What Blows up Next?, page 1

I'm wondering if anyone here has thought as to what institution, industry, or market is most likely to immolate within the next couple of weeks to months. I realize that CPDAMAN's 2009 thread was closed because it turned more into an investment thread than a discussion with a conspiracy related theme, and let's try to avoid that if possible.

I think probably the biggest thing that makes me go hmmm is the Obama/Bush collaboration on the 2nd half of the TARP.

Acting at Barack Obama's behest, President George W. Bush on Monday asked Congress for the final $350 billion in the financial bailout fund, effectively ceding economic reins to the president-elect in an extraordinary display of transition teamwork.

from yahoo

Given the relative speed at which the money can be released why the hurry to get the process started so close to the Inauguration? Is something on the precipice, and if so what could it be?

One potential KABOOM is Citigroup (C). Something doesn't smell quite right with the recent news about a possible sale of C's Smith-Barney retail brokerage to Morgan Stanley (MS). I understand that C needs capital and MS needs to expand its retail brokerage, but something about that deal just doesn't seem right.

Shares of the troubled bank tumble on reports of a sale of the company's Smith Barney division -- and some analysts warn a breakup of the banking giant could soon follow.

The incredibly shrinking Citigroup-From CNN

Has Citigroup gone from too big to fail to too big to save?

Not to be outdone Bank of America (BAC) fell over 10% today. Right before this ball of feces really got to going downhill BAC bought the infamous Countrywide financial, supposedly for the mortgage servicing arm. There are still bodies to be found there as well IMHO.

Still within the realm of finance but a little more attached to the real world is the area of Commercial Real Estate (CRE). Real Estate Investment Trusts (REITs) specializing in CRE are being hit with problems refinancing their debt and simultaneously seeing massive carnage in their tenants especially the REITs specializing in retail space.

Retailers are having their own horror show from the 4Q 08 sales. Many are closing stores and several are downright bankrupt.

The GM and Chrysler only exist currently because CONgress wills it.

I feel we are a bit overdue for a European blowup. The banks are more opaque and less well capitalized, and several European governments are deeper in debt as a percentage of GDP than even the US.

I'm not too great with commercial bonds and monitoring that market but has anyone heard how companies are doing in rolling their debt?

Geo-political events (aside from a worldwide recession) don't seem to be moving oil but one way. Gold seems to have topped at $1000/oz and seems to be printing lower highs and lower lows since (which my amatuer TA says is Bearish).

Several states, including California are teetering on the edge of insolvency. Ohio is having to borrow money from the Federal gov to make unemployment payments, and I'm pretty sure they aren't the only states in trouble.

And let's not forget about revelations of outright fraud. I have no doubt in my mind there are more Madeoffs out there. There is never just one cockaroach.

Given all the above, sovereign debt seems to be the most bubbleisious of asset classes. I have no idea as to how long that lasts, but if it breaks before the economy turns, I'm not sure I want to live in that world. I'm pretty sure the only reason T-s have run so far and hard is no one can answer the question "where else are you gonna put it that's safe". I'm afraid that when that question is answered, it will be the final nail in the coffin for the current paradigm of the US's place in the world. Obama's nearly 1 Trillion "Stimulus"/ continued pigman bailout might be one of the hammers tapping that nail. I could honestly see McCain or Bush for that matter picking the same people as Obama did on economic policy. Though I didn't vote for him his economic picks have squashed any "Hope" I had that he would "Change" things in regards to the economy. He does talk perty though.

So, anyone else have any ideas on what could potentially blow up short term. What have I missed? I get the feeling something is dead, and the rose scented TARP funds are needed to hide the Cadaver a little longer. My greatest fear is that it's not just another BBB (Big Bank And Broker), insurance company, GSE or Car Company and might be the entire system.

Central banks and governments are having trouble recovering from the first blow, and now weakened, they're about to be hit again even harder.

What happens next is the same as before, mortgage resets.

Wave 1: Resets of subprime mortgages killed the mortgage industry and wiped out all wall street banks, took a few depository banks down, insurance companies, and halted inter-bank credit. It nearly took down Fannie Mae and Freddie Mac.

Wave 2: Resets of Alt-A and Option adjustable will hit weakened institutions.

www.iht.com...

A second, far larger wave of U.S. mortgage defaults is building

By Vikas Bajaj Published: August 4, 2008

NEW YORK: The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.
...
But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
...
"Subprime was the tip of the iceberg," said Thomas Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. "Prime will be far bigger in its impact."
...
Prime and alt-A borrowers typically had a five- or seven-year grace period before having to start making payments toward their principal. By contrast, subprime loans had a two- to three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights.

Mortgage resets


Mortgage defaults

The second wave seems to be one that will eat deeper into the middle class pockets as opposed to the first wave.

The commercial collapse will make certain parts of cities into vacant store front ghost towns.

In the world I see - you are stalking elk through the damp canyon forests around the ruins of Rockefeller Center. You'll wear leather clothes that will last you the rest of your life. You'll climb the wrist-thick kudzu vines that wrap the Sears Tower. And when you look down, you'll see tiny figures pounding corn, laying strips of venison on the empty car pool lane of some abandoned superhighway.
www.imdb.com...

Dbriefed i believe the lower long bond rates are tied to alot of the option arms and that the resets are significantly lower NOW than when the article was written in aug. As well as the fact that many seem surprised that the long bond fell.

Jefwane good thread starter, i think sov. gov debt will be quite safe over the next year (every time i read a good Jim willie column i get a little spooked) but rationale (less unbiased non gold perma bull minds IMO) (bond investors) realize the fed is quite ready to purchase long bonds to keep the yield low (especially when income tax revenues will be light for the gov't due to unemployment) keeping bond rates low in this enviornment is vital to pay off the interest on gov debt and relieve some pressure on mortgage rates.

Jefwane i think the biggest task the fed is looking toward (which will be kept on the down low unless you dig on forums or find a blog or two) will be creating and sustaing beliefs/ expectations that there will be future INFLATION as oppossed to (deflation) .........this *attempts* to keep consumers and investors from saving more and instead consuming.......should the fed begin to grow impatient (and appear to be losing) this battle you may see .....more columns like this written and get air time in the media www.timesonline.co.uk...

once Investor and consumer PSYCHOLOGY get entrenched into anticipating future prices to be lower........the psychology of deflation takes hold........ and then most all the monetism/keneysian efforts will be akin to pushing on a string........this is the fed's dilemma.....made worse by the Global nature of this asset price crash when the credit bubble rug was popped......Banking is a confidence game..........Bernanke must exude confidence that he will not let "deflation" happen here.....and even more so he must be able to convince investors that he is not bluffing...

it may come down to dramatic measures such as debt jubilee's and competive one time devaluations against gold that stops the spiral downward in prices (not necessarily living standards) also perhaps with a world war that will grow the debt

as far as the topic (LOL) i will look into that.........right now it appears the consumer will be the next shoe to drop .... CONSUMER CREDIT may drop up to 40% this year!

a lil birdie says;

More than $2 trillion in consumer credit could be cut in the next 18 months, as credit-card companies pull back credit lines in anticipation of credit funding problems and regulatory changes, said Meredith Whitney, an Oppenheimer Holdings Inc. (OPY) banking analyst who’s well-known for her gutsy and prescient (and ultimately correct) market calls.

“What you haven’t seen yet digested by the market is banks pulling lines from consumers,” Whitney said in an interview with CNBC. “And across the board you saw the big banks that command so much of the market share of key products like mortgages and credit cards start to pull lines in the third quarter and that’s going to continue in the fourth quarter. And that’s going to continue into 2009.”

she is talking specifically about lines of credit getting cut to consumers...not just higher % intrest rates on the cards

caps.fool.com...

[edit on 13-1-2009 by cpdaman]

[edit on 13-1-2009 by cpdaman]

reply to post by jefwane

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The second half of the TARP funds being suddenly so important to release before Tuesday is simply an example of Obama/Bush colaberation. Obama has somehow talked Bush into being the fall guy, obtaining the funds through veto if necessary, so they're there for the Big O. If it doesn't happen before Tuesday, then it sets up a potentially embarassing scenario for Obama in which he is publically at odds with his own party and either loses the request for the funds or blows the whole thing up by vetoing his own party's refusal to give up the money.

Obviously there are more than a few senators & congressmen who realize that handing that money over willingly to the banks will more likely than not result in them being voted out of office in 2 years.

reply to post by burdman30ott6

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I don't see how Obama can lay the blame for the PR about the TARP on Bush. After all he was one of the Senators who voted for it. He knew there were no stipulations as to how the money was to be used. Saying otherwise is disengenuos if not an outright lie.

reply to dbriefed

I didn't even mention the continuing situation in housing because in my mind there is no doubt that home prices will continue to fall in most areas through 09. Ramping unemployment will be as much of a downer as ARM resets. Due to negative equity many have already reset and also many have defaulted from walk aways. CPDAMAN makes a good point about resets into a low-long-term interest rate environment might blunt the damage of upcoming resets. The residential real estate component of our economy only has two possible options for equillibrium to be regained. Either prices come down, or wages go up to where the average home is affordable on the average wage (home prices in the 2.5-3.5 xs income range) financed on a 30yr with 10-20% down. If I were a betting man (and I sometimes am) I know which of the two I would put my money on.

I'm with ya CP on your thoughts on deflation. Those with a hyper-inflation thesis are missing a huge point. You can't have rampant inflation without wage inflation. Denninger has some good thoughts on this here . How can Bernanke, Paulson, and POTUS get us spending when they've given over a trillion already to the Banks, GSEs, and insurance companies, and can't get them to spend it on anything but shoring up balance sheets and 3 card monte with bad bank assetts?

I saw the times article you referenced in your post, and almost started a thread on it. For anyone who hasn't read it, let me just post a little tidbit.

Instead of reducing taxes on interest payments, the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets - or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump.

Punish savers and make them spend money

In that type of environment, you're better off digging a hole and stuffing your money in it than putting it in a bank.

Originally posted by cpdaman

It may come down to dramatic measures such as debt jubilee's and competive one time devaluations against gold that stops the spiral downward in prices (not necessarily living standards) also perhaps with a world war that will grow the debt

as far as the topic (LOL) i will look into that.........right now it appears the consumer will be the next shoe to drop .... CONSUMER CREDIT may drop up to 40% this year!

I agree 100%... the real threat to TPTB is indeed deflation...

"Hyperinflation", or even "Serious Inflation" (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages.

From HERE

reply to post by jefwane

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IMO, the "Underworld" as we could call it, will implode next..

I am talking about Small Businesses .. when consumer spending dropping dramatically, coupled with the move towards cheap, big box stores like Walmart, hell, it doesn't look good to be in small business trade.

Small businesses lack the buying power to compete with the cheap prices of huge conglomerate institutions, again a perfect storm of decreased credit, rising minimum wages all across the country, increasing taxes, low consumer confidence/spending..

But it won't be on the news.

Their employees most likely won't apply for unemployment..

You will just see more and more companies fold, as well as far fewer starting up.

So that's my guess, you will see a continuing acceleration of small businesses going under and far fewer start ups.

reply to post by Rockpuck

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That is a very valid point rockpuck. I'm glad you brought that up. I guess it's really a triple whammy on them when you think about it. You mentioned the retrenching of the consumer along with the pricing power of the big boxes, and the third is limited credit availabillity for small businesses. It's a shame too, small business are really the real engines of economic growth in the US. I've seen absolutely zero actions by the .gov that would benefit them to date.

reply to post by burdman30ott6

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That would be the more obvious conclusion, but not as much fun as another theory being floated around the web....

"For the past 8 years JP Morgan has enjoyed the Bush Administration whitewash accounting ability because they were a partner in the war on terror. Using special provisions in the Patriot Act, JP Morgan was legally able to cook their books and not report according to US GAAP under the guise of "National Security Issues". Included in this, of course, was immunity from prosecution in the commodity rigging operations.

By moving up their earnings report, I believe JP Morgan is using their final "Get Out of Jail Free" card under the Bush Administration because the new administration may not continue the financial cover-ups." - Bix (Le Metropole Cafe).

I remain undecided on this reporting issue...but it is interesting.

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