[jboogy]

Thanks,
Mr. Bill-"so basically once again I have to say this is a financial crisis in the U.S. that so far has not spread elsewhere.."
I understand that some of the mortgage backed security hedge funds in this country are doing quite well and most of the rest of the industrialized economies are not suffering volatility in lockstep with what happens here,in spite of the contention by some experts that "when the U.S. economy sneezes the rest of the world catches cold",so my question isn't so much what the forecast is for everyone else but what do you see happening here in U.S., I'm thinking the fundamental weaknesses in the U.S. economy are so entrenched and immune to the standard easy masking techniques that we will NOT be bouyed by the strength of foriegn economies.What about the consesus that the strongest sector of our economy ,consumer retail spending ,largely supported by equity ATM syndrom and high employment and wages growth ( largely due to explosive housing industry growth)is now dead.Do you see this as potentially devastating?We have consumer spending dropping along with credit tightening and nervous investors.I'm thinking that a MAJOR U.S. crash is inevitable and quite possibly beginning now.Do you agree? If not ,why?

[MrBill]

I almost hate to say anything given this signature of yours...
$this->bbcode_second_pass_quote('', '"') Every absurdity has a champion to defend it,for error is always talkative."---Oliver Goldsmith

[jboogy]

Your wise ,prudent and cautious Mr. Bill. You've done a superb job summarizing the U.S. economy in a way even I can understand.
I can see your not wanting to make predictions for the short term,market down 281 friday, up 260? or so yesterday,up and down 50 today. Perhaps forecasting is best left till after the fact.

[OilIsMastery]

I'm not sure where the market averages are headed but I can tell you where Transocean (RIG) is headed.

[holmes]

hee hee cmon its becoming a joke now. Why so serious. We all know this whole ponzi is oil based. Just keep your eye on the oil. as it goes so goes the oil based ponzi. all I see is one big explosion and mushroom cloud. The worthless will be the first to go.
I have one prediction: by 2025 it will be ugly. socially and economically.

[MrBill]

$this->bbcode_second_pass_quote('jboogy', 'Y')our wise, prudent and cautious Mr. Bill. You've done a superb job summarizing the U.S. economy in a way even I can understand.
I can see your not wanting to make predictions for the short term, market down 281 friday, up 260? or so yesterday, up and down 50 today. Perhaps forecasting is best left till after the fact.

[jboogy]

I've read that the derivatives sector is so complex that many of the people that MANAGE them don't fully understand exactly how they work.Reading between the lines I'm seeing a classic collapse structure in place that is almost surely going to be exascerbated by this monstrous vehicle known as derivatives.I've read these things are huge,very complex,interwoven with all other sectors and that no one knows what the effect will be if they implode.I think your telling me something without being crude perhaps?

[grabby]

The derivitives were invented just to wind it up.

[MrBill]

Basically, not all derivatives were created equally.

There are credit derivatives and weather derivatives. Interest rate derivatives and currency derivatives.

Each is unique. Some limit risk. Others are open ended and create risk.

These risks can be exacerbated by the use of leverage.

The use of excess leverage on derivatives on derviatives quickly gets very complicated, harder to understand and even harder to price.

Throw in some 'fat tails' and 'the perfect financial storm' and you may have a bigger problem than your models tell you. Especially if easy money has made previously non-correlated assets and markets auto-correlated.

No one understands every new financial product in every market despite what they might tell you otherwise. Prudent risk management is still the key to financial market stability. And it has been sorely lacking as of late.

[jboogy]

Mr. Bill -"Prudent risk management is still the key to financial market stability. and it has been sorely lacking as of late." You just said THE mouthful there. Greed has motivated every shady character that could game the system to do it, unfortunately a lot of these greedy characters were and are in a position to make or bend the rules to benefit themselves to the detriment of the health of the entire system.One example that comes immediately to mind is Bush retracting a Clinton rule making it illegal for accounting firms to also serve as their clients business consultants. Clinton had the SEC enact it when the Enron fiasco started and then Bush made withdrawing it one of his first official acts. I've seen little evidence that deregulation is a good thing on balance.

[MrBill]

Well, I will not go into partisan politics. For one I am not American, although I lived lived, worked and studied in the USA. And secondly, it is only my opinion as an outsider that many of America's current political and economic problems stem from a two-party state in which power is shared instead of a true multi-party democracy where voters are given a real choice. Therefore, there is no incentive for either party to drastically change anything even if it is in the voters' best interests. I do not see that changing anytime soon, so the problems will persist.

But you are right about the greed part. The sub-prime fiasco is at its heart a massive fraud perpetuated 'mainly' by the mortgage broker industry that falsified many of the foundation documents on which other financial products were built.

In order to explain, I will borrow an example directly from Bloomberg Magazine, July 2007, entitled Toxic Debt.

"The Subprime money trail. How subprime mortgages can end up in your investments."

$this->bbcode_second_pass_quote('', '
')1. Home Buyers.

Buyers with weak, or subprime, credit typically pay annual mortgage rates that are at least 2 percentage points more than the rates that banks charge people with good credit.

2. Mortgage Brokers

Brokers, many of them based in California, lie at the heart of the once-profitable partnership between subprime lenders and Wall Street. They handle as much as 70 percent of originations.

3. Subprime Lenders

Lenders lure people with exotic mortgages such as no-doc loans, which don't require evidence of income or savings. A record of $805 billion of subprime mortgages were originated in 2005 alone.

4. Big banks/wholesalers

Big bank buy subprime loans. Many banks then bundle the debt and sell it to Wall Street firms. Banks such as HSBC Holdings (formerly Household Finance) have been hurt by the subprime bust.

5. Securitization/manufacture of CDOs

Wall Street banks package subprime loans in mortgage backed securities and collateralize debt obligations. Sales of new MBSs soared to $2.4 trillion in 2006.

6. Rating companies

When a bank creates a CDO, it meets with credit raters to discuss the quality of the contents, including subprime debt. They divide the CDO into pieces in order to get the desired rating for each portion.

7. Securities/CDOs

CDOs include a mix of bonds and securities backed by mortgages and home equity loans. In 2006, an estimated $100 billion of subprime debt went into the $375 billion in CDOs sold in the USA.

8. Investors

Investors like CDOs because they offer 'potentially' higher returns than bonds with the same rating. Banks, insurance companies and pension funds take on more risk in pursuit of yields as high as 20 percent.

[highlander]

Until this AM, world markets seemed immune from the US sub-prime woes. Now it seems like the US markets have sneezed and the worlds markets have caught a cold. Mr Bill.. Do you think this trend will continue? Or is it just an attempt to shore up the US markets?

[MrBill]

$this->bbcode_second_pass_quote('highlander', 'U')ntil this AM, world markets seemed immune from the US sub-prime woes. Now it seems like the US markets have sneezed and the worlds markets have caught a cold. Mr Bill.. Do you think this trend will continue? Or is it just an attempt to shore up the US markets?

[Plantagenet]

The Eurobank has just pumped another 60 billion Euros into the system, right on the heels of the 90 billion they pushed out the door last week. That should help with the liquidity concerns.