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Timm

The Black Swan Is Dead

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Hi all. I started thinking about this with this post.

"My take is that the credit crunch HPC is now over, but we have yet to experience the recession HPC.†It was suggested to me that I start a thread on this subject, but when I tried to do so I realised there was a lost more to it than that.

The Black Swan was never really the credit crunch itself, it was the alphabet soup of derivatives that hung off of the credit boom. The fact that so much of these could never be settled threatened to bring the whole system down and led to the Panic of 2008. I think that is over now. Mortgages funded by securitisation are pretty much dead, certainly back to their 2004 levels or below. At the same time, house prices are back to those of the same period, which roughly corresponds to the top of the last boom.

So one might expect that having dealt with the RMBS overhang, we can get on with the cyclical downturn, just as in the early 1990’s But the black swan was if nothing else pure chaos, and he leaves his children behind him. The grey swans, now fully grown, are those crises still to come that can be foretold but are still denied. They are:

Recession.

Savage state budget cuts.

Price inflation. Defaultation.*

Currency crisis.

All of these mean that the average citizen will find himself with less pounds in his pocket, which will be worth less. These are the pounds with which he must acquire food, water, warmth and clothing. He also need to acquire shelter, but rent / mortgage tends to extract surplus income. That surplus is shrinking rapidly, putting downward pressure on what he can pay for housing. But at the same time, there is another grey swan: external upwards pressure on interest rates, which will seek to drive up the cost of borrowed money. The average man is going to find he simply cannot afford to pay current costs, let alone higher ones. But that is what he will be faced with. Now tell me, when faced with debts that cannot be paid and a line of credit that is at an end: what happens next? A: The debts don’t get paid.

The Govt / media is still talking about green shoots and the end of the credit crunch, but rather, this is the point at which the real havoc begins.

*Defaultation is a word I just made up to indicate Proper, old fashioned deflation, where money just vanishes.

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The credit crunch is over? Oh please. Don't tell me you're falling for that one.

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The credit crunch is over? Oh please. Don't tell me you're falling for that one.

I'd say we have a return to normality, yes.

But 2004 - 2007 were not normal. I'd go so far as to say that 2001 onwards was not normal.

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Hi all. I started thinking about this with this post.

"My take is that the credit crunch HPC is now over, but we have yet to experience the recession HPC.†It was suggested to me that I start a thread on this subject, but when I tried to do so I realised there was a lost more to it than that.

The Black Swan was never really the credit crunch itself, it was the alphabet soup of derivatives that hung off of the credit boom. The fact that so much of these could never be settled threatened to bring the whole system down and led to the Panic of 2008. I think that is over now. Mortgages funded by securitisation are pretty much dead, certainly back to their 2004 levels or below. At the same time, house prices are back to those of the same period, which roughly corresponds to the top of the last boom.

So one might expect that having dealt with the RMBS overhang, we can get on with the cyclical downturn, just as in the early 1990’s But the black swan was if nothing else pure chaos, and he leaves his children behind him. The grey swans, now fully grown, are those crises still to come that can be foretold but are still denied. They are:

Recession.

Savage state budget cuts.

Price inflation. Defaultation.*

Currency crisis.

All of these mean that the average citizen will find himself with less pounds in his pocket, which will be worth less. These are the pounds with which he must acquire food, water, warmth and clothing. He also need to acquire shelter, but rent / mortgage tends to extract surplus income. That surplus is shrinking rapidly, putting downward pressure on what he can pay for housing. But at the same time, there is another grey swan: external upwards pressure on interest rates, which will seek to drive up the cost of borrowed money. The average man is going to find he simply cannot afford to pay current costs, let alone higher ones. But that is what he will be faced with. Now tell me, when faced with debts that cannot be paid and a line of credit that is at an end: what happens next? A: The debts don’t get paid.

The Govt / media is still talking about green shoots and the end of the credit crunch, but rather, this is the point at which the real havoc begins.

*Defaultation is a word I just made up to indicate Proper, old fashioned deflation, where money just vanishes.

Sounds very reasonable as an argument - compelling in fact. Millions of stupid loans were emitted and at one end a crisis ensued over debt slicing and dicing and write-downs, ameliorated by QE and bail-outs. At the other end nothing has been done - or can be done beyond a temporary holding operation in interest rate reduction and moratorium in repossessions.

If it had crashed completely we might have had a debt jubilee as both ends of the deal hit a brick wall.

As it is, the over-indebted now face a slow lingering squeeze into oblivion in a defationary depression.

Horrible either way, but I see greater justice and atonement and probably more sensible structures coming out of the long and slow to the quick and painful.

EP

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So long as that means I won't have to read anything more from that tedious kn0b Taleb, then I'll be happy.

I wouldn't write-off CDOs just yet though. The banksters have a habit of getting themselves off the hook by creating a new hook for everybody else.

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I'd say we have a return to normality, yes.

But 2004 - 2007 were not normal. I'd go so far as to say that 2001 onwards was not normal.

With reference to the first line you need to update your signature.

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(...) I wouldn't write-off CDOs just yet though. The banksters have a habit of getting themselves off the hook by creating a new hook for everybody else.

Indeed they do. How about this?

Investment banks, including Goldman Sachs and Barclays Capital, are inventing schemes to reduce the capital cost of risky assets on banks’ balance sheets, in the latest sign that financial market innovation is far from dead. The schemes, which Goldman insiders refer to as “insurance†and BarCap calls “smart securitisationâ€, use different mechanisms to achieve the same goal: cutting capital costs by up to half in some cases, at the same time as regulators are threatening to force banks to increase their capital requirements.

BarCap’s structures involve the pooling of assets from several clients into a secured financial product that can be sold on to other investors and rated by a credit rating agency, potentially reducing the capital allocated against the assets by between 10 per cent and 50 per cent. These new mechanisms are in some respects similar to the discredited structured products, which were widely blamed for fuelling the financial crisis. But the schemes’ backers argue there are two significant differences. First, they involve the securitisation of banks’ existing assets, rather than of new lending. Second, bankers argue that the new products do not disguise the transfer of risk.

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"the grey swans of chaos"

Or rather "The Grey Swans of Chaos".

I'm nicking that as a title for my soon-to-be-hugely-successful* fantasy novel. Ta.

* Soon, as in "as soon as I've got round to writing it".

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With reference to the first line you need to update your signature.

:)

My understanding of the current market is that the price of assets are being driven by capital flight. That is what I see the bull trap as. What I'm talking about in the post you quote is the attitude of banks towards lending - in particular the UK residential mortgage market. But I didn't say I expected the bank's current attitude to risk to remain the same for ever. Indeed, I expect these to be very volitile times indeed. That's why I used words like chaos and havoc in my OP.

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"My take is that the credit crunch HPC is now over, but we have yet to experience the recession HPC.â€

We have just had the bubble froth removed so far. The only change in the excess debt is that much of it has been moved from private banks to the taxpayer (who hasn't felt a thing yet). The main pain has yet to be felt.

No significant debt has been repaid so far (this is the main plot point).

... it was the alphabet soup of derivatives that hung off of the credit boom. The fact that so much of these could never be settled threatened to bring the whole system down and led to the Panic of 2008.

FYI: 75% of JPMorgans's CDS are for internal use, rather than external hedging of risks and a vast proportion of these cancel out. (although they dont actually know how much! - I know someone in the CDS group)

I think the main problem was where the risk of loan default was laid off to companies like AIG with the expectation that AIG would pay up in an event. Loans could be packaged and passed on with defaults being insured and a healthy margin being left over for the packager.

When it all went wrong, AIG couldn't possibly pay up so all these MBS packaging companies were dead. Cue, the US government to step in to guarantee AIG (basically, to ensure the booked profits of the investment banks could be maintained).

So one might expect that having dealt with the RMBS overhang, we can get on with the cyclical downturn, just as in the early 1990’s

I expect the "recession HPC" to start playing out now with the extra downside of government debt acting as an additional load on the economy. I think the fall in government spending is enough to tip a recession into a depression.

Unfortunately for the impatient, it going to take at least 4 more years to reach the trough. I'm getting bored waiting.

VMR.

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Let us not forget the yellow chaffinches of civil unrest, and in the background, the turquoise cormorant of depleting resources.

Brilliant :lol:

CST, any to suit Blears & Mandy?

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