Subject: Sad but true.

Alas and alack Marc, you're right. After decades of inflation (read counterfeiting) by the Federal Reserve and decades of taxation (read theft) by the Federal Government, I don't have any money.

Subject: Selected quotes from the November 2001 Richebacher Letter.

The title of this newsletter was "Weaker and Weaker".

"In the course of this year the US economy has developed far worse than had generally been expected, and nine rate cuts by the Fed have completely failed to show any desired effect, yet faith that almighty Mr. Greenspan and the Federal Reserve can and will successfully reignite economic growth is unshaken."

"Definitely it is not tight money and credit that is driving the economy into recession, but what else could it be? We offer a simple and plausible explanation: it is the US economy's worst profits carnage in the whole postwar period."

"By the way, these considerations also highlight the absurdity of the familiar claptrap that the central banks can 'print money'. What they can 'print' is only one thing: bank reserves, that is, cash balances in favor of commercial banks. But whether these balances translate into effective credit growth that finances higher spending by the consumer and businesses on goods and services depends entirely on the decisions of borrowers and lenders outside the central bank."

"The US economy is crumbling fast. The immediate key causes are plunging profits and capital spending. But the root cause has been conclusively identified: grossly inflated consumer spending, as reflected in the collapse of personal saving and the explosion of the trade deficit. What we saw in the past few years was not a new paradigm US economy bursting with health but a bubble economy that has been bursting of unprecedented credit and debt excesses."

"Not only stocks, but also bonds are in grave danger of a severe decline, once the dollar cracks."

<font size=-1>[ This Message was edited by: Robert on 2001-11-11 12:16 ]</font>

<font size=-1>[ This Message was edited by: Robert on 2001-11-11 12:19 ]</font>

A book written a decade ago with the telling title of "The Great Reckoning, How the world will change in the depression of the 1990.s," concludes with these words:"We can notice the terrorists with the hand-held missiles, the build-up of debt, the eclipse of another empire, the technical signs of a long ecnomic upturn winding down. These developments all point to a slump ahead. Let us hope it is not worse than a slump."
This prediction may have been a few years premature: I believe it is now being realized.
Bert Hielema, Ontario, Canada.

On 2001-11-11 18:37, bert hielema wrote:
A book written a decade ago with the telling title of "The Great Reckoning, How the world will change in the depression of the 1990.s," concludes with these words:"We can notice the terrorists with the hand-held missiles, the build-up of debt, the eclipse of another empire, the technical signs of a long ecnomic upturn winding down. These developments all point to a slump ahead. Let us hope it is not worse than a slump."
This prediction may have been a few years premature: I believe it is now being realized.


Bert Hielema, Ontario, Canada.

bert,

there is a lot of good material in that book. i would also recommend the follow up to it, "the sovereign individual."

personally, i don't agree with their timing, i think they are a couple of decades premature even now. however, the scenario they paint is i believe an accurate one for what we will face as we reach the end of this current cycle over the next two decades or so.

Subject: 30 Year Government Bond

The Treasury is going to stop issuing 30 year bonds. This is a really radical move and I wonder what is behind it. First and foremost the government will save money by financing on the short end of the yield curve. Greenspan has forced short term interest rates way down of course.

But you have to wonder what is going on behind the scenes. This thing reminds me of the LTCM fiasco when the Fed had to go in and bail out the bond market. One of the things eliminating the 30 year bond will do is increase demand for shorter maturity paper. When the price of shorter paper goes up due to demand this will push its yield down. This will have the effect of flattening the ENTIRE yield curve. It's like some gigantic bailout for anyone who has any debt. It makes me think things are far worse than anybody lets on.

Of course the Japanese yield curve is pretty much flat at about .25 percent on the short end to about .50 percent on the long end. They did it to try to lift the Japanese economy out of depression. I wonder if we're not headed in the same direction.

For what it's worth, I am a 'bull.'

Look out world, you ain't seen nothin' yet!

Marc, have you gone long, how much?

On 2001-11-05 20:33, enjolras wrote:
as long as the public retains its faith in the current monetary system this will keep general stock valuations at levels that would have been considered overvalued when compared to pre 1970 valuations before nixon finally closed the gold window for good. but when that faith begins to wane then i suspect we will find the stock markets of the world and the global economy in a situation somewhat akin to a wile e. coyote cartoon where he has run off the cliff but until he looks down he just keeps on going. but when he looks down......pheeeeewwwww!splat! then and only then you will see valuations that will make pre 1970 valuations look high! but that is probably a good 20 years away in my opinion.

Could that happen now?

On 2001-11-16 09:12, rc51 wrote:

On 2001-11-05 20:33, enjolras wrote:
as long as the public retains its faith in the current monetary system this will keep general stock valuations at levels that would have been considered overvalued when compared to pre 1970 valuations before nixon finally closed the gold window for good. but when that faith begins to wane then i suspect we will find the stock markets of the world and the global economy in a situation somewhat akin to a wile e. coyote cartoon where he has run off the cliff but until he looks down he just keeps on going. but when he looks down......pheeeeewwwww!splat! then and only then you will see valuations that will make pre 1970 valuations look high! but that is probably a good 20 years away in my opinion.

Could that happen now?

it is a possibility, but at this juncture i think it is a remote one. typically, it takes a combination of events to cause such a loss of confidence and they have just simply not occurred yet. now, the world is awash in liquidity, interest rates are at 40 year lows, there is no inflation to speak of, the "war" in afghanistan, if you can even call it that, is for all intents and purposes won, and most importantly the u.s. monetary base is currently growing at double digit annual rates.

not much in that mix to cause confidence in the global financial system to waver very much.

Should I buy Stock?

Should I buy land?

i think stocks will do well over the next several years until sometime in the 2009-2013 time frame when the next peak war is due. then it will be time to switch into hard assets like land, timber, natural resources, gold, silver, etc.

Subject: Bulls and Bears

If you really think about it we are all really Bulls. No one wants the economy to collapse into a depression. Even people who call themselves Bears don't want this to happen. Bears only want to drive the Stock Market down a little bit so they can make money, but then they want it to bounce back as it has recently so they can drive it down again.

Regardless of what you think is going to happen your personal wishes are of no consequence to the economy. Think about it. The economy is basically a gigantic inhuman computer that calculates the prices of everything from toothpaste to diamond earrings in real time and continuously. Its microprocessors are human brains instead of bits of silicon and each human brain is vastly more complicated than the simple little chip in your computer. Every time you decide whether or not to buy a new pair of boxer shorts you are inputting information into this gigantic computer. And the computer has about six billion microprocessors running in parallel at this date. I don't care how big your Cray computer is or how sophisticated the program, it simply can't match the processing power of those six billion brains.

So it's IMPOSSIBLE to predict our economic future. Even Al Green$pan is just guessing when he comes out of his Fed Open Market Committee meetings and intones his fatuous pronouncements.

Boom? Or Bust? Only time will tell.

<font size=-1>[ This Message was edited by: Robert on 2001-11-17 18:01 ]</font>

<font size=-1>[ This Message was edited by: Robert on 2001-11-19 10:27 ]</font>

Another one of S&H predictions is about to come true. Class politics is ready to return. This crisis will be severe (sorry about the cliche :razz. We can now add another reason. The economy is still going down the drain, and fears are rising even again as deflation is starting to hit. The current Bush administration, however, is only helping major corporations, giving them billions and tax breaks, with no breaks for the actual workers themselves. If this trend continues, America will fall into class political warfare, and a Huey Long-esque person will probably start to rise. Of course, add that with the corporate grab after the attacks, the likelyhood of American jobs going overseas to save money for corporations, and the increasingly apparent corporate control of politics, and you have a nation ripe for civil disaster. So again, what am I predicting? A revolt sometime during or before 2005.

http://www.truthout.com/11.19D.Kennedy.Stim.htm

<font color="blue">
STATEMENT OF SENATOR EDWARD M. KENNEDY REGARDING THE
ECONOMIC RECOVERY AND ASSISTANCE FOR AMERICA'S WORKERS ACT

On Tuesday, we began debate about the economic stimulus package. We know the economy is in trouble, and we know we have to act. Clearly, by any standard, we face an economic emergency that demands responsible action by Congress.

The American people want action by Congress too. They strongly support our Democratic proposals to provide unemployment insurance and health insurance to laid off workers, and federal assistance to states. They know it's an emergency in the economy and they know it's an emergency for the hundreds of thousands of men and women without unemployment insurance or health insurance.

Yet, some of our colleagues in Congress oppose this action. Instead, they support a bill that would retroactively repeal the corporate minimum tax and give the largest corporations $25 billion in direct payments from the United States Treasury. They don't think laid-off workers who can't afford, or don't have, health insurance are an emergency. Instead, they support spending $120 billion to accelerate the reduction of upper income tax rates, 80% of which won't go into the economy until after next year.

Our economy is in trouble. There is no denying it. Just ask the men and women who have lost their jobs and have to tell their families every week that they cannot find new employment. They'll tell you how hard it is to put food on their families' tables each week. They'll tell you how hard it is to watch their bills piling up with no end in sight.

If that's not enough, look at the numbers.

Only 38% of unemployed workers receive unemployment insurance. This figure is down from 75% in 1975. And, the figure is much worse for low-wage workers. According to a new study by the National Campaign for Jobs and Income Support, only 20% of unemployed low-wage workers will qualify for benefits during a recession.

These workers are least likely to qualify for unemployment benefits, and they are most likely to be laid off. They are struggling to keep a roof over their families' heads and to afford food for their children. We know that the number of hungry children has grown in recent years. Unless we do more to help, the number will continue to grow.

Yesterday, America's Second Harvest released the largest, most comprehensive report on the plight of hungry Americans. Last year, 23 million Americans, including 9 million children, sought emergency food relief through America's Second Harvest. The current downturn in the economy means that even more families are facing the difficult choice between feeding their children and paying the rent, a choice no person should have to make.

These findings demonstrate the dramatic rise in hunger and related health problems among children. They demonstrate that current unemployment benefits are not adequate to help working families during the current economic downturn. We need to do more to see that families can afford to put food on their tables. Our Democratic plan provides unemployment benefits to 600,000 more low-wage and part-time workers and increase these benefits by at least $25 a week.

The economy needs stimulus now. Workers need assistance now.

The best way to accomplish both of these goals is to get relief to the families who need it the most. Economists across the country agree that providing relief to low- and moderate-income families is one of the most effective ways to stimulate the economy.

The Democratic plan would stimulate the economy right away, by putting money in the hands of the people most likely to spend it -- dislocated workers and their families. We do that by strengthening the unemployment insurance system, improving workers' ability to afford health care, and providing a tax rebate for those who did not receive a full rebate earlier this year.

Unemployment insurance is the nation's first line of defense in an economic recession. By putting UI trust fund dollars into the declining economy, we automatically boost consumer spending in communities affected by rising unemployment, while meeting essential needs of households hurt by layoffs.

A recent study by the Department of Labor shows that every $1 invested in unemployment insurance generates $2.15 for the nation's economy. That same study estimated that unemployment insurance "mitigated the real loss in GDP by 15 percent" in the last five recessions.

According to Joseph Stiglitz, "we should extend the duration and magnitude of the benefits we provide to our unemployed. This is not only the fairest proposal, but also the most effective. People who become unemployed cut back on their expenditures. Giving them more money will directly increase expenditures."

The Congressional Research Service agrees: "Extending unemployment compensation is, in fact, likely to be a more successful policy for stimulating aggregate demand than many other... changes."

The Republican plan will put very little money into the hands of unemployed workers. It offers no guarantees of extended benefits in most states. In fact, the states with the highest unemployment rates are the least likely to receive help under that plan. Even for those few workers who will be helped, the plan won't provide any benefits until next spring. America's working families must not be left behind when Congress acts on an economic recovery package.

We must also help families afford health insurance. It is also the right thing to do for them, and it is the right thing to do for our economy. Providing health insurance for laid-off workers improves the health of our economy. When a parent is forced to choose between health insurance and food on their table, it is unfair for their family, and it undermines the economy.

On average, health insurance premiums for these families cost nearly two-thirds of their unemployment insurance. That is why only 18 percent of workers eligible for COBRA use this coverage. And millions of workers are not eligible for COBRA at all.

This is no time to accept an increase in the uninsured. It is wrong for families and wrong for hospitals, nursing homes, health care workers and many others in the health care sector, which makes up one-seventh of our economy.

The Democratic economic recovery plan provides temporary health insurance for workers who have been laid off in the slowing economy. Currently, workers must pay 65% of their unemployment check to purchase COBRA health insurance coverage. Our plan to subsidize COBRA coverage would make health care affordable for all displaced workers. States also could receive federal Medicaid matching payments to cover other laid-off workers who do not qualify for COBRA.

By protecting both workers eligible for COBRA coverage and increasing the Medicaid matching payments, the Senate Democratic plan provides meaningful health coverage for unemployed Americans while the Republican plan will leave families behind. For unemployed workers who are eligible for COBRA, the Senate Democratic plan provides health coverage for 12 months during the economic downturn. The Senate Republican plan provides enough for only 2 weeks of coverage. For unemployed Americans who are not eligible for COBRA, the Democratic plan again provides coverage for one year, while the Republican plan offers no assistance.

The plan to provide unemployed workers with health insurance coverage will also be good for the economy by helping to stop a decline in the health care sector. If unemployed individuals who lack health insurance forgo health care, the health care sector will be hurt during the downturn. The health care system has been one of the most vibrant sectors of the economy in recent years. It has been responsible for 30% of the real growth in gross domestic product and 45% of the net increase in jobs in the past year. A reduction in the purchase of health care services has an effect on the economy similar to that of other reductions in consumer spending - it dampens economic activity.

Finally, a federal stimulus package will do no good if states have to make spending cuts or raise taxes. The current recession is already having an impact on state budgets. In fact, 35 states have reported budget shortfalls - a shortfall that already totals more than $15 billion and will grow to $30 billion if unemployment continues to increase.

This means that states across the country will have to make drastic cuts. In particular, they are cutting back on Medicaid. In fact, 20 states are already planning to cut Medicaid. At the same time, the number of people on Medicaid is expected to grow by as much as three million during this recession - about 2 million of them could be children.

If states cut Medicaid just as more people need it - we are going to see an increase in the uninsured. Also, leading economists believe substantial cuts in state Medicaid budgets would have dramatic ripple effects on the national economy.

Our plan provides financial assistance to states to help avoid devastating cuts in Medicaid -- cuts that will hurt state economies and reduce health coverage. States would receive $5.5 billion through an increased federal Medicaid matching rate --providing an immediate influx of cash into states suffering from the recession-driven budget crisis.

The Senate Republican alternative is unacceptable. It fails to address aid to the states, health care or unemployment insurance in any meaningful way.

The Democratic plan is a fair balance between tax incentives and spending incentives for the economy. The tax incentives in the plan meet the three essential criteria for a stimulus - they will put money into the economy now, they do not impose substantial new long-term costs on the federal budget, and they treat fairly those who are most in need.

Seventy percent of Americans today pay more in payroll taxes than in income taxes. Yet many of them received no tax rebate earlier this year. The rebate unfairly ignored these low and moderate income families. A one-time rebate of payroll taxes to them now will immediately inject $15 billion into the economy, placing the dollars in the hands of people who are likely to spend them immediately. Economists tell us that families with modest incomes are likely to spend the extra money they receive right away on needed consumer goods. Those with higher incomes are more likely to save it. The Democratic bill also includes temporary, targeted tax cuts to stimulate immediate business activity. These changes provide more favorable treatment for new investments now, and they deserve to be supported.

Because the tax cuts in the Democratic plan are truly designed to be an immediate economic stimulus, they do not incur any substantial cost beyond 2003. This point is vital to our economic recovery. Enacting new permanent tax cuts which can trigger large long-term federal deficits would be counter-productive. Permanent new tax cuts - on top of the nearly two trillion dollars in tax cuts enacted earlier this year - would actually hurt the economy now, by raising the cost of long-term borrowing and discouraging the kinds of investment we need most today.

The House of Representatives passed, by the narrowest of margins, a so-called stimulus package that will not stimulate economic growth in the short term, and will not be affordable in the long term. It merely repackages old, unfair, permanent tax breaks - which were rejected by Congress last spring - under the new label of "economic stimulus." The American people deserve better.

The long term cost of the House plan is too high - and less than half of the dollars would reach the economy next year. The House plan offers $46 billion in tax breaks to big businesses by permanently repealing the corporate alternative minimum tax and by giving permanent new tax cuts for multinational corporations. These provisions are an unacceptable giveaway of public resources.

The alternative suggested by our Republican colleagues in the Senate is also flawed. Their proposal to accelerate the reduction of upper income tax rates would cost $120 billion over the next decade. Only a small percentage of these dollars - less than one dollar in four - would go into the economy in 2002. And these dollars would go to those least likely to spend them. The result would be little immediate stimulus, large long-term costs, and a grossly unfair distribution to the wealthiest individuals in our society.

In fact, the House Republican proposal gives $115 billion in permanent new tax breaks to wealthy individuals and corporations, while the Senate plan would give them $142 billion in new tax breaks. Yet each of the Republican tax plans provide only $14 billion for low and moderate income families. Under the GOP plan, the tax cuts for corporations and wealthy individuals are permanent, while the cuts for working families are limited to just one year. The result is unfair, and it won't provide the economic stimulus that the nation urgently needs now.

Perhaps never before in history has our nation faced such grave challenges. The tragedy of September 11 has touched us all. Together, we witnessed a horror we could not have imagined - and bravery which inspires us all. The tragedy may have shaken our basic assumptions about the world in which we live. But, Americans have not retreated in fear. Instead, they have risen to meet these new challenges. The spirit of September 11th has compelled vast numbers of our fellow citizens to ask what they can do for their communities and our country.

It is time for Congress to do its part to respond to the emergency we face. We must respond to the economic crisis the nation faces. As we do so, we must show our dedication to America's best ideals. As we fight for a safer society, we can also create a more just society at the same time. September 11th has taught all Americans that we need to help each other as never before.

We will not ignore the plight of millions of Americans hurt by this tragedy and by economic forces beyond their control. As we work together to get our economy moving again, we can also work together to see that none are left behind.

We have a unique opportunity to give help and hope to every American as we enact a stimulus plan that puts America back to work.

The American people are meeting this challenge, and we must demonstrate to them that Congress is capable of meeting it too. The test we face now is to pass a stimulus package that truly lifts the economy, and lifts it fairly and responsibly. We do have an emergency, and we must address it. The American people are watching this debate closely, and they are waiting for our answer. </font>

Well Australia seems to be escaping the major world economic downturn.

Nation forging ahead as global economy suffers

By Laura Tingle, Political Correspondent

Australia will record a standout performance in the global
economy next year, in stark contrast to the rest of the
industrialised world, which is now in recession and facing a
tough 2002, according to the Organisation for Economic
Co-operation and Devel-
opment.

In its latest economic outlook, released last night, the OECD
predicted that Australia would grow at more than four times the
rate of the United States next year - expanding by 3.2 per cent,
compared with just 0.7 per cent for the US - and more than
three times faster than the average of OECD countries.

But the organisation, which represents the world's 30 wealthiest
industrial nations, has warned against further government
spending and urged the Howard Government to pursue further
economic reforms. It believed there was only limited room for
further interest rate cuts.

While the optimistic outlook for Australia is good news for the
Government, the forecasts largely reflect the official Treasury
view released during the election campaign.

The more significant news in the OECD outlook is its
confirmation that the US, and OECD countries generally, are
currently in recession and face tough times next year.

The OECD said the slowdown that began in the US last year
"has turned into a global economic downturn".

The "OECD area" - the world's developed countries - was
contracting for the first time since 1982, shrinking by 0.3 per
cent in the second half of 2001, according to the forecasts.

It was projected to remain very weak in the first half of next year,
recording growth of 0.7 per cent. Growth across the OECD was
forecast at 1 per cent in 2002 and 3 per cent in 2003.

Japan was expected to remain in recession "through 2002, at
least".

Despite this, the Paris-based organisation still saw a turning
point in the world economy in the middle of next year "as
security concerns abate and confidence returns" - although "the
distribution of risks may be skewed to the downside".

It argued that policy moves by governments around the world
would soften the impact of the downturn but warned that
government spending and low interest rates should not continue
too long.

The bounce-back in the US economy was expected to be "quite
strong, reflecting aggressive policy easing, the depth of the
preceding downturn and strong potential growth".

The organisation said growth in Australia was projected to
strengthen further "notwithstanding the global slowdown".

It said budgetary policy "should remain geared to preserving the
budget consolidation already achieved, which would help to
maintain financial market confidence and keep long-term
interest rates low".

The room for further interest rate cuts "seems limited", it said,
but "further progress on the structural reform agenda would
enhance Australia's proven resilience to cope with adverse
external conditions".

It expected world trade to rebound strongly in the latter part of
2002.

The OECD believed there was limited room for further interest
rate cuts around the world - unless events prove to be even
worse than it is forecasting - and was cautious about the role
further government spending could play in stimulating activity.

It warned that spending pressures should be resisted,
particularly with new calls for spending in areas such as public
aid to the airline industry after the September 11 terrorist
attacks.

Subject: Selected quotes from the November 2001 Steve Puetz Letter

"The US economy is now contracting rapidly. Workers are increasingly concerned about holding on to their jobs. The rampant bullishness of two years ago is finally fading from Main Street. However, other than NASDAQ, very little deleveraging has taken place in the stock market. If the public is turning bearish, then what's holding up the stock market? The answer: financial institutions. The Managers at banks, brokerage houses and hedge funds are still bullish. Their primary vehicle of speculation is financial derivatives."

"Fair value of the Dow Industrials is probably somewhere under 1000, not above 9000, where the Dow currently stands. How could the market have gotten so out of whack with its most basic valuation indicator? In a word: leverage."

"In the US economy, the greatest excesses lie in the derivatives market. It's one major bubble that has not yet burst. ( The other being the housing market.) The bursting of the NASDAQ bubble has damaged both the economy and the stock market. But make no mistake about it; the bursting of the derivatives bubble will create far greater havoc on US markets that the collapse of NASDAQ did."

"It has been leveraged support from financial institutions (especially hedge funds) that has kept the popular averages from completely collapsing."

"Neither the bursting of the Internet bubble, nor a liquidation of margin debt, nor a weakening economy, nor a suprise attack-none of these were ever the major threat facing the US financial markets. Rather a forced liquidation of derivative contracts always was, and still remains, the number one threat facing both the US economy and the US financial system. The leverage is so extreme that the risk is systemic. There is no way that the US financial system can survive a derivative implosion. And it will happen."

<font size=-1>[ This Message was edited by: Robert on 2001-11-24 19:37 ]</font>

leveraged support from hedge funds is holding up the market? for pete's sake, this guy makes them sound almost altruistic!

as someone who is intimately involved with hedge funds on a daily basis i can only say that my experience is that such comments are little more than rubbish. hedge funds that have done well these past couple of years have done it primarily by being short not long and what buying they have been doing of late is because profits from short selling have quite frankly been drying up. that coupled with the facts of an improving fundamental situation with interest rates at 40 year lows, the world swimming in liquidity,little or no inflation, the u.s. dollar on the mend, oil prices falling, and osama bin laden and his cronies on the run are pushing many back into equities. in fact, many funds are very likely still a bit on the short side because if you look at their returns over the last couple of months relative to the indexes they have been underperforming.

is a derivative debacle likely sometime in the future? probably. but its more likely to occur a couple of decades from now when single stock futures become commonplace, offering the same sort of leverage as was available in the 1920s, and "derivatives" are considered no more risky that 30 year mortgages are to us today.

Subject: Its Official.

Well, its official. The US economy has been in recession since March at least and probably longer. But, so what? The US falls in to recession about every 10 years like clockwork anyway (1991, 1981, 1974, 1961 etc, etc). The reasons are obscure. Some say it has to do with the 10 year refinancing cycle. Others think it has to do with sunspots.

Whatever. The only REAL question is will this recession segue into a depression like the 1929 recession did? Ultimately it all depends on whether Al Green$pan's Magnificent Credit Creation Machine is still working or not. We'll know in several years. It's impossible to predict the future course of the economy.

By the way, what Steve Puetz was talking about was the use of derivatives as "portfolio insurance" to reduce risk by large financial institutions. No doubt some of them were short. But derivatives don't REDUCE risk, they simply TRANSFER risk to a counterparty. What if that counterparty can't hold up his end of the bet in a steep decline? Somebody is going to be left holding the bag. This is what happened in the '87 Panic.

On 2001-11-26 11:12, Robert wrote:
Subject: Its Official.

Well, its official. The US economy has been in recession since March at least and probably longer. But, so what? The US falls in to recession about every 10 years like clockwork anyway (1991, 1981, 1974, 1961 etc, etc). The reasons are obscure. Some say it has to do with the 10 year refinancing cycle. Others think it has to do with sunspots.

Whatever. The only REAL question is will this recession segue into a depression like the 1929 recession did? Ultimately it all depends on whether Al Green$pan's Magnificent Credit Creation Machine is still working or not. We'll know in several years. It's impossible to predict the future course of the economy.

By the way, what Steve Puetz was talking about was the use of derivatives as "portfolio insurance" to reduce risk by large financial institutions. No doubt some of them were short. But derivatives don't REDUCE risk, they simply TRANSFER risk to a counterparty. What if that counterparty can't hold up his end of the bet in a steep decline? Somebody is going to be left holding the bag. This is what happened in the '87 Panic.

Ahhhh!

You beat me to it. :wink:

On 2001-11-26 11:12, Robert wrote:
It's impossible to predict the future course of the economy.

By the way, what Steve Puetz was talking about was the use of derivatives as "portfolio insurance" to reduce risk by large financial institutions. No doubt some of them were short. But derivatives don't REDUCE risk, they simply TRANSFER risk to a counterparty. What if that counterparty can't hold up his end of the bet in a steep decline? Somebody is going to be left holding the bag. This is what happened in the '87 Panic.

while it is true that it is not possible to predict the path of the economy with ABSOLUTE certainty, we do know from past experience that one of the foremost ingredients is an increase in the money supply and the monetary base and at the moment the monetary base is increasing at almost a double digit annual pace. you would be hard pressed to go back historically and find an instance where this occurred and the economy did not recover.

secondly, the use of "portfolio insurance" is not anywhere near as widely used today as it was back in the 80s. plus the existence now of large firms specializing in index arbitrage and asset allocation programs, which tend to go counter to market trends, currently act as mitigators against any such recurrence of an 87 crash scenario.

counterparty risk is always a potential problem but as long as there are large central banks willing to act as lenders of last resort and the public continues to maintain its faith in the present world currency system, the odds of that becoming a problem, particularly considering current liquidity conditions, is highly unlikely. could it become a problem at some point in the future? certainly. but until current conditions change that's not likely to be anytime soon.

Mr. Reed writes like one, who upon arriving late, sees another tell David that the King has fallen: "Ahhhh!" He cries, "You beat me to it. :wink: "

Mr. Reed, youth shall not be an excuse soon enough.


"And in all vineyards shall be wailing: for I will pass through thee, saith the LORD.

Woe unto you that desire the day of the LORD! to what end is it for you? the day of the LORD is darkness, and not light.

As if a man did flee from a lion, and a bear met him; or went into the house, and leaned his hand on the wall, and a serpent bit him." --Amos 5:17-19

:wink: :wink:

Subject: More Debt.

Yes the monetary base IS increasing hand over fist, BUT this will make things WORSE not BETTER. Every time Big Al prints up a dollar of CREDIT he also prints up a dollar of DEBT. And that's the whole problem, too much debt. In aggregate the United States can only carry so much debt. The ultimate level of debt is an absolute not a relative quantity. Uncle Al can forestall the inevitable for a while (he might even manage to forestall it for another ten years) but not forever.

As for derivatives they only SHIFT risk they cannot eliminate risk. Even Big Al doesn't seem to understand this. Managers don't understand it either. When they take these huge leveraged positions they think derivatives will protect them in a decline. They can't if the counterparty defaults on the bet. It doesn't exactly make me feel good that the central bank has promised (some of us would say threatened) to print even more funny money to bail out the derivatives market in case of a trillion dollar accident.

By the way the Fed loosened in the early 30's after the '29 Crash just as they have loosened now and it didn't do any good, ditto the Bank of Japan in the 90's.

<font size=-1>[ This Message was edited by: Robert on 2001-11-26 21:21 ]</font>

On 2001-11-26 21:17, Robert wrote:
Subject: More Debt.

Yes the monetary base IS increasing hand over fist, BUT this will make things WORSE not BETTER. Every time Big Al prints up a dollar of CREDIT he also prints up a dollar of DEBT. And that's the whole problem, too much debt. In aggregate the United States can only carry so much debt. The ultimate level of debt is an absolute not a relative quantity. Uncle Al can forestall the inevitable for a while (he might even manage to forestall it for another ten years) but not forever.

As for derivatives they only SHIFT risk they cannot eliminate risk. Even Big Al doesn't seem to understand this. Managers don't understand it either. When they take these huge leveraged positions they think derivatives will protect them in a decline. They can't if the counterparty defaults on the bet. It doesn't exactly make me feel good that the central bank has promised (some of us would say threatened) to print even more funny money to bail out the derivatives market in case of a trillion dollar accident.

By the way the Fed loosened in the early 30's after the '29 Crash just as they have loosened now and it didn't do any good, ditto the Bank of Japan in the 90's.

<font size=-1>[ This Message was edited by: Robert on 2001-11-26 21:21 ]</font>

you are correct in the sense that debt can not be piled up forever and at some point there will come a day of reckoning. but there is still plenty of room to go before we arrive at that point and there have almost always been very clear precedents that precede such a turning point and they have not yet occurred. its possible that this could be the time when something unprecedented does indeed occur...but i would suggest that's not a good bet at this time.

it is also true that every derivative transaction does carry with it counterparty risk. but then so do many other transactions within a capitalist system. to date the instances of counterparties failing to perform in derivative transactions have been extremely rare, so again you are suggesting that something completely unprecedented is likely to occur before the normal events that precipitate such events have occurred and under conditions which are actually favorable to counterparties being able to perform on their obligations. again, its possible, but not likely to be a very good bet.

yes, the fed and japan did loosen interest rates during the times you mention. but the monetary base failed to expand during each instance. that is what pushed the u.s. into depression and is also what has prevented japan from coming out of its economic problems. lower interest rates do not necessarily equate with a growing money supply as the bank of japan has recently discovered to its dismay.

Subject: The End of Enron

Enron was an old line Houston natural gas company which went into online trading in all commodities in a big way. Using heavily leveraged derivatives positions they thought they could "make money trading anything".

Unfortunately they found they could also loose their shirts trading everything when the market went against them. This is what Steve Puetz was talking about in that post of mine above. Financial derivative exposure is now AT LEAST 100 Trillion dollars (yes, I said $100,000,000,000,000). That's 10 times GDP. If just 10% of it blew up at once in a financial accident Big Al would have to print up TEN TRILLION dollars overnight to cover all the bets and allow all the gamblers to break even.

Enron was a Wall Street darling, its stock was at $80 per share now down to essentially nothing. I remember the Motley Fools were heavily invested in Enron, they used to tout it on their radio show all the time. I guess they are more Fools now than they are Motley.

Bear in mind that not only Enron but MOST major corporations and financial institutions (like your bank) are HEAVILY INVOLVED in the derivatives markets.

Emerging markets scuttle down their several black holes.


Mr. Robert Samuelson writes in the 29 November 2001 number of the Washington Post upon another bubble. HTH

_________________

"I often think it odd that [History] should be so dull, for a great deal of it must be invention." Catherine Morland in Northanger Abbey, Chapter XIV

<font size=-1>[ This Message was edited by: Virgil K. Saari on 2001-11-29 08:16 ]</font>