Instead of reshuffling regulatory agencies, the authorities ought to prepare for the next shoes to drop. I shall mention only two. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000bn. To put it into perspective, that is about equal to half the total US household wealth and about five times the national debt. The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred. That must have played a role in the Fed’s decision not to allow Bear Stearns to fail. One possible solution is to establish a clearing house or exchange with a sound capital structure and strict margin requirements to which all existing and future contracts would have to be submitted. That would do more good in clearing the air than a grand regulatory reorganisation.

The other issue is rising foreclosures. About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises.

Anyways…good luck and happy trading.  I’m still long VLO, short C and GRMN.  I am looking into longs in MSFT and shorts in COF.

Perhaps the deciding factor will be next week.  Will the economy announce a further deterioration of the economy or will we see resilence.  I doubt the resilence thing if we can’t even buy muni bonds that are pretty darn safe, how can we fund anything else.  There are problems still.  They need to be solved.  No one is really raising money just asking for recapitalzation help.

Of course, there still is room for oil and commodities to raise a little more.   Perhaps the agriculture and commodities space may be a little crowded but on weakness there should be room for growth at least until we realize that the Indians and Chinese aren’t growing as fast as we thought.

Well back to the topic. The spreading of the credit problem not only spread through the sub prime (low credit) loans and alta A (non documented loans) but now spread to the jumbo loans (any loan above $417,000). Well the problem lies not in the sub prime loans because people with poor credit aren’t exactly supposed to get loans if they have a bad record of paying them back. Second the problem isn’t in the Alta A loan problem because people who can’t document their assets or their income shouldn’t get a loan based on their word because that would mean every Tom, Dick, Larry and Jane can walk off the street and get a loan. I’m sure if Dateline did bust with a homeless guy trying to get a stated loan a last year, it would have blown the cover off the loan industry but it didn’t happen but boy that would have been some story.

The problem lies in the secondary market drying up for jumbo loans. Well these people can afford a half a million dollar loan but they can’t get the loan because the secondary market has stopped funding it although there isn’t as much risk as sub prime or Alta A because these people can document their income and have assets but don’t want to take out a loan that is 1-3% higher because of the amount. Let’s think about this. Well in most major markets, a half a million dollar home is not as big as it sounds. It’s very comfortable in places like Miami, Chicago, New York, San Francisco, and Los Angeles. The average home in Los Angeles is $500,000. If you save up $100,000 for your home which is a huge task for a starter home, you maybe not even get the loan because it borderlines a jumbo loan. So what is happening now is that the real estate prices are coming down to meet this lack of liquidity in the jumbo loan market. In parts of the Los Angeles county prices are being slash forty to seventy thousand so that it can be sold. So if the higher end market prices goes down, then of course the lower end market will go down but perhaps not as much. It’s a vicious cycle.

Here is the best solution: The government has to lift the jumbo loan amount for Fannie Mae and Freddie Mac to above $500,000 so that there is more liquidity for certain markets like California and New York. But here comes the problem, the government would just be feeding the fire more fuel to keep prices artificially high because most people can’t afford homes already. But we all have to worry about consumer spending as well with prices of homes going down, the refinance piggy bank is running empty on equity so those big purchases may be cut off soon. How would you feel if $50,000 equity went off your house in one month or if you already took out equity and figure out that you now owe more than the house! Not a good situation because we need our home prices high to keep some of the spending going because just today there were reports of credit card defaults were moving up so is this a sign of the consumer dying with the jumbo fall of real estate?

Here’s your course synopsis, the books, the authors, the messages:

* “Zen Mind, Beginner’s Mind:” Shunryu Suzuki. “Which is more important; to attain enlightenment, or to attain enlightenment before you attain enlightenment; to make a million dollars, or to enjoy your life in your effort, little by little, even though it is impossible to make a million; to be successful, or to find some meaning in your effort to be successful.”

* “Stumbling on Happiness:” Daniel Gilbert. Another Harvard professor, who says in his new book: “If everybody realized constant production and consumption aren’t a source of happiness … how many of us would get up in the morning and say: I know it’s not going to make me happy, but I want to keep the economy going?”

* “The Art of Happiness:” The Dalai Lama. “Everywhere, by all means imaginable, people are striving to improve their lives. Yet strangely, my impression is that those living in materially developed countries, for all their industry, are in some ways less satisfied, are less happy, and to some extent suffer more than those in the least developed countries.”

* “Money & the Meaning of Life:” Jacob Needleman. “The battlefield of life is money. Instead of horses and chariots, guns and fortresses, there are banks, checkbooks, credit cards, mortgages, salaries, the IRS. But the inner enemies remain the same now as they were in ancient India or feudal Japan: fear, self-deception, vanity, egoism, wishful thinking, tension, and violence.”

* “The Millionaire Mind:” Thomas Stanley. “As most millionaires report, stress is a direct result of devoting a lot of effort to a task that’s not in line with one’s abilities. It’s more difficult, more demanding mentally and physically, to work at a vocation that’s unsuitable to your aptitude.”

* “Flow: The Psychology of Optimal Experience:” Mihaly Csikszentmihalyi. “Isn’t it funny? I’ve been studying happiness for at least 40 years, but I still don’t have a definition of it. The closest one would be that happiness is the state of mind in which one does not desire to be in any other state. Being deeply involved in the moment, we do not have the opportunity to think about anything but the task at hand — hence, by default, we are happy.”

* “Seven Spiritual Laws of Success:” Deepak Chopra. “Everyone has a purpose in life, a unique gift of special talent to give others … Sit down and make a list of answers to these two questions: Ask yourself, if money were no concern and you had all the time and money in the world, what would you do? … Then ask yourself: How am I best suited to serve humanity? Answer that question and put it into practice.”

* “The One Thing You Need to Know.” And if all else fails, take Marcus Buckingham’s incredible advice: “Discover what you don’t like doing and stop doing it.”

* “The Way of the Peaceful Warrior:” Dan Millman. “The secret of happiness, you see, is not found in seeking more, but in the capacity to enjoy less … This is the final task I will ever give you, and it goes on forever. Act happy, feel happy, be happy, without a reason in the world. Then you can love and do what you will.”

* “The Alchemist.” Paulo Coelho’s novel is a spellbinding must-read about everyone’s lifelong search: “When you want something, all the universe conspires in helping you achieve it … God has prepared a path for everyone to follow … The secret to happiness is to see all the marvels of the world, and never forget the drops of oil on the spoon.”

The federal funds rate which is tied to the prime rate which affects consumers and businesses was not cut. Everyone is expecting soon especially with consumer sentiment going down. The temporary bandaid will get us through this period but we have to keep in mind how the full brunt of the housing downturn will affect consumers. “This is fine for temporary relief, but I think they will still have to cut the funds rate because the markets will still be turbulent,” said David Wyss, chief economist at Standard & Poor’s in New York. The main problem is still the housing problem which is flowing into prime mortgages which is merely the beginning because who is going to buy all these mortgages now that they know they are going down. The hedge funds will step in when they see more blood. The market was down really hard before market but with the announcement, the Dow shot up 300 points but we’ll see if it can hold it which will provide the large psychological boost because if it doesn’t, if the Fed can’t save us who can?

Did someone say recession?  Is it possible?  Some people are saying it’s possible when before it was not.  A rate cut doesn’t seem to be coming soon with the threat of inflation.  Here is the possibilities for this market.

Ok the world’s best consumer us is falling apart.  Will corporations start laying people off in foresight of this consumer spending drop.  Yes there will less money to spend and less money to spur the economy because we know that everyone in America already maxed out their credit cards.  Well what about world growth, what about world growth.  It depends on us, the world’s best consumer who isn’t so great anymore.

Why is there so much selling?  Why?  Well let’s see.  The loan funding was pulled.  Lack of liquidity in the mortgage market pushed up the rates for loan funding.  Then this pushed up rates for corporate borrowing.  Then this killed the buyout mania.  Then the catalyst for stocks started falling one by one.  Buyouts were more expensive.  Stock buybacks are more expensive.  Borrowing cost for corporations are more expensive.  So it’s a huge problem.  So now you have stocks dropping and people demanding for redemptions of their money because they are scared.  I’m scared.  I sold everything today because the market is dropping on low volume.  Flight to quality it’s called.  So now funds will need to sell everything as the redemptions come and you know what some people aren’t sticking with these funds who are supposed to beat the market and so heavily invested.  So there will be fund closures not because of subprime but because of the regular market dynamics.  This is not good for the world of capitalism.

It would be nice to just wait it out until all the rates reset and the banks figure out what is going on with the liquidity situation because money is disappearing every single day.  I say go with something save until you see huge selling at huge volume.  Like is the world coming to an end volume.  We need something to say that everything is ok.  Wait it out folks.

This is the Rebuttal to the Second Support for China:

So now we have to figure out while the Euro is growing against the dollar.  Is the European counterpart much better equip as a country than the US.  I really say no.  Their emphasis on jobs and socialism really puts them at a disadvantage against the highly capitalistic US while all the talents of the world come here (well not quite with these retarded immigration restrictions – we need to solve this because imagine if the US stole all the global talent because we all know that all the talent would go to the US because of the higher wages – from China, India, Europe anywhere because our corporations can afford this but keep in mind we are developing egineering and design facilities all over the world to take advantage of this as well while maintaining the best talents in the States while using the best talents of the world)  What do you say to that!  But Europe is only growing because of the Eastern european state and not because of growth.  Germany, Spain, France and everyone else is not growth either.  If the US can annex Canada and Mexico, we could destory the world but too bad we can’t.

I agree that China is exporting everywhere in the world but as the wages in China growth and their competitive advantage disappears because they are destroying their country so that they can make money.  Look at the rivers, the skies, the land, the pollution, the disease, the air….there is no price on that.  While they keep growing uncontrollably, there is neglect of the environment which is becoming damaged beyond recognition.  So is there a price on that?  Also what about the humanitarian issues that China will face eventually, that will cause wages to rise and the cost associated with health care, retirement, welfare, etc.  What will happen if they don’t take care of all those issue…will that cause their economic advantage to go down?

So that’s the end of the discussion.  Only time will tell whether America and withstand the growing global powers around the world.  Japan was once great and now it’s a shadow of itself.  Will America be the same way?  Will it end up to be a lumbering giant among great superpowers.  We’re not the only super power anymore and that’s one truth that we all have to face.  From outsourcing to military power to capitalistic dominance, the world is getting more competitive.

If only things are so straight forward. The world is so globalized that just describing the US CHINA relationship is not really representative of the big picture but only one strand. In fact, US has a bigger deficit with the middle east due to oil imports.

And China, in fact is becoming much less independent of the US even though America is still the largest trading partner. China is exporting heavily to Europe…and not to mention every part of the world because the existence of -”product”- originate solely from China because some products are produced no where else in the world because the laws of economy don’t allow it to exist in any place except China. No other country produces better and cheaper -basic- products or even high tech products… (in the grand scheme). It is clear though, China has its fangs, tentacles or whatever you want, in the main blood vessel of the US, and is sucking some tasty cold hard cash.

Yes, America may bounce back because America is a strong country and even though the political system may be decrepit in many aspects, it’s still the best and provides unquestionably the best standards of life (barring little insignificant countries like Norway etc) on a broad scale.

But, maybe the finer point of argument and perhaps the central issue is, can America maintain it’s overarching dominance?

The near future is certain that it can maintain a waning dominance, militarily, and economically despite it’s debt. ( we are seeing weakness thru the handling of the middle east as well as north korea, where china appeared as a big involvement and mediator/instigator) Nevertheless, I’ve realized that the expandability of debt is very flexible simply because we are not tied to gold anymore and everything is numerical. But what is at stake may be 1) credit loss…the credit (believability and worth) of the US dollar and the US economy 2) opportunity and power, the piece of the pie will get smaller for the US as wealth is distributed throughout the world causing multipolar superpowers rather than one single American power. American’s will have to get used to it and use more of it’s diplomatic/democratic face. They will have to accept other nations doing things better and bigger..Korea, the number 1 LCD producer, Japan most successful car manufacturer, etc etc. We’ll see…say we have another good 40 years to live…we’ll definitely see how this all pans out.

When i try to think deeper, it just doesn’t go further because there simply is NO ANSWER! For example, China. +, -, divide, square root, tons of problems, environmental issues, corruption, bubble, and so on, but the right side of the equal sign yields 12% growth in GDP, a record (some cities must be growing at 20%). So for now, despite the absurdities, it’s on a growth trajectory. America probably is not.

And thank you for reminding me of not only looking to the good when times are good. Just like real estate, and just like stocks. But it can also be told to America..who has a global foothold in every country, just as The Great Britain once did.

“This is more of a theoretical argument than anything. I tried to look up these figures before but I haven’t found any. Perhaps if I ever go back to grad school. Your father is right in terms of his attacks. The US at this time is currently in huge world of shit however, regardless of how you see it, the American corporation is essentially the American economy. Yes the economy is running into problems caused economic problems associated with trades, overspending and debt yet it’s difficult to argue against the state of the American corporation at this time. You have to see where the flow of money is going to be going in the future:

1. China will have to let the currency flow more – Giving more strength to other currencies including the dollar
2. The industrialization of the world will lead to further growth of American product overseas because regardless of how shitty we are and how we are hated, American culture is a commodity that people around the world still want.
3. Our debt problems and spending problems can be fixed through our political system. We’ve done it before. That is the special thing about America – the resiliency. http://www.uuforum.org/deficit.htm
4. We have our feet in every single country in the world. As the world grows, we have a hand in the growth through corporations. The taxes from this growth will eventually flow back to the US.

So the argument is not if the US is shitty right now…it so is. The argument is whether the US will stay shitty. I don’t think that will continue. China is as dependent on the US as the US is dependent on China. Does China have more politcal problems or the US? The stability of the US will eventually dominant if there are any global problems. Civil war in China is much more possible than civil war in the US. There is not doubt that in any global catastrophe that the US will always be the safer investment but yet again, it’s a theoretical argument.

But in the end, it’s the argument can go back and forth whether the American corporation can save the economy. It depends on the figures. How much are we making overseas compared to domestically. The percentage of international revenue is growing much faster than domestically benefiting from the global growth. American brands are the worlds most widely recognized http://www.cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf . The problem is we spend too much because of this war and retarded administration that will surely change after this term. The fix will take decades but it’ll eventually fixed. Ridding of debt and running a surplus will support and strengthen the dollar. That’s the only way but even America at these darks times are not dark. For the last decade almost (the same period that the dollar has dropped so much), we’ve been lead by the Bush Administration that created a deficit by spending way too much.

In bad times, people only see the negatives (US). In good times, people see only the positives (Shanghai) – Not a poke at anyone – just looking at the other perspective because we all know China is still the growing faster.”

Yes, I do agree American corporate entities have achieved sophisticated efficiency, the best in the world. Like the machines in the Matrix.

Yes, you can separate the two, American economy and American corporate economy. But aren’t they undeniably interlinked and if America is running a debt it doesn’t matter how well the corporations are doing. At the end of the day, the country is operating at a loss. Trade imbalance measures external loss with other countries, and budget deficit measures internal loss. And both are HUGE recurrent losses not to mention a shaky financial system.

Tell me if you can rebut my thought: America is strong right now and just feeding off of its PAST success, (yes in part because of its corporations that funnel money back), but it is really because the whole world uses US dollars to conduct transactions and THAT fact was established not now but when America was really booming after WWII. When the dollar became the world currency for transactions in goods and trade.

And one MAJOR reason america is losing dominance in the world is the introduction of the Euro. The euro created excess liquidity, an alternative choice, Japan wanted to become a world currency but failed because they sucked in too many USD and became infected with that disease. The introduction of the Euro also contributed to a new global inflationary rise in prices…simply because there’s more money in the system.
Now the middle east oil producing countries are slowly rebuking the USD – which is causing further erosion – and greater adoption of the Euro. The Euro to the dollar has appreciated 40%!!!!! Imagine, suddenly you are 40% worth LESS over the decade since it was introduced.

So the Corporate savior theory may not be the answer. because corporations go down just as easily when the economy of the country starts to fail.

Stay tuned for Part Two!!!