Agora Financial’s Rude Awakening

Jump to Comments

Laguna Beach, California

• When good booms turn bad – preparing for the bust,
• The grim tale of runaway indebtedness and a 
  plummeting currency,
• Empire of Debt takes the stage and more…

Eric Fry, reporting from Laguna Beach, California…

 ”Satyajit Das is laughing,” writes Jon Markman in a
brilliant column for MSN Money, “It appears I have said
something very funny, but I have no idea what it was…One
of the world’s leading experts on credit derivatives, Das
is the author of a 4,200-page reference work on the
subject, among a half-dozen other tomes. As a developer and
marketer of the exotic instruments himself over the past 30
years. He seemed like the ideal industry insider to help us
get to the bottom of the recent debt crunch — and I
expected him to defend and explain the practice.
 
“I started by asking the Calcutta-born Australian,” Markman
continues, “whether the credit crisis was in what Americans
would call the ‘third inning.’ This was pretty amusing, it
seemed, judging from the laughter. So I tried again.
‘Second inning?’ More laughter. ‘First?’ Still too
optimistic.

“Das, who knows as much about global money flows as anyone
in the world, stopped chuckling long enough to suggest that
we’re actually still in the middle of the national anthem
before a game destined to go into extra innings,” Markman
writes, “And it won’t end well for the global
economy…[Das] thinks we’re on the verge of a bear market
of epic proportions. The cause: Massive levels of debt
underlying the world economy system are about to unwind in
a profound and persistent way.”

Hmmm…Satyajit Das’ grim prognosis sounds eerily
familiar…like something we might have read somewhere in a
fringy, off-Wall-Street publication…like the Rude
Awakening…or the Daily Reckoning.

A few weeks back, for example, our psychic twin over at the
Daily Reckoning, Bill Bonner, offered the following
observations:

“There are good booms…and then there are bad booms. A
good boom is like the one following WWII. Real money was
invested. Production increased. Wages increased. Profits
increased. At the end of the boom, people were wealthier
than they were at the beginning of it.

“A bad boom is based on bad money,” Bonner continued. “When
the United States Treasury prints up an extra dollar bill,
the gesture lacks sincerity; like a duelist who first
smiles and shakes your hand, then walks back twenty paces
and pulls a trigger; you know he didn’t really mean it.
Instead of being built on real savings, the faux boom is
built on monetary inflation and credit. And when it comes
to an end, people are no better off. Their money is worth
less than it used to be. And the average fellow has dug
himself deeper into debt in order to enjoy the boom years.”

Alas, dear investor, which type of boom do we now inhabit?
Is it a good boom or a bad boom? Or is it a good-boom-
turned-bad? All booms start out good; some just turn bad
later on. And, ironically, the badder the boom, the gooder
it feels in the beginning. When stocks are rising every
day, or home prices are soaring on the back of EZ-credit,
the boom times seem pretty darn good. Can anything that
feels so good be so bad?

Ummm…yes.

———– Gold’s Up Again! Get In Now ————

From Hulbert’s #1 Ranked Advisory Letter of the Last 5
Years, Our Most Shocking Forecast Yet…

Gold $2000

“I’m so sure gold will soar higher, I’ll even make you a
guarantee … plus I’ll give you 5 entirely new ways to
play the trend…”

“Including one way to own gold that comes with ‘ zero-
downside’ risk…”

(But you have to jump on this before October 23, 2007… or
the doors on this could slam shut to you forever…) Read
On Here

————————————————–

Alrighty Then
By Eric J. Fry

Bad economic booms tend to produce bad results…like
runaway indebtedness and a plummeting currency. Do you
happen to know of any large Western economy with these
characteristics?

Sometimes, the difference between a good boom and a bad
boom is very subtle and subjective. A “bad boom,” for
example, might simply be a good boom that you failed to
participate in. But usually, key fundamental differences
differentiate the good from the bad. Bad booms tend to rely
upon credit, for example, rather than earnings and savings.
Therefore, when the inevitable bust occurs, credit becomes
a four-letter word: Debt.

When a nation of debtors finally exhausts all its sources
of additional credit, it chokes on debt. The nation of
debtors can no longer sell a house to repay it creditors.
Instead, the debtors must simply work to satisfy their
creditors. And that’s not all. Sometimes the debtors must
work for cheapened money, but repay their creditors with
expensive money.

Let’s consider a simple illustration: A European creditor
who loaned 100 euros to an American in 2001 will expect to
receive 100 euros in repayment. He does not care that 100
euros will cost the American 65% more dollars than they did
in 2001. But the American will care…especially if he
loses access to easy credit.

Since bad booms rely upon ever-larger doses of credit to
sustain themselves, what happens if credit creation lurches
into reverse?

Usually, the booms go bust…in a big way.

In fact, credit may be lurching into reverse right before
our eyes, as the shocking chart below illustrates.

The lenders are simply refusing to lend, which is why the
commercial paper outstanding is plummeting. In a perfect
world, asset-backed entities, known as “structured
investment vehicles” (SIVs), borrow short-term money in the
commercial paper market, then invest the proceeds in debt
instruments like mortgages, credit card receivables and
collateralized debt obligations (CDOs). But the borrowing
part of this formula has dried up completely. The asset-
backed issuers of commercial paper cannot find any lenders
to finance their toxic cocktails of lousy mortgages and
“new math.”

Over the last six weeks, the (formerly) $1.2 trillion U.S.
asset-backed commercial paper market has contracted by a
whopping $245 billion dollars. In other words, one fifth of
this market has simply disappeared. Unfortunately, the SIVs
still need the $245 billion that nobody will lend them.
Without the money, they must liquidate their illiquid
portfolios of subprime mortgages and credit derivatives.

“We’re dumping all our collateral into the market and it
becomes a death spiral for the assets,” moans Brian
McManus, head of collateralized debt obligation research at
Wachovia Corp.

To avoid dumping their collateral on the market, however,
some SIVs will try to “move back home” like an unemployed
college grad. Where is home exactly? On the balance sheets
of the biggest banks and brokerages firms in the U.S.
(We’re talking about the same folks who are already reeling
from overexposure to various other piles of financial
compost). According to the fine print in many SIV formation
documents, the underwriters who issued the SIVs must
provide the financing of last resort.

So far, the slow-motion crisis in the commercial paper
market is unfolding behind the veil of institutionalized
obfuscation. That’s because all of Wall Street wishes to
keep it that way. The cold, hard truth might hold some
interest for short-sellers and academics, but not for the
folks who are on the hook for billions of dollars worth of
mortgage-backed securities. But even a very bad boom is not
so bad if an individual prepares for the bust. Preparing
would include reducing debt and diversifying savings into
foreign currencies and “hard assets.”

But the American financial system is not merely an “SIV
problem,” it is also – and more importantly – a financial
system problem. In addition to the $250 billion of short-
term financing that has already disappeared form the asset-
back CP market, another $300 billion will come due before
Thanksgiving. It will come due, and it will probably not
find willing lenders. So where will this $550 billion of
credit and/or collateral end up?

Probably not in a place that will please stock-market
investors, or bond investors or stock market
investors…especially, dollar-holders.

Here’s the problem in a nutshell.

Since homeowners are defaulting in record numbers,
mortgage-backed securities of all types are tumbling in
value. And since the prices of mortgage securities are
tumbling – and since know one knows what these things are
really worth – no one wants to provide financing.

And since no one wants to provide financing, hundreds of
billions of dollars worth of credit drops out under the
asset-backed securities market.

You get the idea.

As credit disappears, therefore, SIVs and other mortgage-
loaded entities must either liquidate their portfolios or
obtain new financing from some other channel…or dump
their portfolio back on the underwriters.

And the numbers involved are extremely large.

The $500 billion that might disappear from the commercial
paper market before Thanksgiving could be a very big
problem…for the mortgage market, for the banking
system…and especially for the U.S. dollar.

Bad booms produce bad results. That’s just the way it is.
Maybe its time to prepare for the bust.

[Joel's Note: But bad booms don’t have to be bad…if
you’re a good investor. In fact, they can be pretty darned
good. Take a look at what’s happened to gold since
Bernanke’s rate slash on Tuesday, for example. As the
dollar continues to slump against the pound and the Euro,
gold has shot to $743. While the rest of the economy is in
a tailspin, take advantage of the bad boom and grab some
good gold. Here’s the best way: Gold $2000: The Report

—- Bulletin Board Elite: Remaining Positions —-

The first time, I called it beginner’s luck…

When it happened again, I called it a coincidence…

But after 9 stocks in a “secret” market one ace analyst was
screening JUMPED to major exchanges - and major profits -
in just a 12-month span, I knew he was hunting in the right
place for huge gains.

In just the first six months of 2007, the AVERAGE top-tier
stock in this all-but-unknown universe of securities gained
25,498%! Just $100 invested in the best of these on New
Year’s Day would’ve handed lucky shareholders gains of
$409,900 before the Fourth of July…

RIGHT NOW, I’m offering those who respond a discounted
chance to turn even a small investment into a small fortune
on this ace analyst’s best picks in this overlooked market.

But you must act quickly: Only a few spots remain in this
revolutionary services ranks. Click Here To Read On

——————————————————

Rude Endnote: “You like to rock, right?” asked a Rude
reader in an email to your rockin’ editor. “Can’t recall if
it was you or not that wrote about seeing the Smashing
Pumpkins recently. At any rate, enjoy the brief reading
from Empire of Debt circa the 1:10 mark.”

http://www.youtube.com/watch?v=p5NywhUyvWw

Addison, co-author of Empire of Debt, will be headlining
today’s 5-Minute Forecast…appearing at in box near you
after lunch.

Cheers,

Joel Bowman
Rude Awakening