$this->bbcode_second_pass_quote('smallpoxgirl', '
')
The thing that makes me apprehensive is that I don't understand why it fell so far right now. That makes me a bit apprehensive about predicting it's future behavior. Having fallen so fast, it's pretty unlikely that it's going to rocket back up. I don't feel huge urgency to buy today.
PeakOil is You
The commodities dip of July/August 2008
Re: The commodities dip of July/August 2008
by Jotapay » Tue 12 Aug 2008, 17:24:00
If this guy is correct, it is because hedge funds are de-leveraging due to margin calls and the cascading effect that these margin calls cause.
http://www.urbansurvival.com/week.htm
Choice snippets:
$this->bbcode_second_pass_quote('', 'L')et me sketch out where we are at the moment. We're in a world awash with excessive leverage and the world has to "de-lever" in order to get things back in balance in the world of high finance. Think of it this way: When times are good, a high quality securitized bond can be had for as little as 2-cents on the dollar. That's 49 to 1 leverage. More typical was the slightly lower rated securitized assets where leverage was a more modest 19 to 1, but still, that means putting 5% in to control the position.
What is happening with The Great De-levering" underway is actually a double whammy. First, the value of the securitized assets is dropping, so instead of a tranche being valued at 100-cents on the dollar, it might drop to perhaps 92-cents on the dollar. And then, to make matters worse, the lenders were (and are) demanding the hedge funds have more 'skin in the game'.
So say you had a MBS (mortgage backed security) that was valued at $1.00 and held with 49 to 1 leverage. Your hedge fund puts up two-cents for each $1.00 controlled. Just add zero's to the concept and you're there.
Next, because of foreclosures and jitters, you get "the call" (a telephone call that's a margin call) from your banker who's been putting up the 98-cents as a loan. The call goes something like this:
"Hi, George? That $1.00 MBS is no longer going to be marked to model. Instead, we are marking to street price and that's now 87.5-cents. And, because capital is getting more dear, we're also going to increase your margin requirement to 5% from the current 2%."
Look at what this has done to my hedge fund P&L: I used to show $1.00 of assets on the strength of my MBS but since it has been repriced, This asset just dropped 12½%/ And now, to stay in the game, I will need to put up 5% of the 87.5-cent asset or 4.375-cents instead of the two-cents I had in earlier. My hedge fund sudden looks like a poor lending risk - and that would trigger more margin calls in itself. Yikes!
Placed in this position, the hedge fund, which has been enjoying great profits from this trade before repricing, now finds that they are upset down, so the only way to get out of the trade is to sell the repriced assets into the market to liquidate the position, but that sale will happen at the new lower price. And then, if there's any kind of gap left, they will have to sell off other assets, too. Things become self-reinforcing on the downside.
You can see what happens now, right? One asset class going toes up means that assets that were maybe just fine (and fairly priced) have to be sold off to balance the books. And because that asset is sold at a discount (like gold contracts, or silver, just as a hypothetical) those prices begin to move down.
"We've got about $500-trillion in synthetics to de-lever, but some of that is double-counted, and some is counted four times, but it's still lot of money," he explains. "And the hedge funds only have about a trillion to play with. So you can see there's a lot of downside potential."
As good as my confidant is at running numbers out, there's no way to tell when it will all stop. But if you're looking for a wild-*ss guess, try this observation: "There are about 9,000 hedge funds out there right now. I wouldn't think the de-levering is over until maybe 6,000 of them have gone broke...and the 3,000 that remain will be a mix of winners and those barely hanging on..." That's only a guess. No one knows for sure.
There's a lot of 'pile on' in play, too. The lemming-like behavior of the retail customers is apparently nothing when compared to the lock-step behavior of hedge funds. All it takes is a word here or there at those particular places in Greenwich, and 'poof!' A whole asset class gets whacked, and thanks to the circular nature of the game, everything else de-levers to some extent as margin calls come in for the players 'caught out'. A failure here, means pressure there, kind of thing.
You won't get to see all this working out in real-time, though, because the offshore funds don't have to report like the regulated players in the US, even though many of the plays are phoned in from Connecticut.
As my friend's book points out, there's nothing wrong with leverage at modest levels, like the 20% down conventional loans to buy a home - that's still a great use of leverage. But 2% (and less) to control huge financial abstractions? That's coming to an end. Painfully.
What's hard for people to conceptualize is that a sell off of one commodity (or stock) generates margin calls in others, which in turn drives selling in non-related markets, and those in turn cascade in slow motion which might more properly be called a "Crashcade" although I haven't spied that term (or "Debtberg" in my friends book, yet.
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Re: The commodities dip of July/August 2008
by MrBill » Thu 14 Aug 2008, 05:17:55
shady28 wrote:
$this->bbcode_second_pass_quote('', 'A')nd I'll be frank on money supply - it's exceedingly complex and most people who talk about it (esp here) haven't the faintest clue just how complex.
To give an example, lets say you run out and spend $10k on your credit card today. Did you know that you have just expanded the money supply? In most cases, that is a true statement. A large commercial bank takes a loan from the Fed, which you then take from the bank. When you spend that money, someone deposits it into a bank account. This then raises the total deposits of the bank, which for example I'll assume is the same bank you took your loan from. If the bank reserve requirement is 10%, they can then use that $10,000 depost to create an additional $90,000 in credit. People receiving that credit spend $90,000. The seller deposits it, and the bank can now loan out an additional $890,000.
This is a very simplified view of credit as money, but in essence it is correct.
$this->bbcode_second_pass_quote('', 'A')nd I'll be frank on money supply - it's exceedingly complex and most people who talk about it (esp here) haven't the faintest clue just how complex.
To give an example, lets say you run out and spend $10k on your credit card today. Did you know that you have just expanded the money supply? In most cases, that is a true statement. A large commercial bank takes a loan from the Fed, which you then take from the bank. When you spend that money, someone deposits it into a bank account. This then raises the total deposits of the bank, which for example I'll assume is the same bank you took your loan from. If the bank reserve requirement is 10%, they can then use that $10,000 depost to create an additional $90,000 in credit. People receiving that credit spend $90,000. The seller deposits it, and the bank can now loan out an additional $890,000.
This is a very simplified view of credit as money, but in essence it is correct.
No, you are absolutely wrong. So if people do not understand the concept of money supply growth it is because posters like you confuse the cause and effect of credit expansion and contraction. A bank cannot use a $10.000 cash advance on a credit card to expand money supply by $890.000.
They can only use a $10.000 deposit in cash to extend $9.000 of that cash in new loans using your own 10% minimum reserve example. If they wanted to loan out $890.000 in cash they would have to borrow $881.000 either from the interbank money market or directly from the Fed. Credit expansion is different than money supply growth. Learn it, remember it.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Re: The commodities dip of July/August 2008
by JohnDenver » Thu 14 Aug 2008, 23:20:38
People, you can't say you weren't warned.
Commodity Correction Warning
I posted it, right there on the front page of peakoil.com, a couple of weeks before the carnage set in.
I did my darndest to raise the alert, but I was laughed at... ridiculed... pelted with rotten tomatoes... I was told that only a moron could believe that commodities weren't headed for the moon.![[smilie=5propeller.gif]](https://udev.peakoil.com/forums/images/smilies/5propeller.gif "5propeller")
Commodity Correction Warning
I posted it, right there on the front page of peakoil.com, a couple of weeks before the carnage set in.
I did my darndest to raise the alert, but I was laughed at... ridiculed... pelted with rotten tomatoes... I was told that only a moron could believe that commodities weren't headed for the moon.
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Re: The commodities dip of July/August 2008
by Roccland » Fri 15 Aug 2008, 00:06:26
$this->bbcode_second_pass_quote('JohnDenver', 'P')eople, you can't say you weren't warned.
Commodity Correction Warning
I posted it, right there on the front page of peakoil.com, a couple of weeks before the carnage set in.
I did my darndest to raise the alert, but I was laughed at... ridiculed... pelted with rotten tomatoes... I was told that only a moron could believe that commodities weren't headed for the moon.
Commodity Correction Warning
I posted it, right there on the front page of peakoil.com, a couple of weeks before the carnage set in.
I did my darndest to raise the alert, but I was laughed at... ridiculed... pelted with rotten tomatoes... I was told that only a moron could believe that commodities weren't headed for the moon.
Yep - you called it.
Kudos
Now - what you need to do is back the truck up...cuz a correction is all it is...
TO THE MOON ALICE!!!!!!!
500 MPH into a brick wall - me
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