Financial topics

[vincecate]

M3 is the important measure, which the Fed no longer reports. M3 can be calculated from other Fed data, and some folks do just that.

http://nowandfutures.com/key_stats.html

This is a great source of info. Thanks.

[Lily]

I agree; that is very useful info. Thanks.

Anyone care to make a guess as to the timing of the next panic?

Though I suppose for those of you invested in the various markets it might be more of a wager than a guess, eh?

[OLD1953]

They do present good information, and as far as I can tell, they don't bias it apart from showing some things together in some of those charts that I'm not sure are closely related. But that's a judgement call.

I mean, aspirin sales and the stock market track each other, in an inverse relationship, but I don't think the brokers rush out to buy aspirin every time the market drops. It's either meaningless or irrelevant to the real world, or seems to be, given what information I have on that subject. So I take all multiple charts with a dose of "do these meaningfully relate" but those guys aren't bad in that aspect.

[shoshin]

wouldn't Maalox be a better indicator?

[browner55]

Has John or anyone done a "Revision to the mean" analysis on interest rates? My guess is that Long term rates in the U.S. will be going up (like the PIGGS) as a result of the insurmountable debt. I am not so sure about short term rates though. Would a 5 yr CD at 2.5% be a poor investment if long terms rates go up? In other words would all rates go up, or just the long term?

Thanks,

Matt

[vincecate]

I think the coming stock market crash will be one of the sharpest ever. I don't think it will slowly go down over many years, I think it will be more like the flash crash. There are more computer algorithms trading than ever before, so things will happen faster than ever before. If you look at interest rate trends since the Fed was created they usually go on for many years, so once rates start going up the prediction will be they keep going up, the computers will recalculate and then sell. What do other people think?

If you buy puts for the next 2 months they are well under half the price of ones 4 months out at the same strike price. This is reasonable since many times markets decline gradually, in which case a 2 month one at the same strike might be worthless when a 4 month becomes in the money. However, I am convinced enough of the sharpness of the crash that I think short term puts are a good deal.

[OLD1953]

I think the crash will start in commodities this time. The risk in stocks and bonds has been assumed by governments as far as possible, but the hunger for risk is still there, so many commodities are super leveraged and bubbled to the max right now. Look at that lumber link I posted the other day, just what kind of construction can be expected to raise the price of lumber that much in a few months? This is speculation and leverage taken to extremes.

And a side note here, one data point does not make a trend, and anecdotes are not evidence of much of anything, but be that as it may, I'm sitting in north central Iraq and it's been raining all day and it's raining hard right now. Last week it was storming and hail was falling. It's terribly late in the year for that kind of activity here.

http://weather.uk.msn.com/monthly_avera ... c:IZXX0008
I've looked for a chart of rainfall totals this year, can't find one. But over here by Tikrit, it has been pretty wet for this part of the world.

[Higgenbotham]

Maricopa, the name of a community ravaged by the housing downturn, isn’t Spanish for “negative equity,” but it might as well be. On a recent Wednesday evening, Chad Chadderton, a local realtor, welcomed about two dozen people to a seminar for underwater homeowners with the news that most homeowners in the desert town a 40-minute drive from downtown Phoenix are upside down on their mortgages.

Retired Warden

Bill Smith is among them. A retired Maryland prison warden, Smith, 65, bought a home in a development called Rancho El Dorado for $238,000 in 2006. Last month, a house almost directly across the street sold for $59,900, according to Zillow.com.

Seated at a table in the back room of a local Native New Yorker restaurant, Smith said he was still making payments on his mortgage despite the loss of value. “Maybe in three to five years” the home would again be worth what he’d paid, he said.

A Marine Corps veteran who lost three fingers in Vietnam, Smith a few moments later acknowledged reality. “It’s like you’re putting money in a hole,” he said. “It’s eating at me.”

A few miles south in the neighborhood of Maricopa Meadows, a young couple mulled costs that go beyond the financial. Sitting at their kitchen table, John and Mary Arrison are a study in dejection and regret. Their four-bedroom 1,600 square foot home cost $193,000 in 2006. They still owe about $170,000, plus a $60,000 home equity line they took out as home prices peaked.

Last Payment

John, 44, a factory service representative for a maker of outdoor security systems in Tempe, says the mortgage became unmanageable after his wife, 43, quit her job at Minneapolis- based Target Corp. to return to school. In March, a potential buyer offered the couple $56,000 for their dream home. The Arrisons, who made their last mortgage payment seven months ago, are waiting for their bank to approve the sale.

Dirk Street, where the Arrisons planned to grow their family and build a life, now is lined with “For Sale” and “For Rent” signs. The neighbors, next door and across the street, are renters and strangers.

It was a nice street when the Arrisons and their two little boys moved in. Not today, they say. The police have become frequent visitors, drawn by a spate of domestic disputes. Another renter nearby scared them with a pair of pet pit bulls.

“It came to the point I didn’t feel safe walking to the park at the end of the street with my kids,” says Mary. “It’s not even a place I want to live anymore.”

http://noir.bloomberg.com/apps/news?pid ... BWdHbYi2ho

This article can give people a feel for what QE2 is doing to the economy. Anytime you have a community 40 minutes from a major city, and there are millions of middle class or maybe I should say formerly or soon to be formerly middle class people living in such around the country, the high gas and food prices induced by QE2 will be enough to push these communities over the edge. And that's probably why home prices have started accelerating in a new downward spiral in the past couple months. Granted, some of these people didn't make smart choices, but those who did will still get hurt and they never got a chance to take that cruise and get that boob job before their life savings got trashed.

[OLD1953]

And that's part of the reason why there won't be a QE3, there'll just be talk about it. Bernake propped up stocks and pushed bonds and did a LOT of jawboning to keep the wealthy on top and smiling, but in doing so he flat broke the back of millions of unemployed and ran the middle class right into the ditch. He isn't wholly to blame, his predecessor followed the same lines and the Fed is largely to blame for the virtually nil growth in middle class salaries over the last fifteen years (after inflation of course). Any attempt to take QE3 past the jawboning stage will be met with voter revolt, and that's putting it mildly.

And there is just no possible way there will be a bailout for the commodities investors. It will not even make it to the floor of the house.

[vincecate]

And that's part of the reason why there won't be a QE3, there'll just be talk about it.

If Bernanke stops buying $100 billion US government debt each month, what do you think happens next?

1) Nobody else buys US government debt either
2) Interest rates shoot up till there are enough buyers
3) The US suddenly figures out how to balance their budget and does
not need to sell bonds any more.
4) The US defaults on bond payments and declares bankruptcy
5) The US government changes the laws governing the Fed and just prints
money on their own
6) The US government fades away like the Soviet Union

What are the consequences of the central bank no longer buying up government debt? At this point it would be a big change.

A few quotes from related article below:

“In our risk scenario, little progress on the fiscal front raises the probability of a fiscal crisis and the odds that the Fed becomes the buyer of the last resort,” said David Woo, currency strategist for Bank of America Merrill Lynch, in a note to clients today. “This would accelerate the process of the USD’s demise as the global reserve currency and cause it to decline in a disorderly manner.”

“QE2 has artificially reduced the risk premium of U.S. government bonds to below the level necessary to compensate investors for the worsened U.S. fiscal position,” added Woo.

http://www.cnbc.com/id/42809381/

The basic problem is that the Fed is printing money to drive down interest rates. This makes US government debt a really bad deal for investors for several reasons. First, lower interest rates are lower returns, even below inflation. As the Fed prints this new money it lowers the long term value of the money and so the long term value of the bonds. Also, it lets the government go further into debt making the eventual problem worse when it hits. At some point bond holders will just have to realize they are getting screwed and run away.