It was a long time coming
The down move I've been predicting in the stock market is most definitely happening now. It did take a long time coming - longer than it should have. I think this means that it will be more severe than it could have been if it had happened earlier. It's like a late fee if you miss your payment. The longer you wait, the more the penalty.
The market wants to ALWAYS go up. Of course, this is not reasonable, but it is what the market wants. If you read up on the credit issues, you will learn that things were levered several times over. What I mean is this: the original loans were used to secure other credit. Then THOSE loans were used to secure other credit. Then THOSE loans were used to secure other credit. As I understand it, there were at least 4 levels of credit built on top of the original loans. Sadly, many of those loans were subprime. If the foundation of this "house of cards" even cracks a bit, things begin to tumble. The Fed rate cut in August and the double-cut in September served as some scaffolding on the house of cards, but scaffolding will not hold up a skyscraper.
It is getting to the point where the Fed has no real tools available. The dollar is getting so weak (RECORD weakness) that further cuts may accelerate inflation. At some level the bad debt needs to work its way out of the system. But not cutting rates can exacerbate the market's loss of confidence - and the entire credit industry is built primarily on confidence. Without that confidence, credit becomes very difficult to acquire. Plus, real estate values are falling in most of the country, so many recent mortgages are "upside down" and getting worse. If the values fall far enough it becomes the "smart" thing to do to just walk away from the mortgage. Ugh.
Find a way to preserve your capital value.
The market wants to ALWAYS go up. Of course, this is not reasonable, but it is what the market wants. If you read up on the credit issues, you will learn that things were levered several times over. What I mean is this: the original loans were used to secure other credit. Then THOSE loans were used to secure other credit. Then THOSE loans were used to secure other credit. As I understand it, there were at least 4 levels of credit built on top of the original loans. Sadly, many of those loans were subprime. If the foundation of this "house of cards" even cracks a bit, things begin to tumble. The Fed rate cut in August and the double-cut in September served as some scaffolding on the house of cards, but scaffolding will not hold up a skyscraper.
It is getting to the point where the Fed has no real tools available. The dollar is getting so weak (RECORD weakness) that further cuts may accelerate inflation. At some level the bad debt needs to work its way out of the system. But not cutting rates can exacerbate the market's loss of confidence - and the entire credit industry is built primarily on confidence. Without that confidence, credit becomes very difficult to acquire. Plus, real estate values are falling in most of the country, so many recent mortgages are "upside down" and getting worse. If the values fall far enough it becomes the "smart" thing to do to just walk away from the mortgage. Ugh.
Find a way to preserve your capital value.
posted by MichaelPolutta at 10:56 AM
1 Comments:
Hey, Mike!
Hope you're doing well. Pray about you all the time. You should blog more often! Question--what do you think of the proposed subprime bailout? Wall Street seemed to respond well to the initial news, but I wonder if it's not just kicking the problem down the road, when prices will be worse and equity therefore more upside down.
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