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The Ebbing Financial Flood
The Daily Reckoning
London, England
Monday, November 12, 2007
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*** The dollar is our problem too…listening to big suspicious numbers…borrowing to participate in the boom…
*** The wash of credit is ebbing…four things you can count on…when the average family can?t afford the average house…
*** Outsourcing not so profitable anymore…don?t look forward to that raise…gold might need to take a breather…and more!
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The tide has turned, dear reader.
On Friday, the Dow lost another 224 points.
The Wilshire index, meanwhile, is helpfully quoted in dollars. So you can see immediately how much money people are losing. From the top around 15,900 to last week ? when the index bounced around 14,600 ? is a loss of $1.3 trillion.
That?s in U.S. dollars. But the U.S. dollar has lost about 10% of its value this year. So, the real world loss to investors is more than twice that amount…or around $3 trillion.
(John Connelly, treasury secretary under Richard Nixon, once famously remarked to a group of European visitors: ?It?s our dollar, but it?s your problem.? That was back in the days when America still had an almost-positive trade balance. Now, when the United States needs nearly $3 billion in foreign money every day, the dollar has become OUR problem too .)
Add to that the loss in housing values ? probably about another $1 trillion, so far.
And then, there are the losses, both announced and still hidden, in subprime debt and derivatives, which could tote up to another $0.5 trillion or so.
Hey…we?re starting to talk about some real money here ? a combined loss of wealth equal to $4.5 trillion…or nearly 10% of the entire net worth of the United States of America.
Could that be?
We?re very suspicious of numbers . They?re twisted. They?re bent. They?re shifty. Still, our guess is that these big numbers are telling us something. They?re telling us that the tide has turned…that there won?t be another big bull market in stocks or property any time soon…and the feds? efforts to goose up the economy with more monetary inflation are probably not working…
…at least, that?s what it looks like this morning.
You?ll recall the basic plot, dear reader: central banks encourage consumption by artificially increasing the supply of money and credit. This flood tide of extra money boosted asset prices worldwide, leaving the impression of a booming economy. But wages in the United States are not rising ? so the only way ordinary people could participate in the boom was by borrowing. As they borrowed more and more, credit quality decreased. Finally, holders of subprime debt realized that their credits weren?t as solid as they thought they were.
Early this year, housing prices were already falling…and housing owners were having a hard time making their payments. Then, in August, credit crunched .
And now people are asking questions…borrowers are reluctant to borrow; lenders are wary about lending…
?Gloom envelops world markets,? says the Financial Times .
?Wall Street Braces for More Trouble,? says another headline.
The wash of credit ? which lifted spirits and asset prices all over the planet ? is ebbing. And once begun, it is probably impossible to reverse it.
More below…
…but first, let?s se what our guest essay has in store for us…
Twenty-Five Standard Deviations in a Blue Moon
by Bill Bonner
?We recall looking out our window. Outside, we saw a summer day much like any other. And inside, what we saw in the news was also rather typical ? a credit crunch. No, credit crunches don?t come along every day…but nor do 100,000 years separate one from another. In the United States, recently, we have had the crash of the dotcoms, the crash of Long Term Capital in ?98 and the crash of ?87; outside of the United States, there have been a number of credit crunches, in Japan, Russia, Mexico and various Asian countries.
?When you make loans to people who can?t pay the money back, trouble is only a couple standard deviations away. So far, during the first eight months of 2007, some 1.7 million houses have been caught up in foreclosure proceedings in the United States. That is just the beginning. According to Congressional estimates, up to 2 million families are expected to lose their homes over the next two years.
?The individual amounts of money weren?t very large, not by Wall Street standards. But when the money didn?t show up, it had an alarming effect. Last week?s press brought estimates of total losses of over $13 billion at Citi. Morgan Stanley is said to be facing $8 billion in losses. Merrill Lynch set records with estimated losses of $18 billion. The cat still has Goldman Sachs? tongue. But when the losses are toted up, they will probably be spectacular. Altogether, there is more than $1 trillion in subprime debt outstanding; much of it will go bad.?
Keep reading today?s guest essay here:
Twenty-Five Standard Deviations in a Blue Moon
Now, back to Bill for a few more noteworthy items…
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