especially laws against colusion and price fixing. There is no earthly
reason that large parts of the sale of every new car should go to Madison Avenue and sports
stars.
The feds need to step in and see what's going on with the financial regulators. There needs to
be an unwinding of many of the new instruments and their derivatives. There are areas where
heads should roll, and mostly this is about enforcing law not writing new law.
If they do want to write some new laws then the place to start is waste. There are huge amounts
of waste built into most of our systems. There is no accountability and no responsibility. Millions
are spent for equipment that isn't tended. It's easier to ignore something than to have anyone
responsible for it.
go up, prior to a three day weekend. It is
counter intuitive and does not seem to make
any sense.
2. Why has silver seemed to have vanished
from the commercial market places?
3. Two large financial institutions were downgraded
on Friday when the markets mere closed.
4. Monday should prove interesting to say the least.
Camelot