Where is the US economy headed?

The Roots of the Lending Crisis Run Through Wall Street

By Nomi Prins, The Nation.

Behind every great bubble and its subsequent bust lies the power of Wall Street's trading operations. In the case of our national housing market saga and toxic subprime fallout, it's true that banks and specialist lending institutions rapaciously extended credit to ill-equipped borrowers.

But that's not the whole story. Housing value fluctuations weren't just caused by lending run amok, but by the trading that enabled the lending and made a precarious situation even worse.

While politicians are focused on stricter lending practices or debating the merits of Treasury Secretary, Hank Paulson's $100 billion Wall Street trader bail-out fund, they miss a glaring point. If lenders couldn't offset their loans to Wall Street, their lending practices couldn't have spiraled out of control. If Wall Street hadn't leveraged these positions, their losses wouldn't have brought the economic and psychological damage to the housing market that mere inability on the part of borrowers to repay their loans would have caused. There is no chance that trading limits will be imposed, and for this particular cycle, it would be too late to assuage the volatility in the housing market anyway. But greater transparency of the role of trading that created much of the housing upward and downward hysteria would go a long way to calming it the next time.

http://www.alternet.org/mediaculture/70096/

2006 Wall Street bonuses; $25 Billion. 2007 Sub prime losses: $25 billion.

0 Replies

``Two thousand and eight will be the year of `recoupling','' said Peter Berezin, an economist at Goldman in New York, explaining his firm's about-face. ``What began as a U.S.-specific shock is morphing into a global shock.''

Of the 38 countries they monitor, Goldman economists expect growth to slacken in 26 and strengthen in a dozen. That will cause global growth to slow to 4 percent next year from 4.7 percent this year, with Europe and Japan fading faster than the U.S., they say.

``There are a lot of risks out there,'' Goldman Chief Economist Jim O'Neill said in an interview today.

Market lending rates have risen worldwide in the last three weeks as $70 billion of writedowns linked to defaults on U.S. subprime mortgages fanned international concern about the strength of financial institutions.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aUs1KMhofeRg&refer=economy

0 Replies

The market is following the fed's plans to drop short-term interest rates tomorrow, disregarding the financial crisis already in full swing.

Investors are dumb! It doesn't make sense for treasury prices to be dropping and rates increasing when the feds are planning to drop rates.

It's a total contradiction!~

0 Replies

I love this thread.

http://www.marketwatch.com/news/story/mild-recession-likely-morgan-stanley/story.aspx?guid=%7BB3B506BA%2DFF11%2D4D76%2D849D%2DB8B4A16797A1%7D

Quote:

The U.S. economy is likely to slip into a mild recession in 2008, said economists at Morgan Stanley, which is the first major Wall Street firm to predict a recession.

Domestic demand is expected to fall 1% annualized over the next three quarters with zero growth in gross domestic product and a 5% to 10% drop in corporate earnings, said chief economist Richard Berner and U.S. economist David Greenlaw in an updated forecast on the firm's Global Economic Forum Web site. For the full year, Morgan Stanley sees 1% growth.
...
"Those negatives sound like the recipe for a serious recession, so why do we think it will be mild?" Berner and Greenlaw wrote. "Although it is slowing, global growth is still strong, and we expect that net exports will add about 3/4 percentage point to growth through the end of 2008. In addition, we think that corporate capital and hiring discipline in this expansion mean that there are no business-investment or labor-market excesses to unwind, adding to U.S. economic resilience."

That's the first big boy to come out and say it.

Recession in election year = dem president, bank on it

Cycloptichorn

0 Replies

Mortgage crisis forces big cuts at WaMu

By JESSICA MINTZ

The nation's largest savings and loan also said it will close offices, lay off more than 3,000 workers, slash its dividend and set aside up to $1.6 billion for loan losses in the fourth quarter.

Word of WaMu's $2.5 billion convertible preferred stock offering came just hours after Switzerland-based UBS AG said it would sell $11.5 billion in shares to Government of Singapore Investment Corp., a sovereign-wealth fund, and to an unidentified investor in the Middle East.

Last month, Citigroup Inc. took a $7.5 billion investment from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of Citigroup's equity, and government-sponsored mortgage finance companies Freddie Mac and Fannie Mae both recently announced sales of $6 billion and $7 billion in preferred stock, respectively.

WaMu has not yet priced its offering, but increasing the total number of company shares will dilute their value for existing stockholders. WaMu shares fell $1.76, or nearly 9 percent, to $18.12 following the company's announcement Monday.

When WaMu does price the sale, it may have to do so at less than favorable terms, if the other recent deals are any indication. In exchange for its cash, the Abu Dhabi fund will get an 11 percent annual yield from Citigroup. The Freddie Mac offering has a fixed dividend rate of 8.375 percent, almost 2 percentage points higher than its last sale of preferred stock, in September.

After cutting 1,000 jobs and dismantling much of its subprime mortgage operation in September, Seattle-based WaMu will now get out of the business entirely. The company said it will close about 190 of its 335 home loan centers and sales offices, shut down nine call centers and eliminate 2,600 home loan workers and 550 corporate and support jobs.

The company also said it will shutter WaMu Capital Corp. and rely on third party broker-dealers to sell mortgage-backed securities.

These changes, meant to address what WaMu called "unprecedented challenges in the mortgage and credit markets," will save the thrift $140 million in the fourth quarter. But the company still expects to post a loss, due in part to a $1.6 billion charge for the writedown of goodwill associated with the shrinking home loans business.
http://www.businessweek.com/ap/financialnews/D8TF2BQ80.htm

0 Replies

Forecast: U.S. dollar could plunge 90 pct

UPI - via Information Clearing House November 24, 2007

A financial crisis will likely send the U.S. dollar into a free fall of as much as 90 percent and gold soaring to $2,000 an ounce, a trends researcher said.

"We are going to see economic times the likes of which no living person has seen," Trends Research Institute Director Gerald Celente said, forecasting a "Panic of 2008."

"The bigger they are, the harder they'll fall," he said in an interview with New York's Hudson Valley Business Journal.

Celente - who forecast the subprime mortgage financial crisis and the dollar's decline a year ago and gold's current rise in May - told the newspaper the subprime mortgage meltdown was just the first "small, high-risk segment of the market" to collapse.

Derivative dealers, hedge funds, buyout firms and other market players will also unravel, he said.

Massive corporate losses, such as those recently posted by Citigroup Inc. and General Motors Corp., will also be fairly common "for some time to come," he said.

He said he would not "be surprised if giants tumble to their deaths," Celente said.

The Panic of 2008 will lead to a lower U.S. standard of living, he said.

A result will be a drop in holiday spending a year from now, followed by a permanent end of the "retail holiday frenzy" that has driven the U.S. economy since the 1940s, he said.

http://www.informationclearinghouse.info/article18776.htm

0 Replies

blueflame, IMHO, I don't think our economy is "that" bad. Bad enough, surely, but compared to other economies, our economy will hold it's own.

Your scenario from the article assumes the dollar will plunge by 90%. That means our balance of payments will be wiped off the map. Won't happen.

The other strong economies of the world, namely Japan and Europe, are not in a position to replace the dollar; they don't produce near enough products and services to back up their currency.

We will surely have a slow-down, but it'll be a world economic slowdown. It'll be pretty bad; a long-term recession where many more will lose their jobs and their homes.

There are many companies in the world with good management; they will survive this downturn. Many are rich with cash to withstand the slowdown in our economy; some will go bankrupt.

The economy of the world will slow down; not a bad thing.

Hold onto your hats; the breeze is going to get pretty strong during the next few years.

Protect your assets.

0 Replies

cicerone, I thought the article was interesting but that dont mean I agree with everything in it. What I do know is the US dollar is a bad investment. If I had a bunch I would think how dumb it is not to convert them to a more stable currency. Why just watch savings disappear?

0 Replies

So, Blueflame... which currency might that be? Which is predictable and stable enough to be more stable than the USD for greater than a short while? The Euro?

0 Replies

Why, Gold, of course.

Normally, when you see the fed cute the base rate, as they did today by a quarter-point, the markets rally. Today, they plummeted. Why?

from bonddad.blogspot.com

Quote:

Tuesday, December 11, 2007
Today's Markets

A long time ago I read the book Winning on Wall Street by Martin Zweig. He used to be a regular on Wall Street Week with Louis Rukeyer's (now if that statement doesn't date me, I don't know what does). It's a really good, common sense book that I would still recommend.

One of Zweig's comments was to always watch what the Fed is doing. He noted when the Fed cuts stocks advance. And that is exactly what I was expecting today.

That is, until I read the Fed statement (see below). This was a very bearish statement from the Fed -- there is not one thing good about what they said. The economy is slowing, the credit markets are in turmoil, and they have no idea what is going to happen. There is not one positive statement in the Fed's statement.

So, the markets tanked hard after the Fed released their statement.

On all of the charts, notice the extremely heavy, post-announcement selling. Bottom line, the markets realized the Fed is cutting rates because things just aren't that good right now.

On the daily SPYs, notice the heavy volume, the strong downward bar and the fact that prices closed through the 50, 200 and 20 day SMA. There was a lot of technical damage today.

On the QQQQs, notethe strong downward bar, the heavy volume and the fact that prices moved through the 50 and 10 day SMA. While there was a lot of damage to this average as well, there is still technical support at the
upward sloping trend line and the 20 and 200 day SMA.

Notice the heavy volume and the fact that prices bounced bounced off the 50 day SMA, through the 100 day SMA and into the 20 day SMA. Also notice the index bounced off of the upward sloping trend line that has been in place for 4 years. This index took a huge technical hit today.

On all of these charts, notice we've been advancing since late November. The Fed's statement may have ended that advance in one swoop.

Posted by bonddad at 12/11/2007 03:58:00 PM

Cycloptichorn

0 Replies

I just looked it up and it seems that 4 currencies are perceived as relatively stable:

Swiss Franc (CHF)
New Zeland Dollar NZD
US Dollar USD
Singapore Dollar

Why not hedge your bets and invest in all 4 and/or even alternate the % apportionment of investing in the 4 currencies?

0 Replies

Ragman, Not a bad idea; that's if you can trade currencies free of fees and commissions.

0 Replies

One reason for the downturn was that a rate cut of some sort was already anticipated. However, there was a lot disappointment that the rate was to be ONLY 25 bp. What was hoped for was 50 bp. The market may have reacted to this and a few other bad economic indicators.

Also, simultaneously major investor USB showed a massive $9B loss ..and it was larger than the already announced major losses of Merrill Lynch or Citibank, WaMu announcing its shrinking of 3000 people. the banking giants insurance credit companies who back them in times like this are up agains tthe wall now too. This is not a pretty sight as it's not nearly at an end as far as a deepening credit problem.

Consumers continue to lose confidence and as such are voting with tighter purse-strings which bodes poorly for the economy at such a critical time of Xmas. 3/4 of the economy is based on consumer spending on goods.

CI and all: Look at the follwoing link regarding currency stability:

http://www.stablecurrencybenchmark.com/Background/how_we_choose.aspx

0 Replies

My guess would be that this winter, the sales aren't quite as far off as some are predicting. Americans loooove to spend, and will go into debt in order to keep doing so - the savings ratios of the last 5 years are horrendous. I don't see that stopping any time soon.

Sales will probably be off some, but not enough to truly reflect the problems we have/deepen them severely and suddenly. More likely is a poor but not terrible sales season, followed by a generally slow slide downwards over the next year as home prices continue to fall and the dollar continues to weaken.

Cycloptichorn

0 Replies

Ragman, The market and people has a six to nine month delay before they react to good or bad news. It's been my contention that the sub-prime debacle isn't fully exposed yet, and that's going to take until the second half of next year. That's when people will begin to "react."

The quarter point reduction in the short-term interest rate doesn't mean much; it doesn't now, and it never really did. People's concept of short-term interest rate vs market potential is a facade with no face nor reason. Not when our government continues to increase the national debt, and consumers are already buying most things on credit - and while energy and food costs continue its upward trend. People are still paying over 15 percent on their credit card debt while banks pay under five percent on savings accounts.

The only saving grace for our economy is that the world economy is tied to ours as never before: we cough, and the world sneezes.

The slow loss of value of the US dollar against other currencies is not a problem for us; it helps us more than it hurts. Our balance of payment is reduced, and imports become more expensive at home. We need to keep the home fires burning.

Speculators will keep the market from dropping too far; the PE ratios are still pretty healthy. 1000 point swings in the DOW will become the norm. If one is diversified and thinks long-term, all should work out well.

0 Replies

CI: it is my belief (born out by the last few years volatility) that the time frame for consumer reaction has been shortening considerably.

Judging from the current reports of financial returns from Sears, Target, WalMart etc. you could be right...Xmas season not as awful as you might think.

Cyclopt: you asked about coming up with some suggestion for stable currency and I provided some info and a suggested. Any comment?

Seems that the credit crunch from the massive housing downturn and tons of bad loans from banks has only just begun - re USB... and others will be announcing more massive losses. Hold on to your hat.

0 Replies

WAMU, one of the biggest banks have lost 56% of their value, and they're so cash poor, they're going to delude their stock value by selling more shares.

They are getting desperate; the signs of the times.

0 Replies

Ragman wrote:

Judging from the current reports of financial returns from Sears, Target, WalMart etc. you could be right.

Cyclopt: you asked about coming up with some suggestion for stable currency and I provided some info and a suggested. Any comment?

Seems that the credit crunch from the massive housing downturn and tons of bad loans from banks has only just begunv - re USB... and others will be announcing more massive losses. Hold on to your hat

I agree with the diversification choices. The Swiss franc is quite stable but for some reason it isn't very popular with a lot of currency investors that I know - I'll ask around.

The true damage of the credit crunch still hasn't been seen. The SIV that Paulson proposed is dying, they just haven't admitted it yet, but pretty much everyone they've asked to come on board is turning it down. I greatly fear that this will become a taxpayer-paid bailout of investment companies. Paulson and others will argue that this is a superior option to allowing major financial institutions collapse, and don't kid yourself - there's absolutely enough credit risk for that to happen, if the insurance underwriters keep going under like the british ones are looking like.

What REALLY scares me is this: that there is no new industry or technology really in place to pull us out of our recession. In the past, America has used various cutting-edge tech industries to boost the economy in various decades; automobile, aerospace, internet technologies all were world-wide leaders in their time and helped prop up our economy. I can't imagine which current technology is going to do this today, if it isn't renewable energy or somesuch.

Cycloptichorn

0 Replies

CI: you said "If one is diversified and thinks long-term, all should work out well. "

While I definitely agree with you on that philosophy for my investment direction. I don't agree with you regarding the avg US consumer/investor.
It has been shown that US consumer is not diversified enough and has no clue about long term. In fact the consumer is more of a short-term thinker than ever. Hence bad loans ... deep debt and record low savings rate.

Ahh..a race for new conservation new technology - that is where the R&D race should be...a way to save energy..reneweable source..low carbon footprint... and beat the other countries to the punch. What are the odds of this happening here?

0 Replies

Where is the US economy headed?

Related Topics

Quick Links

My Account

able2know