Financial Gloom

Rashiminos

Diabloii.Net Member
Financial Gloom

Apparently the Royal Bank of Scotland thinks subprimes going under was just a beginning:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cnrbs118.xml

RBS issues global stock and credit crash alert

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:19am BST 19/06/2008

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The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

RBS issues global stock and credit crash alert
RBS warning: Be prepared for a 'nasty' period

Such a slide on world bourses would amount to one of the worst bear markets over the last century.
# RBS alert: Quotes from the report
# Fund managers react to RBS alert
# Support for the euro is in doubt

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.
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"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.

US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.
# Morgan Stanley warns of catastrophe
# More comment and analysis from the Telegraph

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.

Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

Have your say

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Dondrei

Diabloii.Net Member
Re: Financial Gloom

Our reserve bank dropped interest rates by 100 basis points yesterday, which surprised even people who predicted a massive drop. This is after decades of consistently rising interest rates, it's an astonishing move.

I wonder if it's largely due to the massive jump in cost of funds for financial institutions. My company is AAA-rated, which is higher than all the major banks in Australia, but according to the grapevine our cost of funds went up around 200 basis points in the last month.
 

jimmyboy

Diabloii.Net Member
Re: Financial Gloom

I think it was because of the Bloody Monday following the US Fed Bailout which had minimal impact. Looks to me that world governments found out the hard way that we're much more interconnected than in the past. So we are either going to all succeed or all fail.
 

PFSS

Diabloii.Net Member
Re: Financial Gloom

Then aren't you losing equity?
Doesn't that only really matter if she plans on selling in the near future? And even then - given the reason she would be selling would be to buy another house - that new house will also have lost value leaving her in about the same place anyway?


 

jmervyn

Diabloii.Net Member
Re: Financial Gloom

I'm having trouble seeing the high inflation part.
The reason it will seem so high is that it's currently been hidden, by having crafted too narrow criteria for evaluation. Once inflation shows up due to the rising price of pet food (rather than the cost of gas, corn cereal, or milk), the dollar will have become devalued. So where you might have bought that bag of pet food for $10, you'll suddenly see <much> higher prices rather than just the $11 it would have appeared to be.



 

Dondrei

Diabloii.Net Member
Re: Financial Gloom

Doesn't that only really matter if she plans on selling in the near future? And even then - given the reason she would be selling would be to buy another house - that new house will also have lost value leaving her in about the same place anyway?
Or if you want to borrow against it, etc.



 

Moosashi

Diabloii.Net Member
Re: Financial Gloom

I've heard it said that the collapse of the multi-trillion-dollar derivatives market is to the financial industry what a sudden un-invention of computers would be to the rest of us. It's an analogue of the worst-case Y2K scenario, except real.
 

BobCox2

Diabloii.Net Member
Re: Financial Gloom

Don't Blame Capitalism
By Peter Schiff
Thursday, October 16, 2008; Page A19

Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.
For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.
Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.
Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.

But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie May and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.
Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.
Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.
Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.
Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.
And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.
Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.
The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.
The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."
 

llad12

Diabloii.Net Member
Re: Financial Gloom

Ah yes, another ideologue finger-pointing statement from our laissez-faire Libertarian friends.

Excuse me if I vomit on you greedy bastards.
 

SaroDarksbane

Diabloii.Net Site Pal
Re: Financial Gloom

Ah yes, another ideologue finger-pointing statement from our laissez-faire Libertarian friends.

Excuse me if I vomit on you greedy bastards.
Your argument is both thought-provoking and deep.

May I subscribe to your newsletter?



 

llad12

Diabloii.Net Member
Re: Financial Gloom

Your argument is both thought-provoking and deep.

May I subscribe to your newsletter?
Your cynicism is witty and compelling. Perhaps you should start your own nation where your brand of "Libertarian freedom" can thrive without the trappings and restrictions of American government. I have heard that Antarctica is available.



 

SaroDarksbane

Diabloii.Net Site Pal
Re: Financial Gloom

Your cynicism is witty and compelling. Perhaps you should start your own nation where your brand of "Libertarian freedom" can thrive without the trappings and restrictions of American government. I have heard that Antarctica is available.
Show me on the dolly where the mean 'ole Capitalist touched you . . .



 
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