A concise summary of where our financial markets are headed.
jmski52
Posts: 22,834 ✭✭✭✭✭
A straightforward and easy to understand article that tells me all I need to know about why gold, silver and platinum are the places to be.
These markets are all interconnected. Be advised.
These markets are all interconnected. Be advised.
Q: Are You Printing Money? Bernanke: Not Literally
I knew it would happen.
I knew it would happen.
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"2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that
------->the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities<------
this year proves that the traditional buyers are not keeping pace with the US government’s defi cit
spending. It makes us wonder if it’s all just a Ponzi scheme."
Definitely makes one wonder how we can support additional debt in 2010 as a nation, let alone begin to pay for past loans.
peacockcoins
<< <i>I agree. I'm 56.5 yrs old and therefore 3 years away from drawing, getting some Roth IRA money out of equities. We're talking $30,000. Do I take it out now with the penalties, or ride it out for 3 more years.
I'm not sure what the penalty for a Roth IRA is, the same as a regular IRA? Ten percent and then regular tax as income on the money? If you are going to end up with low $20's on $30k, a 30% or so hit? Then I think you would be foolish. The markets would have to take another huge move downward, and stay there for a few years to do the same damage to your money that you are thinking about. If you are that nervous, could you move it into a money market or GIC within the IRA?
pulled the rug out from under everyone who has worked hard and saved for their retiremrnts.
The average guy in his mid-50s has less than $100k to his name. (We), as a country, havent saved a dime for retirement. Unions and the govt have overpromised retirement benefits. For the most part the only thing average Joes knows about money and investing is how to tell the difference between a 10 and 20 dollar bill. Perhaps now people will finally get the education they were so lacking.
Coinboy, very possibly. The FED is trying to keep the 75 yr run of inflation intact. Deflation is the natural cure for bad investing, ehich is precisely what the G has done in keeping GM, GE, AIG and the banks alive. You cant fight nature.
Knowledge is the enemy of fear
I'm not 100% sure, but I believe that there are no tax penalties for withdrawal from a Roth IRA, since the taxes have already been paid on the initial deposits. The only part that is taxable is any profit that has built up, and that would be taxed at your marginal income tax rate. There shouldn't be any 10% penalty.
Someone correct me if I am wrong.
On another note, cohodk said: The author in the OP's link is trying to compare the USA to Zimbabwe, the Weimar Republic and Argentina. Nothing could be further from the truth. These situations are so so different from ours it isnt even funny. I know these articles are both fun to read and write, but it is becoming a bit old. Yes, Bernanke is walking a tight line and i dont know if he will succeed or even the outcome if he fails, but we are no way close to being Zimbabwe.
It wasn't the reference to Weimar that got my attention, and I'm not saying that a Weimar hyperinflation is inevitable. What I was trying to bring to people's attention was the 4 paragraphs just preceding the author's Weimar reference:
Evidence of increasing inflation could also drive Bernanke to raise interest rates before he plans to do so. If the Fed is compelled follow such a course, several things are likely to occur.
First, there would be a rapid sell-off in overpriced long-dated Treasuries. This would be the 'bond market crash' that we have long envisaged.
Second, American equities will likely experience downward pressure as the discount rate, used to assess the present value of dividends, rises.
Third, a rise in interest rates could trigger a crisis in interest rate-dependent derivatives held by banks, similar to circumstances of the last credit crisis.
Finally, and most concerning, higher rates would increase the debt burden for the U.S. government, which is increasingly sold in short-term notes. With a stagnating economy, the tax base will be unable to shoulder this extra weight. This could potentially lead to the largest sovereign default in history.
Now, it may turn out like Weimar but you are right that not everything is similar. Weimar wasn't in a position to negotiate their huge debt that was imposed on them as reparations for WWI - we still are an independent country, somewhat. Our government could repudiate it's debt and screw China (and our seniors) and nobody could keep them from doing it. Furthermore, we aren't the only nation that has imposed crushing debt on ourselves - it's a world problem, so "it's all relative", right?
The biggest worry that I see is when more people are backed against the wall and there is no chance of maintaining the standard of living that people have become accustomed to, it is much easier for a Manchurian candidate with socialist aspirations or worse, to assume power. It doesn't help that there is a devil's pact between the government and the big banks, and that most of the good manufacturing jobs have been exported for the sake of top corporate executives' salaries, pensions and bonuses at the expense of *everyone else*.
If things get bad enough, any Stalin, or FDR or social experimenter might feel compelled to implement a new domestic security mechanism that is "just as well funded as our military" in order to "keep the peace" and "maintain security". Of course, it would provide bunches of new jobs for all of SEIU's poor impoverished and displaced "workers", wouldn't it?
Yeah, I see problems no matter how you slice it. Pretending that something simply can't happen here is a really good way to have it happen. The financial markets can affect much more than finances, and it would be naive to ignore all of the possibilities.
I knew it would happen.
Stocks may suffer, but more likely would be "stuck" in a trading range much like the late 70's. Nothing wrong with this.
Im not sure anyone hasa grasp on the derivative situation. It could turn out to be a non-event. We dont really know so best not to speculate.
Yes, there would be a higher debt burden, but the higher yields would bring out more buyers, IE, those in my first sentence. Wouldnt it be nice to pay Americans the higher interest rates rather than the Chinese or Japanese. Those higher payments would be put right back into the American economy. The burden would not be as great as some want you to believe. Also, after the baby boomers are largely gone from the system, the payment of entitlements will be much more orderly. What we have right now is essentially a balloon payment. A payment that the boomers never saved for.
The Weimar situation was a result of a nearly completely destroyed manufacturing base as much as it was a heavy debt burden. There was no way Germany could repay those debts with no manufacturing base. It was a plan that backfired miserably. We are much more likely to suffer massive deflation that hyperinflation.
I would have enjoyed reading an article about the interreationship of the bond/equity/currency markets, as it what I live and breathe, unfortunately the author only provided a few sentences designed to elicit a fear based response. I dont pretend to hide from anything especially fear/greed and apathy.
Knowledge is the enemy of fear
<< <i>getting some Roth IRA money out of equities. We're talking $30,000. Do I take it out now with the penalties, or ride it out for 3 more years.
I'm not 100% sure, but I believe that there are no tax penalties for withdrawal from a Roth IRA, since the taxes have already been paid on the initial deposits. The only part that is taxable is any profit that has built up, and that would be taxed at your marginal income tax rate. There shouldn't be any 10% penalty.
Someone correct me if I am wrong.
The penalty would be 10%, then taxed on the GAINS at your marginal tax rate, this per The Motley Fool
The BSC, Lehman, GM, AIG, Fannie, Freddie Walmu, Citi, Merrill, CIT examples certainly seem to have given us some good data points as to what will happen with cascading derivative failures. The LTCM derivatives failure in 1998 was only a couple of billion dollar failure and it nearly rocked the financial world. Enron followed. We know what happened. There was no shortage of well thought of analysts back in 1998-2002 who were predicting the current outcomes if otc derivatives were allowed to be unregulated. I think those in the know in the FED/Treasury know exactly what the future outcome will be if things are left to themselves. There are also those in the private sectors that know the answers as well. It's just that the PTB will not give any creedance to those who know since it's a lose-lose situation. Best to keep mum on this issue for as long as possible.
The above is the 800 lb. gorilla in the room that no one really wants to talk about, esp. the entities that own the rights to said gorilla. It is the primary issue why the big banks remain in the precarious condition they are in. Not a whole lot has changed in the past 2-3 years other than some of them are now even bigger.
roadrunner
Are you sure that you aren't confusing a conventional IRA with a Roth IRA? My understanding was that the main advantage with a Roth IRA was that you can withdraw money without a penalty, since it is not a tax deductible account.
Note, a conventional IRA is a tax-deductible account; a Roth IRA is not a tax-deductible account. Both are tax-deferred accounts.
I knew it would happen.
In addition, a horrible precedent has been established in bailing out everything that looks in trouble instead of having the managements fend for new jobs in the poor economic environment that they helped to create.
I knew it would happen.
<< <i>The penalty would be 10%, then taxed on the GAINS at your marginal tax rate, this per The Motley Fool
Are you sure that you aren't confusing a conventional IRA with a Roth IRA? My understanding was that the main advantage with a Roth IRA was that you can withdraw money without a penalty, since it is not a tax deductible account.
Note, a conventional IRA is a tax-deductible account; a Roth IRA is not a tax-deductible account. Both are tax-deferred accounts. >>
No, that is for the ROTH, without penalty there is much less incentive to leave it there.
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The national debt is technically the larger problem but up to a few years ago we could have carried that forward for a decade or two longer without it strangling the nation. The derivatives problem is here and now and on the order of $203 TRILL notional with 85% of that exposure in interest rate swaps. This has frozen the biggest banks in their tracks with the exception of their trading desks. What percentage of that $203 TRILL will fail in the near term?
Lehman's payback on derivatives was about 9%. The big banks are probably valuing theirs many times higher than that. I don't think anyone would dare publish the AIG derivative's failure rate. A 5-10% failure rate on derivatives to me would be quite conservative. Can the economy handle another $10 TRILL shock in bailouts? The long term entitlements can be dealt with years down the road long after the current group of politicians have left office. The derivatives are here and now. Only the suspension of marked to market pricing and interest rates kept artificially low keeps those derivatives afloat.
Derivatives legislation becoming toothless
Possibly up to half of all derivatives will be left untouched by the proposed legislation. What are the odds that the $171 TRILL in interest swaps by the big banks will fall into that category? Those are at the core of the problem.
roadrunner
Lehman's payback on derivatives was about 9%. The big banks are probably valuing theirs many times higher than that. I don't think anyone would dare publish the AIG derivative's failure rate. A 5-10% failure rate on derivatives to me would be quite conservative. Can the economy handle another $10 TRILL shock in bailouts? The long term entitlements can be dealt with years down the road long after the current group of politicians have left office. The derivatives are here and now. Only the suspension of marked to market pricing and interest rates kept artificially low keeps those derivatives afloat.
Two points:
1) Don't forget the unfunded liabilities of Medicare and Social Security. What are they now, $62 Trillion? Both of these will keep adding to the debt, and **the interest on that debt** will continue to keep making it harder and harder to avoid inflating out the wazoo. Seniors without gold or some other meaningful assets are going to be really screwed.
2) Directly related to the $203 Trillion that roadrunner mentions is the change in accounting standards.
FASB has long been (since at least 1973 or so) the professional standards authority for the accounting profession. FASB publishes the professional standards which govern accountability for CPAs and all corporations. A sensible set of standards, along with the major accounting firms was used to make sure that companies don't cook the books and then foist scams upon the public with bogus stock offerings, false earnings and such. **All of this is now changed**. There is no longer any accountability. This is somewhat important!!
If you are an investor, there is no help, no assurance - it's all smoke. This applies as much to the insolvent financing arms of GM and GE as it does to the large banks. The whole system is vulnerable and with the track record we've seen, who would doubt that there will be more fraud and more failures? I contend that if you invest in this type of environment without an intimate and in-depth knowledge of a company, then you are a complete fool. In other words, you almost have to be the CEO or the Controller to be assured of knowing the true story for a company. Good luck with that.
Paulson, Geithner, Bernake, Obama, Bush - they put enough pressure on the FASB that the FASB decided to change their standards for financial derivatives, in the middle of the game.
Instead of being forced to accept the market price for $203 Trillion worth of derivatives, the banks are now allowed to keep a bunch of mostly bogus paper on their books fully-valued. Basically, it's FRAUD on a MASSIVE SCALE, sanctioned by the government - mainly for the benefit of insolvent investment banks.
These are the same entities whose corporate officers are knocking down $10s of billions in annual bonuses, when they should be on the street unemployed as a result of mismanagement (or in jail for fraud).
It's all ok with the public as long as people have jobs and get paid for what they do. Take away everything they've worked for and it's a different story. The story continues to evolve.
I knew it would happen.
<< <i>There is no penalty for a Roth. You can withdraw contribtutions penalty and tax free anytime. You can only withdraw what you put in though. You can't pull out interest earned. >>
Okay, that is right, on contributions only. Interest is subject to regular tax and the 10% penalty if it isn't qualified. Be careful if the ROTH was converted from a regular IRA.
"Derivatives Time Bomb
What Does It Mean?
What Does Derivatives Time Bomb Mean?
A possibile situation where the financial markets plunge into chaos if the massive derivatives positions owned by hedge funds and the large banks were to move against those parties.
Institutional investors have increasingly used derivatives to either hedge their existing positions, or to speculate on given markets or commodities. The growing popularity of these instruments is both good and bad because although derivatives can be used to mitigate portfolio risk. Institutions that are highly leveraged can suffer huge losses if their positions move against them.
Investopedia Says
Investopedia explains Derivatives Time Bomb
A number of well-known hedge funds have imploded in recent years as their derivative positions declined dramatically in value, forcing them to sell their securities at markedly lower prices to meet margin calls and customer redemptions. One of the largest hedge funds to collapse in recent years as a result of adverse movements in its derivatives positions was Long Term Capital Management (LTCM).
Investors use the leverage afforded by derivatives as a means of increasing their investment returns. When used properly, this goal is met. However, when leverage becomes too large, or when the underlying securities decline substantially in value, the loss to the derivative holder is amplified. The term "derivatives time bomb" relates to the speculation that the large number of derivatives positions and increasing leverage taken on by hedge funds and investment banks could lead to an industry-wide meltdown. "
Texthttp://www.investopedia.com/terms/d/derivative.asp
Since the days of LTCM the derivatives industry has leveraged itself up another 5-10X. The growth rate of otc derivatives was close to 50% per year at the height of the banking boom. There is no earthly reason for our top 25 banks to be carrying over $170 TRILL in interest rate swaps. This is how other industries and markets have collapsed when it was found that there multiple CDS's/MBS's for the same property. There should only be one insurance policy/hedge per legitimate asset owned....not 30 to 100.
roadrunner
Granted the rates MUST be higher to entice purchasing fixed instruments, but the ongoing COLLAPSE of earning/paying ABILITY has gutted the sources of revenue.
Higher interest rates would generate some revenue from SAVERS.
How many substantial SAVERS do you know?
We BORROWED our butts into this mess and ...inflation.... to have any meaning would have to morph to HYPERinflation in short order.
The repos haven't stopped yet. That's a precondition to ...saving.
. There is no earthly reason for our top 25 banks to be carrying over $170 TRILL in interest rate swaps. This is how other industries and markets have collapsed when it was found that there multiple CDS's/MBS's for the same property. There should only be one insurance policy/hedge per legitimate asset owned....not 30 to 100.
roadrunner >>
Then how would they "wet their beaks' as the mafioso in the "Godfather" put it, each swap creates a payday for all those involved.
<< <i>. There is no earthly reason for our top 25 banks to be carrying over $170 TRILL in interest rate swaps. This is how other industries and markets have collapsed when it was found that there multiple CDS's/MBS's for the same property. There should only be one insurance policy/hedge per legitimate asset owned....not 30 to 100.
roadrunner >>
Then how would they "wet their beaks' as the mafioso in the "Godfather" put it, each swap creates a payday for all those involved.
da plan
tee dee tee dum dee dah
<< <i>cohodk, how can interest rates rise when there is no capacity to generate interest?
Granted the rates MUST be higher to entice purchasing fixed instruments, but the ongoing COLLAPSE of earning/paying ABILITY has gutted the sources of revenue.
Higher interest rates would generate some revenue from SAVERS.
How many substantial SAVERS do you know?
We BORROWED our butts into this mess and ...inflation.... to have any meaning would have to morph to HYPERinflation in short order.
The repos haven't stopped yet. That's a precondition to ...saving. >>
That is the problem. Interest rates may not rise and we will suffer the same fate as Japan. Drawn-out deflation that lasts for decades.
How many substantial SAVERS do you know?
There are trillions in govt, investment grade corporate, high yield, money markets and muni bond funds. Trillions. Invest this money in America's future and a large part of this problem can be solved.
The derivative "time bomb" is not a guaranteed explosive device. If the situation got that worse the counterparties could just agree--with Govt strong-arming--to cancel these contracts. There wont be any more big bailouts, they spent those bullets, so no new money pumping, and the result would be deflationary.
Knowledge is the enemy of fear
Bailouts should continue only they will be called something else, even the generic term QE or TBond/agency purchases. In the game of high stakes scrabble "bailout" has already been used for a triple letter word score. This party will still need another $10 TRILL or more tossed at it to keep things afloat. It will be gotten from somewhere.
The big banks appear to hold the best hand. They can continue to threaten to dump the SM or the bond/treasury market if they don't get continuous ransom money from the Treasury/FED.
roadrunner
I like this one better.
John Williams, who is an economist/statistician is still using that 1980's CPI figure with housing intact and he showed inflationary figures over the past 2 years. But I do like the way Clive Maund backed away from an overly bearish forecast from last week and modified his analysis.
roadrunner
Stocks will continue to rise and fall on emotion
Cash will REMAIN PAPER
The further you attempt to get financially ahead
the more behinder, it appears, you will get.
Value assets, are half emotion and half wishful thinking.
Taking one day at a time, is about all I can handle
Analysts are a lot like ear wax, we keep producing more
but it does not seem to do a whole lot of good.
It would fill me with a quiet sense of joy, if the top 20 officials
of all mega financial institutions, were stretched on a rack, until
they were all 10 feet tall, just like the Navi of Pandora. It is optional
If you wish to paint these officials blue.
Camelot
on the Good Ship Lollipop, with Captain Bligh at the helm.
In reality, we have a broken ship, a drunken crew, a Captain
as mad as a hatter and the steering wheel is broken.Tally Ho
and another round of grog for the men.
Camelot
<< <i>Our financial Markets are headed to Never Never Land,
on the Good Ship Lollipop, with Captain Bligh at the helm.
In reality, we have a broken ship, a drunken crew, a Captain
as mad as a hatter and the steering wheel is broken.Tally Ho
and another round of grog for the men. >>
bad pot of honey?
Fred, Las Vegas, NV
<< <i>I'll let North and Denninger fight over deflation/inflation and CPI accuracy. I don't think either one has the right picture. Is KD trained in monetary policy or economic analysis? What are his credentials?
John Williams, who is an economist/statistician is still using that 1980's CPI figure with housing intact and he showed inflationary figures over the past 2 years. But I do like the way Clive Maund backed away from an overly bearish forecast from last week and modified his analysis.
roadrunner >>
Agreed. Lots of misinformation or misunderstanding, IMO, on both sides. The truth is in the middle somewhere.
So far we have been able to withstand "rolling" deflation. Deflation in gold for 20+ years. Deflation in equities for the past 10 years. Deflation in real estate (ongoing). We've been able to dodge these bullets when they come one at a time. Some say the next deflation will occur soon in fixed income. This may be a more troubling asset to "fix" than all 3 previously mentioned. What asset class would then be next, currencies? I can tell you now, if they manage to fire more than 1 bullet at a time, we could be in trouble.
Knowledge is the enemy of fear
Anyhow, being cheerful gives me gas.
Camelot