Market bets against hope

The Market is Now Pricing In the Genuine Possibility that the US will Default on Its Debt

While the chances that our economy will go into default has increased from 8 in January to over 25 basis points by mid September, the Daily Telegraph also reported that, as a result, market interest rates have also spiked going from -50 to 150 basis points in the same time.

Speculators have become increasing skeptical the sudden US move to price in another trillion dollars in government debt is a good one, and have bet against us. The result is making it harder for Uncle Sam and many Wall Street firms to seek the financing our economy needs to survive this crisis.

According to the George Washington blog posting on Saturday.

"You've heard of "credit default swaps". They are a type of derivative where one person places a bet that a certain company will go out of business, and another person on the other side of the contract places a bet that the company won't go out of business (see this and this).

Well, people are now starting to increase their use of credit default swaps to bet that the U.S. will default on its ability to pay on its treasury debt."

Last week we were witness to a wild ride on Wall Street and it looks like we are headed for more volatility in the future as the market reaction to more government debt is turning very negative.

As Reuters reports, as of Monday morning opening of the Asian markets ... "Stock futures off on rescue detail worry"

It seems our top economists are also helping to trigger the alarm bells this time. Avi Zenilman from the Politico reports Sunday that the experts have weighed in and don't seem too impressed.

This week will certainly see more wild fluctuations on Wall Street, and in markets abroad, sending us ever higher into the precipice of a final turn in one direction or the other. How long the markets can endure this dizzying pace of turmoil is anyone's guess, but we are certainly in need of stability not ever-increasing volatility.

Too good to be true

I knew there was a good reason not to “play” the stock market. Jim Willie writes for Kitco today:

"Hidden inside the AIG bailout funding package, surely hastily cobbled together, but carefully enough to include a totally corrupt clause, was a handy dandy clause that permits raids. The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures. This represents unauthorized loans of your stock account assets. So next, if the conglomerate fails, your stock account is part of the bankruptcy process. Finally the corrupt USGovt and corrupt Wall Street houses are desperate enough to put into policy, stated by the US Federal Reserve, outlining the authorized raid of your money. Beware.

In the olden days, this sort of thievery resulted in a rope, a tree, and a horse scared out from under the perpetrator. Now? The government in cahoots with the Fed actually helps the bankers steal the money."

Socialism American Style

Over the weekend, intense negotiations were taking place at the highest levels of our government attempting to solve this country's myriad of problems from environmental disaster and dwindling natural resources to economic catastrophe.

And it seemed as though some sensibility had come over the newly emerging socialist tendencies of our financial system when the Fed announced Sunday that it would not come to the aid of Lehman Brothers - even though it had rescued a string of similar companies in previous months. But by Wednesday, it had again decided to come to the aid of another company, AIG. Then shortly afterwords it announced a bailout of our automotive industry as well.

Yet, with all of this "rescuing" going on, by midday the stock market was still down by over 300 points.

It is certainly becoming hard to keep track of all the socialist firsts this government is making these days. Bailout after bailout from investment firms, banks, home lenders, insurance companies, and now our auto industry.

Taking into account that the fallout from Lehman Brothers will far outweigh the collapse of WorldCom, (which was previously the largest corporate bankruptcy in American history). The sheer number of companies that would have become bankrupt hadn't the government stepped in is becoming enormous, both in size and quantity.

Our economy, as reflected through Wall Streets books, would be well beyond tatters by now hadn't these bailouts occurred. This is not even accounting for the several regional banks, like WaMu and SunTrust that have also seen better days before playing the game of unregulated predatory lending.

And yet, just as in physics, these losses don't just vanish into nothing because of the governments massive bailout program. There still needs to be an accounting for every dollar whether its shifted from private to public coffers, or from liquid to gas.

You can change the substance of something, like water into steam, but it will always retain the identical mass.

So, in essence, these massive bailouts happening practically everyday are going to have to be paid for by someone. Welcome to socialism American style.

Now we as taxpayers won't have to pay for it all as there will be numerous vultures lurking in the wings just waiting to scoop up the stinking remains of the corporate victims left behind. Of course, we will also welcome foreign "investment" from Britain, Europe, China and the Middle East.

And the trend will continue for as long as there is money to be made in swooping in and taking what we think are failed businesses. Just like the sale of the Sears Tower in Chicago, it's happening all around us from Wall Street to Main Street, fire sale after fire sale. If not our government, it will be another American company, if not another American company, then it will be another foreign company, or even country.

While this is taking place, larger numbers of Americans will find themselves without employment and wondering how much their personal burden will be to the government come tax time. Doubt we will be getting any rebate checks anytime soon.

Funny to imagine all of this could have happened in just eight short years, but that is the nature of our economy. Change can happen fast.

Now, the bottom is far from being over and already the American taxpayer is left holding a pretty horrible bag of corporate debts, the FDIC is running out of "insured" money, and the Fed is suddenly finding itself backed into a corner without any good options.

In fact, the Fed is now finding out that it is not able to set its rates because they are being set for them at record high levels by a market that is more concerned with hording its reserves, or using them to pay off these bad bets made in the derivatives market.

At the same time, the American consumer is also left with little to no options itself. The job market, as weak as it is, is our saving grace and the inbred system of payroll deductions, FICA, Medicare, et. al. will ensure that the government gets the money it needs to keep ticking along saving the country from its own mistakes. However, as good paying jobs are being replaced by increasingly menial labor and lower paying positions in an ever decreasing job market, this is also becoming a slippery slope.

Unlike the 60s, we can't just burn our draft cards so to speak and decide not to support a government who has had little to no regard for its constituents because the same paper that feeds us feeds our government. It's just like a modern version of indentured servant-hood, a step away from slavery but a form of ownership never-the-less. That combined with out right to demonstrate or protest having been taken away, as is now the case, we have in effect become "sheeple".

If the government was held accountable for its actions, and we had a say, this wouldn't be the case as our money would most likely pay for things we wanted them to, but not anymore. Through the system of corporate news cycles, we are made to believe what we should think, and so our power is reduced further.

With all options seemingly off the table for the Fed, and the American people, it seems like the game is up and we have lost this bad game of poker. How big the loss becomes will certainly be much more than the devastation of Hurricane Ike and Katrina put together, but in similar fashion, we will be left holding the bag paying for the mistakes of greedy people who have effectively brainwashed our entire political system.

We can only hope that after this man-made disaster has come full circle the wasteful debris of human greed is washed away like the bad paper they helped to create.

Until then, comrades, I will save a seat for you in Siberia.

American Gamblers

Heard of he phrase, "put your money where your mouth is?" Well, if you're an American investor, you probably live by that phrase and are eating it right about now.

For some time the American economy has moved away from the production of goods and entered into the services industry. The end of the industrial revolution happened sometime shortly after WWII as the United States began to expand its global reach, providing other countries, such as Japan and Germany with the resources necessary to compete with our companies here at home. We did this through the Monroe Doctrine in Europe and under the reconstruction efforts of General Douglas McArthur in Asia.

By the 70s, it was becoming a hard pill for many Americans to swallow. And we are still in the process of losing our manufacturing base to foreign competitors, most notably China and southern Asia now.

Hard pill? Quite. The US has enjoyed being the primary manufacturing hub of the world since shortly after the American Revolution. Our continued innovation and subsequent manufacturing of these inventions, have provided this country with the ability to become the strongest nation on earth.

Interestingly, almost all finished goods prior to the Revolution were produced in England and then re-sold to consumers all across the world. Take clothes made from cotton as an example. American farmers would grow and then sell the cotton to manufacturing companies in England who would then make clothing items and, in turn, transport them back overseas to be sold as a final product. This was the case for almost every conceivable product, including tea.

As for the English, this system worked wonders for their economy until its colonies wanted to produce their own goods without having to bear the additional cost of shipping, or pay "unfair taxes" on these goods. The British knew a good thing when they had it and tried very hard to hold on to the advantage as long as possible.

However, after WWII the United States willingly gave several nations, (formally our enemies) the ability to directly compete with its own companies at home by building up their manufacturing bases even better than they were before. Often even better than our own.

Fortunately, the resourcefulness of Americans would lead to the growth of the services industry which quickly began to prosper in conjunction with the technological revolution. Again, the United States had a great deal of opportunity to prosper economically, and dominate, for a very long period of time.

However, we are currently struggling to remain competitive with other industrialized countries in the innovation of new technology, and we have long ago given them the reins of production. Those latest iPods that enter the market right before Christmas every year, are made in China. From the development of the iPhone, it has taken all of one year for an Asian company to develop and market a competitive product, which sells for a third of the price.

The services industry has followed the same path as manufacturing has, repeating pretty much the same mistakes. In order to remain competitive, American companies have decided to provide most its services off-shore. Because of the governments unwillingness to regulate how business do their business, this trend has continued unabated for almost two decades now. The result of which has provided for the emergence of several other countries as players in the world market.

Then in the late 90s, a new type of economy began to bloom here in the US and it was called the derivatives market.

Lets take a quick step back and glimpse a shortened snapshot of the history of the American economy.

First, we provided raw materials for others to produce, selling vast quantities to other countries and then buying the finished product later. Then we quickly became the world leader in manufacturing, but after about two hundred years of (mostly) unabated prosperity, we decided to provide other countries with the ability to directly compete with us. While this was happening, we painfully transformed our economy from production of goods to the servicing of these goods. Not too long afterwords, we decided to save a little money and sacrifice quality to save a buck here and there shipping the bulk of the service industry overseas. Now, the bulk of our capital is used to speculate on those very goods and services we used to own themselves.

In essence, we are now a country of gamblers. No matter how you look at it, the derivatives market is nothing other than sheer speculation with no guaranteed outcome. That is why anyone who is smart gets insurance on it, or doesn't play the game at all.

According to the richest man in the world, Warren Buffet has talked about the derivatives market using the terms, "ticking time-bomb","A fool's game", and "weapon of mass destruction."

Now, derivatives are nothing like stocks traded on Wall Street. They are very different things all together mainly because the vast majority of derivatives are traded outside of the market and are not held on a company's "audited" balance sheets. They also have really nothing to do with anything other than the concept of risk.

Stock is ownership in something. A derivative is really nothing other than "absence of risk" in something like a stock, or really anything you would normally put your money in. The upside is that the potential returns are generally faster and often larger.

Now why would I include this singular type of trading into the overall picture of our entire economy and equate it with our real economy? Simple. Because since 2003, the derivatives market has been larger than our combined global monetary wealth.

That's right, we (the entire global community) are no sitting on basically nothing other than sheer speculation which is now estimated at over 500 trillion dollars. In essence, Wall Street has become the new Las Vegas, but have put up our hard-earned money and savings as collateral.

What's worse is that they have continued to hide their devious accounting from the federal government, and lied to us about the true nature of the risks involved. Of course, none of this would have been allowed to occur if it hadn't been for the fed to give its OK, and it did this under the leadership of Alan Greenspan who now tells us we are about to head right off the cliff and into possibly another Great Depression.

How nice.

Also, unlike stocks which will last indefinitely-until sold to another buyer, or the company itself is sold, (or goes belly up), all derivatives have an expiration date associated with them.

This is why banks and investment firms, among others, have needed access to cash quickly or risk total collapse. This money is being used to pay off its bad bets in the derivatives market.

Now derivatives are not really sold in a market like Wall Street so to speak. By the derivatives market I mean to say whenever there is a buyer and a seller brought together to create a market.

Because there is no real regulation of derivatives, any seller of a derivative can find their own buyer willing to risk a future outcome. And this is why banks are swallowing up investment firms. Investment firms have basically purchased bad derivatives from banks who cannot pay them back for these loses when they are due. If these banks did not take them into their fold, then they in turn would be held to pay for these bets gone wrong, and as a result, probably go belly up themselves. That would be a really, really bad thing because our money is in those banks.

So, while investors have for years been telling the public that the best strategy for the American consumer is to take a long-term conservative approach to investing our money, they have essentially ignored their own advice and played craps with our hard-earned money we give them in good faith.

This while certain politicians have told us to quit "whining" about the economy and then gone ahead and decided to use taxpayer money to bail out these very same banks and investment firms who put us all here in the first place.

Make no mistake about it, until the derivatives market is brought under tight regulatory control, which I doubt it ever will be. The American consumer will continue to be mislead by the very people we are supposed to be putting out trust in.

But again, this shouldn't really be news to you.