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DrBob

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Everything posted by DrBob

  1. Maybe they have realised it, which is why they're turning their pieces of paper (cash) into a solid asset (a home to live in)?
  2. Not really. Yes, every dollar must be repaid, but you don't say anything about how much every dollar is worth! The Fed are making a tacit promise to generate a sustained period of higher inflation. This is the only way out of the problem. I do not doubt that we are in a deflationary environment now (my brother works for the Uni of California where an across-the-board 8% pay cut is about to be delivered). However, a sustained period of above-average inflation remains the only solution, and will be engineered by hook or by crook.
  3. Maybe not within six months, but I am certain that economics textbooks of the future will attribute this financial crisis to the derivatives/structured finance market. Future economics students will be astonished that authorities allowed a $1 quadrillion market to develop without regulation and without transparency. Although derivatives can serve some useful purposes for productive companies (hedging against currency or interest rate shifts), they have been thoroughly abused. The development and trading of very complex products such as synthetic CDOs has become a Ponzi scheme. Trade upon trade is generated, each bringing a profit to the trader (usually a small percentage of a very large amount). The pyramid of derivatives becomes larger, the derivatives more complex, and the trading parties more closely linked. Eventually one or more large counterparties fails, and the whole structure collapses. We would have seen a derivatives-related meltdown of the entire financial system last year, but Western governments have taken unprecedented action to bail the system out. The scale of the bailouts is already huge, but will have to grow to become several times larger than that we have seen so far. Calculating net derivatives exposure is near impossible - there are too many classes of derivatives held by too many companies. Most are not exchange-traded (i.e. are traded privately between companies), so information is scarce. Some structured securities are too complex for all but a handful of individuals to comprehend (and even they probably understand the maths but not all the implications of all the underlying exposures). As a ballpark figure, I'd expect derivatives losses to amount to around five percent of the total notional value (more for CDSs and complex structured derivatives, less for straightforward interest rate swaps etc). So around $50 trillion of losses.
  4. NZ is vulnerable, yes. But particularly vulnerable, no. I don't think it's as badly placed as you suggest. NZ does not have the large banking sectors, and associated exposures, that Iceland, Ireland, Britain and Austria have/had. Unlike Eurozone members, NZ benefits from a free-floating currency, which will be allowed to fall as necessary to correct trade imbalances. NZ's main exports are in the relatively non-cyclical agricultural sector (although NZ will be hit by a tourism collapse). NZ also has a Prime Minister who intends to balance the budget, improve productivity, and who has a good concept of international money flows - John Key was a currency trader for many years. Take a read of this recent Wall Street Journal interview with the NZ Prime Minister, John Key. I think you'll find that the Prime Minister of New Zealand is speaking a hell of a lot more sense than Obama or Brown: http://online.wsj.com/article/SB123638162497057661.html I'd rather have a PM who's speaking this sort of pragmatic language than one, like Brown, who just keeps denying responsibility and blaming America.
  5. Canada would be a good choice - huge land area, food, timber, plenty of energy (oil, uranium etc). Only problem is that it shares a land border with the US! Australia is a good bet, only problem being the climate - droughts seem increasingly frequent. I'm in NZ. Definitely not boring (at least where I am). Well-placed for food self-sufficiency. However, unlike Australia, NZ has a high risk of natural disasters (volcanoes, earthquakes). Moreover, although we have plenty of self-sufficient electricity, gas, coal etc, there's not that much oil being produced: The main oil field (Tui) won't last forever, and even with Tui at full-flow, we are still a net oil importer. Having said this, provided you have a safe job, a good network of friends, and an emergency rural bolthole, you should be fine anywhere!
  6. You misunderstand the issue. If this was a simple B&B bond default, the news would not be as shocking. It's the unilateral re-writing of the rules that matters. Some investors in the B&B bonds will have bought credit default swaps (CDSs) to protect their investment. The CDS is basically an insurance contract that pays out if B&B defaults. In buying both the bond and the CDS contract, the bond investor considers themselves 100% safe: if B&B remains solvent, they get the bond payments from B&B; if B&B defaults, they get a payout from the CDS writer, which compensates for the bond losses. Now the govt has rewritten the rules so that B&B can renege on its bond payments without triggering a default (so no payout is made on the CDS contract). Some investors will have been well and truly screwed by this. The reason the govt is doing this is to avoid triggering massive losses on synthetic CDOs. Just a few more big-name bankruptcies will lead to huge losses in the synthetic CDO investments made by insurance companies, pension companies and municipalities etc.
  7. Only if everyone fulfils their counterparty obligations. Credit derivatives (of various types) constitute a huge portion of the derivatives market. If the 'promises' (that borrowings will be paid off using future income) inherent in the contracts are reneged upon, then there will be huge destruction of wealth.
  8. Pension and insurance firms have always viewed their share holdings as potentially risky assets. In my view, they are less at risk from falling share prices, and more risk from collapsing bond values. Pension and insurance firms have to invest a certain proportion of their assets "AAA" rated bonds, many of which which are now facing losses and are trading at heavy discounts. We already all know about the disaster in mortgage-backed securities. According to MarkIt, 2007 AAA-rated mortgage-backed securities are currently trading at just 30-40% of face value. The next wave of losses for pension/insurance companies might come from their purchases of synthetic CDOs. These are effectively highly-rated bonds which pay a coupon to the investor. However, if more than a certain number of reference companies default on their debts (and we're perilously close to this now), the investor loses a large chunk or all of their capital. You can read more on this here. It's the derivatives market which will f*** us all over!
  9. Agreed. I wonder whether central banks are already 'covertly' buying treasuries to artificially lower their yields. Central banks want to give the impression that they WOULD use quantitative easing if necessary, but don't want bond investors to know that they are using QE (as this might lead to their treasuries being shunned). If I were a central banker in this situation, I'd first credibly threaten to use QE. If the threat didn't work, I'd institute QE, but in a covert manner. For instance, I would lend/give money to banks on the proviso that they use a large proportion of this to buy treasuries. Or I would enter a deal with another central bank to buy each others' treasuries (either directly or via intermediaries).
  10. Is it really a monopoly? After all, you could watch a DVD on a cheap portable player or laptop, or you could read a book - many hospitals have free mobile libraries for patients. Ten years ago there were no bedside televisions in hospital wards (you'd have to go to the Day Room at the end of the ward).
  11. Deeply unethical. Whichever doctor implanted that many embryos is not fit to practise, and should have his licence revoked immediately.
  12. Good on him! Let's hope Brown is removed from power before the whistleblower is found dead in the woods
  13. Buy shares in NYSE:POT if you're talking fertiliser. Hold them in a certificated rather than nominee share trading account to reduce counterparty risk. Edit: clarity
  14. Agree with above. My GF used to live a few houses down from this one on Mayall Road about four years ago. It's not the absolute worst area, but intimidating groups of kids used to hang around the North end of it at night. A few people I knew got mugged in the area. I wouldn't want to park a nice car there. Having said that, it's good for transport (tube, bus and rail), walking distance to the bars/restaurants/clubs in Brixton & Herne Hill, and close-ish to the park. It would sell if they dropped the price by 150k.
  15. I'm tired of comments that high inflation cannot occur without significant upward wage pressures. This is rubbish! Iceland has high inflation because of the collapse of its currency. Does Iceland have upward wage pressures? No! It has imported inflation due to a currency collapse. This could happen in the UK. Zimbabwe has hyperinflation because its government printed money to pay off its IMF debts and for imports. This led to loss of faith in the currency, and a dramatic rise in velocity of money. Was the cause of this upward wage pressures? No! The Weimar Republic had hyperinflation because its government printed money to pay off its war reparation debts. Faith in the currency was lost, and the velocity of money rose. Upward wage pressures were not the cause! A period of above-normal or high price inflation is likely in the coming years. It may take several years before it happens, but it will. Yes, the current debt crisis is highly deflationary, but Bernanke has made it abundantly clear that he will not allow sustained deflation, and other central banks will follow his lead. The reasons for high price inflation will be one or more of: further fall in value of GBP relative to other currencies leading to rise in cost of imported goods loss of faith in the GBP leading to a rush to convert GBP holdings to other currencies or to hard assets continued 'printing' of money (through treasury purchases, fiscal stimuli etc) and failure to withdraw the extra money once monetary velocity rises current demand destruction leading to reduced capacity and therefore rising prices in the long term High price inflation can and does arise during recessions/depressions. Wage rises are not necessary! [Note that I believe hyperinflation in the US/UK is unlikely - perhaps naively, I believe that central banks and governments are bright enough to see this risk and take measures against it.]
  16. Read The Selfish Gene by Richard Dawkins! Wikipedia definition of meme is here. Edit: clarity
  17. I've been struggling with the inflation or deflation concept for over a year now! The destruction of debt we are witnessing is highly deflationary. Prodigious 'quantitative easing' efforts will be needed to overcome this. But I think that such efforts will be made. Bernanke has made abundantly clear that he sees no reason for a nation to experience deflation - he will do what it takes to prevent this (i.e. print money). Other Western nations will follow the lead of the US (although the Eurozone will do so only with much heel-dragging by the Germans). Fundamentally, I just do not see how a nation can overcome its debt problems by taking on more debt. The situtation is analogous to an over-indebted individual. Increasing one's debt works only until the lenders stop lending. This is when the individual would go bankrupt. But fiat-money states with debts denominated in their own currency have the extra option of devaluing their currency (by printing money) to devalue their debts. The best way I can sum it up is that in future we shall be paying a greater proportion of our income on food and energy, and a smaller proportion on houses and holidays. As well as shiny yellow metal, I shall move back into commodities and shares over the next year.
  18. This together with the 9k price tag rang an alarm bell. Here's the Environment Agency flood map. I've marked the location of the house with a red arrow. By all means buy it, just keep your furniture upstairs, avoid carpets, and don't expect to find insurance!
  19. Not as far as I can tell. The property mags are full of overpriced homes. Still seems to be at the 'denial' stage. I know some people who've put in some what they consider 'cheeky' offers at 20% below asking, and they've not had a nibble. There seems to be a popular conception that the central Wellington housing market will be supported by high-paying civil service jobs. I, on the other hand, fully expect the National government to set about cutting public service positions and salaries in the next year or two (as Ireland are considering). Cutting expenditure will be the only way to balance the books and prevent a sovereign credit downgrade. I'm looking at buying here in 2012ish, if we haven't had a jolly big earthquake by then.
  20. What an interesting graph! Where does it come from, and when was the study performed (the job titles suggest it's a US study)? Has anyone else noticed how high on the IQ scale "Finance, insurance, real estate occs" and "Sales, FIRE" (FIRE = Financial Sector, Insurance Sector and Real Estate Sector) sit? I wonder if the explosion in these finance/real estate occupation jobs between 2000 and 2007 lowered the median IQ in those professions?
  21. Competitive devaluation = race to the bottom. The central banks of many developed economies are in a race to see who can devalue their currency fastest. It's a simple formula: 10 LET IR=(IR-0.5) 20 IF IR=0 GOTO 40 30 GOTO 10 40 PRINT "money (but lets call it quantitative easing)" 50 GOTO 40 You might think that the refusal of creditor nations to purchase treasuries would slow down the printing presses, but the central bank can always push down treasury yields by buying them with freshly 'printed' money. In fact, central banks won't end the above process won't end until deflation is well and truly out of the picture, and high inflation is assured.
  22. So a girl with a design degree from a second-class university can't get a job in design. Where's the news? This sort of thing happens normally, never mind during recessions! In 1991/2, during the last recession, I had a regular holiday job as a hospital porter, which paid less than even care assistant jobs at the time. One of the permanent porters had a physics masters, and couldn't find other work. He was a nice guy - not an unemployable nerd type. He worked full-time as a porter for at least a year.
  23. For those who haven't yet read it, here is Markopolos' 2005 letter to the Securities and Exchanges Commission entitled "The Worlds Largest Hedge Fund is a Fraud". This was publised last week by the Wall Street Journal: http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf If you have the time, I encourage you to read the full submission. It really is fascinating. Remember that this was all written three years ago, and that Markopolos started communicating his concerns about Madoff to the SEC as long ago as1999! After this 2005 submission, the SEC investigated Markopolos' 29 'red flags' on Bernie Madoff's fund, and in response, made Madoff register himself as an investments adviser. Clearly the corruption was endemicc. Markopolos also predicts (at the end of the letter) that when Madoff's hedge fund blows up, other hedge funds and funds of funds would fail, and that French and Swiss private banks (who invested heavily in Madoff) would suffer.
  24. The auto bailout bill will be back within a week or so, served with a hefty side of pork. Then it will pass.
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