Thursday, December 06, 2007

Where is Debt Being Stuffed? Minyanville

Thanks Mr. Practical. On top of this i suggest to read the latest from Hussman An Irrelevant Fed: Thimbles of Water in a Forest Fire .

Besten Dank Mr. Practical. Ergänzend empfiehlt sich das letzte "Werk" von Hussman An Irrelevant Fed: Thimbles of Water in a Forest Fire

Thanks to Jim Borgman

Where is Debt Being Stuffed? Mr. Practical / Minyanville

As the markets seem to want to be relieved that global central banks have the “liquidity” problem under control, let us Minyans remind ourselves of the magnitude of the problem.

I have described just how central banks inject “liquidity” into the markets when they need it. Essentially central banks encourage debt creation, for people to borrow money, so that they buy things (consumption) to spur the economy. But due to too much debt, financial engineering has had to create new and better places to stuff more and more debt.

You may have seen this chart before. It shows the results of that financial engineering. Central banks can only affect the bottom two parts of the chart, high powered money and M3. M3 the Federal Reserve is growing as fast as it can in order to indirectly support the much larger problem of securitized debt and derivatives.

These two phenomenal pockets of debt are supported by asset prices: when asset prices (which act as collateral) decline, liquidity gets sucked out of the system. So the purpose of pumping new debt into the system is to keep nominal asset prices up to protect collateral values of the real problem of leverage in the system that the Fed cannot directly control. It takes more and more debt to do this because people are having huge problems servicing the debt they already have.

So we have two huge forces fighting each other right now: central banks desperately attempting to re-flate (create more debt) and the market grudgingly but purposefully attempting to deflate by paying back (which the bureaucrats are trying to help with) or more likely destroying (write-offs) that debt. We have extremely high volatility as these two forces fight it out.

Looking at the chart, which do you think will win?

>If you are still not convinced i urge you to read Straight Talk on the Mortgage Mess from an Insider via Herb Greenberg. One of the best i´ve seen in months. It looks like the "Hope Now Alliance" will become a running gag during the coming years.....

>Solltet Ihr immer noch Hoffnung haben das alles gut werden wird empfehle ich dringend Straight Talk on the Mortgage Mess from an Insider via Herb Greenberg zu lesen. Mit das Beste was ich in den letzten Monaten zu lesen bekommen habe. Es sieht so aus als wenn die "Hope Now Alliance" zum Running Gag in den nächsten Jahren werden dürfte......

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Anonymous Anonymous said...

Looking at the chart, which do you think will win?

Hank Paulson, he's loaded.

BTW, jmf, the people over in Germany do understand that us poor people aren't in charge over here, right? The U.S. is a country of, for, and by, the billionaires. We have no voice, and the electorate is too stupid to even realize it. I see how the old wars got started, the average Joe didn't start 'em, the maggots did.

9:02 PM  
Blogger jmf said...

Moin Edgar,

at least more and more people realize that the US is doomed.

A few years ago the US model was considered from some as "the way" to go.... This has reversed.

The mess in the US is letting German & European politicians, central bankers etc looking better. But only on a relative basis.....

And yes we know who is responsible for the mess

We in Germany have a slogan

"Der Fisch stinkt vom Kopf"

Should be "The fish smells from the head" in English.

The "empire" will go down for sure....

I only would change my mind if Ron Paul will become the next president :-)

9:16 PM  
Anonymous eh said...


An interesting video here.

10:02 PM  
Blogger jmf said...

Danke EH,

it´s not often that i like the guy next to Shiller better !

I assume Rosner ? won´t get an invitation from CNBC.....

10:12 PM  
Anonymous eh said...

I assume Rosner?

Genau. Joshua Rosner of Graham Fisher & Company. They have a terrible web site, but if you google him you will see he has a fairly high profile and has done a number of media appearances.

This recent rally just confirms that you need to be trading this market. I'm glad I covered most of my shorts back in late November. But I wish I had traded a bit more to grab more profits here. Now looking for a good entry point for more shorts, but it may take some time...

12:35 AM  
Blogger jmf said...

Moin Eh,

i´m with you.

Once more the lesson number one

"it´s not the news, it´s the reaction to the news"

has proven as a good or best indicator if it is worth the "stress" to be short.

It is indeed amazing how the markets still play and (some might even believe it) the "central banks" will rescue the markets mode...

This is on top of the players that are playing the "year end rally"....

The first quarter will be very very interesting ( to say the least....)

The buy the dip buying mode is still intact... until it isn´t....

On top of my pound short i have opened a long position in the NOK vs the €.

Maybe i should switch to short Pound vs NOK :-)

12:54 AM  
Anonymous traderboy said...

i looked into a short pound/long NOK trade a few weeks ago when you mentioned it then. trouble is, although it looked ok and probably made sense, if you've ever been to norway it is just crazy expensive there, like at least double or triple even the crazy london prices so SURELY the currency can't get even more expensive can it??

as an aside, i heard from a taxi driver there is a place in pakistan called "Little Norway", due to immigrants working in norway sending cash back home. hardly surprising, i reckon a days wages for a norwegian taxi driver must be about the same as a months wages in pakistan, or more.

oh and that link to herb greenberg's post is unbelievable...its getting me back in bearish mood...

7:11 AM  
Anonymous Anonymous said...

Hi! Can somebody pls explain in layman terms how the FED can inflate M3? Thanks! Joen

7:27 AM  
Blogger jmf said...

Moin Traderboy,

"i looked into a short pound/long NOK trade a few weeks ago when you mentioned it then."

Don´t take my word as an advice. My timing is very often "subpar" and i agree with you that the NOK is probably as overvalued as other currencies.

I was surprised to see that despite the strong resource basis the currency is flat with the € or pound over the past 5 years.

But i´m not 100 percent convinced that this trade on a relative basis wil work....

"oh and that link to herb greenberg's post is unbelievable...its getting me back in bearish mood..."

I have never left the bearish mood but you have to respect the market reaction to certain news. It will be fun to see what probably tiny news will bring the shift in sentiment.

But the fact that several people are already talking about new highs gives me comfort that the optimism is already at elevated levels.....

7:32 AM  
Anonymous traderboy said...

:) don't worry i do all my due diligence and won't blame you if any trades go wrong!!

i was also surprised though that NOK was flat vs €/£...and I bet u my timing is worse than yours :)

i think the trade today is just to be shorting all the stock markets, US/UK/Europe, and just sit tight for 6 months. Smells pretty bad everywhere.

9:26 AM  
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11:18 PM  

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