Monday, Jul 27, 2009
Déjà vu - CDO's back in the news, remember them
Asset Backed Alert: Coming Sales Threaten Mortgage-Bond Gains
"An anticipated gush of selling could cause the values of mortgage-related bonds to whipsaw in the coming months...A hint of the coming secondary-market supply was seen this week, when bondholders voted to liquidate Kent Funding 1, a CDO that Declaration Management issued in 2005 at a face value of $1 billion. The investors gained that power after the transaction hit an event of default on June 4...Of course, troubled CDOs have been unwinding all throughout the financial crisis. But a growing number of investors in those vehicles are expected to push for liquidations in the next 6-12 months, as the debt market's struggles continue. In many cases, they could be swayed by a desire to take advantage of the recent pricing rally."
Posted by mountain goat @ 01:55 PM (608 views) Add Comment
5 Comments
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1. general congreve said...
If I wasn't loaded up to the nuts with gold and silver I'd be very concerned.
2. mountain goat said...
GC - as you know I am also a PM fan but the next bout of debt collapse might hit gold and silver too, like last year, maybe worse. Debt collapse should trigger the next instalment of falling house prices, govt stimulus and QE. Will this be repeated endlessly until economic growth resumes? Maybe governments won't wait for another major bank collapse but start the next stimulus early as the economist Joseph Stiglitz was promoting on TV this morning.
3. general congreve said...
Gold took a hit last year from March onwards, tranding downwards until November. In November when the bank crisis happened and this crisis really started rolling it started flying back up. It is widely thought that the demise of gold in the first half of this year was a concerted manipulation effort to prop up the dollar at gold's expense. One only has to look at the VI's who holds all the net short positions. This manipulation continues today.
It is true that when the next wave of this crisis hits PM's will probably take an initial hit as people run scared in all directions and/or liquidise gold holdings to cover loses elsewhere. But this will be temporary and despite the manipulation of the likes of Goldman Sachs and JP Morgan, with the collusion of the US government (who are basically all on GS's pay roll anyway), gold will eventually win through I believe.
4. stillthinking said...
Are you really so sure that there is intervention in support of the dollar? By whom?
There hasn't been any US support for the dollar in a decade, the euro appreciated against the dollar since inception and the US continuously complains that the yuan is too cheap. China cannot dump their holdings in favour of gold because they don't hold dollars, neither does anybody else, they only hold dollar debt. The only way to get the dollars is to wait for the debt to mature, the 2 trillion figure is the debt held to maturity figure. The real dollars (not debt) they get on a yearly basis, would be 100 billion if they get 5% a year. Put that into a UK perspective, thats 80 billion pounds, less than we have already printed !
They can't get out of their dollar debt position because there are no non-skanking buyers. They have to hold to maturity. So where is the money for the big gold rush ?
5. general congreve said...
It won't be a gold rush from bonds, I agree with you on the debt/dollar argument that this can't happen. However, the result of all the debt issuance by the US/UK and a lesser extent the Eurozone will be that buyers refuse to buy all the debt in the end. Indeed this is already happening and we are montetizing our own debt. It is entirely feasible with debt levels and the world economy the way they are that Western governments will end up the only buyers of their own debt. The end result of this would be currency devaluations. This will be good for the price of gold in that currency, just look at Iceland. A further by-product of such an event, when it hits a big currency like Sterling or the Dollar would be to push the price of gold up, as many investors and owners of whatever currency was affected would sell out of it and buy gold to protect from further falls.
So basically, as a result of too much debt issuance you end up with gold not only acting as a safehaven against currency devaluation, but as an investment that is likely to provide further returns when panic sets in.
Who has intervened to support the dollar? Well Gordon Brown did for starters when he sold loads of our gold at rock bottom prices to support the dollar as a favour to the US.
Currently Goldman Sachs and JP Morgan typically hold 100% of the net short positions in gold and silver. Not insignificant players in the market I think you'd agree? They are basically the same entity as the Fed and US Govt. and are now doing their bidding to support the dollar price by suppressing gold (as the two typically have an inverse relationship). I wonder where all that unaudited bailout money went?