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EJ
10-13-08, 08:43 PM
http://www.itulip.com/images/EconFranksm.gif It’s... ALIVE!

Central banks hit the dead Frankenstein Economy (http://www.itulip.com/frankensteineconomy.htm) with US$2.4 trillion volts from European central banks in addition to $900 billion pledged or already spent by the US.

After several weeks laying dead on the gurney after suffering a fatal heart attack mid-September – a thick stream of chunky green securitized debt vomit dribbling from the corner of its mouth, its credit-based blood supply pooling and turning shades of purple and blue at its back – how will the Frankenstein Economy with its new government "brain" installed function?


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Manic versus Panic

Apparently stock market investors think so. Nothing like a 19% one day spike in the stock market to calm the nerves after a 40% one week decline preceding. Time to jump into the market?

One longs for a simpler time, when stocks were owned by individuals, funds, and corporations in competition with each other rather than by governments, governments, and governments.

Oh, well. We expect our government will sell our banking system back to us later – at a fair price and in excellent condition. Like this.


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That's the nature of government interventions in markets. Short term, the patient lives. Long term...

The huge spike in stock markets today tells us that the majority of fund managers, who own the bulk of the money in the markets, believe that government controls the markets.

Government promises bailout, stocks spike.

Government fails to deliver promised bailout, stocks crash.

Government delivers more than promised bailout, stocks spike.

With each bailout, stocks spike more.

With each disappointment, the markets crash farther.

A recession was in train even before the banking crisis and credit crunch. We warned about it Oct. 2006.

We have to ask: what happens when, inevitably, the latest bailout fails to deliver the implied promise of not only banking system solvency but economic recovery?

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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marvenger
10-13-08, 11:07 PM
stick your head between your legs and kiss your arse goodbye?

phirang
10-13-08, 11:53 PM
I dunno... seems like the US has a good thing going now...

hoodoo
10-14-08, 12:54 AM
Is it a foregone conclusion that the intercardiac injection will really succeed - even for the short term? It sounds a bit like EJ thinks so.

I'm still learning but it seems that we would expect LIBOR rates to drop quickly over the next week or so if the banks resume lending. What else to watch?

Hoo

marvenger
10-14-08, 01:01 AM
LIBOR would come down but I don't think it'll last if it does and I don't think EJ does either, there's too much in consumer spending reduction and recession and further asset price declines for that to happen. I think EJ is saying that only bailouts won't do and there has to be a stimulous package preferably and probably to stimulate altE and Infrastructure...and hopefully we can kiss the FIRE/frankenstein economy goodbye instead of our arses, much preferable.

Tulpen
10-14-08, 01:03 AM
What else to watch?

- Corporate earnings and forcasts
- Inflation or deflation
- State of the US pension funds

photoncounter
10-14-08, 01:22 AM
http://video.google.com/videoplay?docid=4343898391323537541

This is the link to a video by an Indian Economist: Global Imbalance - An Imminent Dollar Crisis


"Either they can save the banks or the Dollar, they cannot save both" !His frustration for the US Dollar Hegemony is imminent. May be it is an educational video for the people, not sure though. He comes out strong on certain issues, maybe even exaggerates. I am not sure about the verity of some of the facts, nevertheless, some interesting views and mostly in sync with itulip.

marvenger
10-14-08, 03:26 AM
Mega posted this a while ago, I remember it was Mega coz he normally posts random news articles like me and this was some left of field good stuff.

kingcopper
10-14-08, 07:40 AM
- Corporate earnings and forcasts
- Inflation or deflation
- State of the US pension funds

WATCH THE BOND MARKET! That is all yah need to know for the next couple months.;)

jimmygu3
10-14-08, 09:49 AM
WATCH THE BOND MARKET! That is all yah need to know for the next couple months.;)

Can you please elaborate, kingcopper?

bill
10-14-08, 10:07 AM
WATCH THE BOND MARKET! That is all yah need to know for the next couple months.;)
correct
next for Paulson's fund ,,,Corporate purchase of?
http://www.forbes.com/forbes/2008/1013/130.html

Fixed-Income Watch
The Coming Bond Default Wave
Richard Lehmann 09.18.08, 6:00 PM ET
Forbes Magazine dated October 13, 2008

<TABLE cellSpacing=0 cellPadding=0 align=left border=0><TBODY><TR><TD><SCRIPT src="http://images.forbes.com/boxes/1013forbes.js"></SCRIPT><!--alternating row box--><STYLE>.head1013forbes { background-color: #336699; color: #ffffff; font-weight: bold; padding:2px;}.border1013forbes{ border:1px solid #003366;}.bordercolor1013forbes { background-color: #336699;}.row1013forbes { background-color: #ffffff;}.row11013forbes { background-color: #ffffff;}.row21013forbes{ background-color: #efefef;}.rule1013forbes { background-color: #cccccc;}.space1013forbes { background-color: #ffffff;}</STYLE><TABLE class=border1013forbes cellSpacing=0 cellPadding=0 width=170 border=0><TBODY><TR class=1013forbesrow1 vAlign=center><TD></TD></TR><TR class=row21013forbes vAlign=center><TD class=boxtext>Wall Street: What's Next (http://www.forbes.com/2008/09/24/lehman-merrill-aig-biz-wall-cx_0924wallstreetcrisis_land.html)</TD></TR><TR class=row11013forbes vAlign=center><TD class=boxtext>Internet War (http://www.forbes.com/forbes/2008/1013/064.html)</TD></TR><TR class=row21013forbes vAlign=center><TD class=boxtext>Kidnap Inc. (http://www.forbes.com/2008/09/24/kidnap-inc-gangs-biz-cz_nv_0924kidnap_land.html)</TD></TR><TR class=row11013forbes vAlign=center><TD class=boxtext>Complete Contents (http://www.forbes.com/forbes)</TD></TR></TBODY></TABLE><!--/alternating row box-->


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My business has maintained a database of all corporate and municipal bond defaults since 1982. Over the years it has grown to include defaults by 4,400 issuers on $560 billion in debt. That's a record of failure that clearly should concern investors, even if defaults have been relatively few in the last several years.
One particular reason to worry right now: Corporate bond defaults come in waves, not a continuous stream. They happen when banks cut off companies' lines of credit, and that usually happens when there's a recession. That's because the economic downturn reduces the value of a company's assets and thus reduces the collateral that banks can fall back on to recover loan principal. This time we face not only recession but also a banking industry with damaged balance sheets of its own. Throw in the fact that the corporate junk bond market has grown to $1.3 trillion and you have the likelihood of defaults easily surpassing the last wave in 2001--02. In 2002, $98 billion of corporate bonds went bad, out of $757 billion outstanding.
One of the effects of such a default wave is that it makes a recession last longer, by heaping more bad news on a market whose faith in credit ratings is already impaired. That's a danger right now, as even investment-grade issuers are having to pay 8% or more for their borrowings. Such yields suggest that we may face some significant defaults even among bonds with ratings above the junk level.
What about tax-exempt bonds? You might presume that municipal bonds aren't vulnerable to default, but they, too, fail in significant numbers. In fact, of the 4,400 defaults in our database, 2,900 are of municipal bonds. Their total principal amount of $44.5 billion is low compared with that of corporate defaulters, because the typical municipal issue (especially revenue bonds, which are most prone to default) is much smaller than a corporate one. Insurers, including the federal government, made good on the loss of 30% of that default volume. In those cases, muni insurance was really worth something.
The causes of municipal bond defaults are many: nursing homes that don't fill up, housing developments that were started too late, commercial projects with thin revenue streams and so-called "economic development" tax exemptions. This year we've seen an unsurprising surge in defaults connected with housing developments in Florida, California and Nevada. Jefferson County, Ala. issued $3.2 billion of water bond issues that were structured unwisely, relying on sewage-service revenues to fund them as they rolled over every month and a half. Those bonds have collapsed as interest rates soared, and they're being kept alive only by the fact that the investment bankers and underwriters who have been left holding many of them face conflict of interest charges if they try to recover all they think they're owed.
The good news about bond defaults, such as it is, is that when they do happen, all is usually not lost. Bondholders have a claim on a company's assets before stockholders, although not before banks. On average, holders of defaulting corporate bonds recover about 72 cents on the dollar. Future defaults will do worse, though, because recent changes to bankruptcy law have added to banks' advantage. Municipal bond defaults repay an average of 85 cents on the dollar for those with some sort of insurance and 70 cents for those without (the range of repayment goes all they way from zero to full face value). That sounds grim, but remember that a 30% decline in a stock's price has the same cost to the investor, and that happens even with healthy companies.
Since we are just entering the default phase of the bond market, this is no time to reach for yield. Review your holdings now, and dump all issues rated B-- and CCC. I predict that in the coming default wave as many as 50% of those issues will default. That will leave 50% that don't default, but their yields can be expected to rise as high as 20%, further depressing their prices, before the default wave begins to ebb.
You may already be looking at a loss on your below-investment-grade holdings, but much worse lies on the horizon. The same can be said about junk-bond mutual and closed-end funds. They are already weak (Bloomberg's index of high-yield mutual funds has a return of --8% this year), and they are likely to get weaker.

GRG55
10-14-08, 11:47 AM
correct
next for Paulson's fund ,,,Corporate purchase of?
http://www.forbes.com/forbes/2008/1013/130.html

At some point yield spreads, which have already blown out tremendously, are going to offer a fantastic opportunity to buy high yield corporates very cheap for a potential capital gain play that's likely better than anything the equity market will offer up for many years.

c1ue
10-14-08, 12:01 PM
At some point yield spreads, which have already blown out tremendously, are going to offer a fantastic opportunity to buy high yield corporates very cheap for a potential capital gain play that's likely better than anything the equity market will offer up for many years.

Agreed. For those corporations which don't default.

Of course, should be get hyperinflation, then the definition of what constitutes a fantastic opportunity is going to change.

I am more and more of the belief that the only way out is a fiat devaluation of the dollar.

Adding an extra zero would do it.

GRG55
10-21-08, 08:15 AM
Agreed. For those corporations which don't default.

Of course, should be get hyperinflation, then the definition of what constitutes a fantastic opportunity is going to change.

I am more and more of the belief that the only way out is a fiat devaluation of the dollar.

Adding an extra zero would do it.

1. I would never try this play with individual bonds; one needs a basket, and if I pull the trigger on this idea it will be through a high yield bond fund most likely. You can't make this play and assume you won't suffer any defaults within the basket. That's like saying you can play the stock market and never have a loss. The point of the play is that the default risk now being priced into high yield bonds is about double the maximum historical experience. In the next credit event [CDSs?] the yield spread may blow out even more to yet another new record, and that would be the time to consider making a speculation [although one could also argue that at that point the margin of safety is approaching Ben Graham levels :)].

2. hyperinflation, should it arrive, will take considerable time to manifest. This isn't a play for retiree income; it's strictly a potential capgains play...;)

c1ue
10-21-08, 11:22 AM
GRG,

You're missing what I'm saying: that the extent of debts and trajectory of the economy is such that we won't even have hyperinflation.

Because hyperinflation will be too slow.

We may get a straight FDR style fiat devaluation of the dollar.

That's the only way to fix the problem fast enough.

phirang
10-21-08, 11:43 AM
GRG,

You're missing what I'm saying: that the extent of debts and trajectory of the economy is such that we won't even have hyperinflation.

Because hyperinflation will be too slow.

We may get a straight FDR style fiat devaluation of the dollar.

That's the only way to fix the problem fast enough.

That would solve a LOT of problems... regardless, the die is cast: new deal 2.0 is nigh.

bam
10-23-08, 05:25 AM
GRG,

You're missing what I'm saying: that the extent of debts and trajectory of the economy is such that we won't even have hyperinflation.

Because hyperinflation will be too slow.


Ah, the Great Leap Forward....that sounds familiar?!

GRG55
10-23-08, 06:57 AM
[/b]

That would solve a LOT of problems... regardless, the die is cast: new deal 2.0 is nigh.

They have to collect up all your gold first gentlemen...:p

phirang
10-23-08, 09:06 AM
They have to collect up all your gold first gentlemen...:p

We'll fly it in from Qatar once we threaten to REALLY let Israel bomb Iran...:D