Credit Bubble Bulletin, by Doug Noland

[davelj]

We are at one of those fairly rare moments – “THE MOMENT” – in an economic/credit cycle. While I think it’s unlikely, the bulls could stampede tomorrow and take the market(s) up 2% with the logic(?) that, “things are so bad that the Fed will be forced to lower rates soon, so things will be GRRRRRRRRRRREAT [with deference to Tony the Tiger] in ’08!!” This is the old “good news is good news, and bad news is good news; ergo, all news is good news” weltanshauung. This has been the prevailing bull market thesis for the past few years up until the last two weeks. And make no mistake, it has worked marvelously.

Now comes the test. The market’s been smacked around, the news has been really dire over the last couple of days and the question is: Can the bulls take this thing up or do they throw in the towel? I think we could see a 3%-5% down day tomorrow – a real panic sell-off. There is so much risk that still needs to be offloaded before anyone gets comfortable.

My bet is that we are substantially down tomorrow and then down even more on Tuesday when Bernanke doesn’t lower rates (although I’m sure the “language” will be a bit more dove-ish). But, again, the bulls have been so persistently… well… bullish that it’s hard to keep these nutjobs down. Regardless, it will probably be a very big move in one direction or the other. While I’m not a trader, my preference is for it to be down. But given the persistence of the bulls, in general, nothing surprises me anymore.

[davelj]

We are at one of those fairly rare moments – “THE MOMENT” – in an economic/credit cycle. While I think it’s unlikely, the bulls could stampede tomorrow and take the market(s) up 2% with the logic(?) that, “things are so bad that the Fed will be forced to lower rates soon, so things will be GRRRRRRRRRRREAT [with deference to Tony the Tiger] in ’08!!” This is the old “good news is good news, and bad news is good news; ergo, all news is good news” weltanshauung. This has been the prevailing bull market thesis for the past few years up until the last two weeks. And make no mistake, it has worked marvelously.

Now comes the test. The market’s been smacked around, the news has been really dire over the last couple of days and the question is: Can the bulls take this thing up or do they throw in the towel? I think we could see a 3%-5% down day tomorrow – a real panic sell-off. There is so much risk that still needs to be offloaded before anyone gets comfortable.

My bet is that we are substantially down tomorrow and then down even more on Tuesday when Bernanke doesn’t lower rates (although I’m sure the “language” will be a bit more dove-ish). But, again, the bulls have been so persistently… well… bullish that it’s hard to keep these nutjobs down. Regardless, it will probably be a very big move in one direction or the other. While I’m not a trader, my preference is for it to be down. But given the persistence of the bulls, in general, nothing surprises me anymore.

[lindismith]

Thanks for posting LArenter.
Well worth the read.

[lindismith]

Thanks for posting LArenter.
Well worth the read.

[lindismith]

Thanks for posting LArenter.
Well worth the read.

[lindismith]

Are the markets open in Asia yet?

[lindismith]

Are the markets open in Asia yet?

[lindismith]

Are the markets open in Asia yet?

[Anonymous]

Have a newbie question for you:

Saw an article posted on the Steve Quayle website which was from the Office of the Currency Administrator of National Banks. Its their (OCC’s) Fourth Quarter 2006 Report on Bank Derivatives Activities. It lists the top 25 U.S. Banks
with the most derivatives contracts in notational amounts. Bank of America is number 2 on that list. Total amount of derivatives are 26,674,360 (millions) compared to BofA’s total assets of 1,196,124. While I’ve read somewhere that BofA does not do subprime mortgages, in reading this document, I wonder how much impact this credit crunch will have on BofA, or for that matter on any bank with that much exposure to derivative contracts. Do you have any idea what the likely impact would be??

Thanks for your time and attention! And patience with my question…:-)

[Anonymous]

Have a newbie question for you:

Saw an article posted on the Steve Quayle website which was from the Office of the Currency Administrator of National Banks. Its their (OCC’s) Fourth Quarter 2006 Report on Bank Derivatives Activities. It lists the top 25 U.S. Banks
with the most derivatives contracts in notational amounts. Bank of America is number 2 on that list. Total amount of derivatives are 26,674,360 (millions) compared to BofA’s total assets of 1,196,124. While I’ve read somewhere that BofA does not do subprime mortgages, in reading this document, I wonder how much impact this credit crunch will have on BofA, or for that matter on any bank with that much exposure to derivative contracts. Do you have any idea what the likely impact would be??

Thanks for your time and attention! And patience with my question…:-)

[Anonymous]

Have a newbie question for you:

Saw an article posted on the Steve Quayle website which was from the Office of the Currency Administrator of National Banks. Its their (OCC’s) Fourth Quarter 2006 Report on Bank Derivatives Activities. It lists the top 25 U.S. Banks
with the most derivatives contracts in notational amounts. Bank of America is number 2 on that list. Total amount of derivatives are 26,674,360 (millions) compared to BofA’s total assets of 1,196,124. While I’ve read somewhere that BofA does not do subprime mortgages, in reading this document, I wonder how much impact this credit crunch will have on BofA, or for that matter on any bank with that much exposure to derivative contracts. Do you have any idea what the likely impact would be??

Thanks for your time and attention! And patience with my question…:-)

[Ex-SD]

My wife and I lived in San Diego for 30 years. We were die-hard San Diegans but we had a strong feeling that what is happening now was going to happen on some level……….most likely a 25-40% meltdown. So, in early 2005, we sold our home for a huge profit and moved to the mountains of South Carolina where land and homes are very inexpensive. We’re constantly watching the San Diego housing market to see just how far this goes and if prices ever get back to a sane level, we will sell our home and move back. You didn’t have to be a rocket scientist to figure out that there was a huge probability of a bubble-burst when fewer and fewer people could qualify for a mortgage (and that was with the liar loans/2-28 mortgages/and all the other smoke & mirror chicanery that was taking place in the mortgage business). We believe that as more homeowner loans reset at much higher rates, people will either walk away and go into foreclosure because they will see that they have negative equity due to falling prices or they will simply not be able to make the higher house payments.
If we’re wrong, we have a fully paid for home in a nice, quiet area with low taxes……….and although it’s not San Diego, it’s not a bad place to live. Anyone who buys a home for the next couple of years in Southern CA (except the $1 million plus properties that seem to be immune from the bubble-burst) must be out of their mind or know some hard inside information that the rest of us are not aware of.

[Ex-SD]

My wife and I lived in San Diego for 30 years. We were die-hard San Diegans but we had a strong feeling that what is happening now was going to happen on some level……….most likely a 25-40% meltdown. So, in early 2005, we sold our home for a huge profit and moved to the mountains of South Carolina where land and homes are very inexpensive. We’re constantly watching the San Diego housing market to see just how far this goes and if prices ever get back to a sane level, we will sell our home and move back. You didn’t have to be a rocket scientist to figure out that there was a huge probability of a bubble-burst when fewer and fewer people could qualify for a mortgage (and that was with the liar loans/2-28 mortgages/and all the other smoke & mirror chicanery that was taking place in the mortgage business). We believe that as more homeowner loans reset at much higher rates, people will either walk away and go into foreclosure because they will see that they have negative equity due to falling prices or they will simply not be able to make the higher house payments.
If we’re wrong, we have a fully paid for home in a nice, quiet area with low taxes……….and although it’s not San Diego, it’s not a bad place to live. Anyone who buys a home for the next couple of years in Southern CA (except the $1 million plus properties that seem to be immune from the bubble-burst) must be out of their mind or know some hard inside information that the rest of us are not aware of.

[Ex-SD]

My wife and I lived in San Diego for 30 years. We were die-hard San Diegans but we had a strong feeling that what is happening now was going to happen on some level……….most likely a 25-40% meltdown. So, in early 2005, we sold our home for a huge profit and moved to the mountains of South Carolina where land and homes are very inexpensive. We’re constantly watching the San Diego housing market to see just how far this goes and if prices ever get back to a sane level, we will sell our home and move back. You didn’t have to be a rocket scientist to figure out that there was a huge probability of a bubble-burst when fewer and fewer people could qualify for a mortgage (and that was with the liar loans/2-28 mortgages/and all the other smoke & mirror chicanery that was taking place in the mortgage business). We believe that as more homeowner loans reset at much higher rates, people will either walk away and go into foreclosure because they will see that they have negative equity due to falling prices or they will simply not be able to make the higher house payments.
If we’re wrong, we have a fully paid for home in a nice, quiet area with low taxes……….and although it’s not San Diego, it’s not a bad place to live. Anyone who buys a home for the next couple of years in Southern CA (except the $1 million plus properties that seem to be immune from the bubble-burst) must be out of their mind or know some hard inside information that the rest of us are not aware of.

[davelj]

Well, looks like I was wrong, and it won’t be the last time. Today looks pretty prosaic for the stock market so far. And it’s up, so I was wrong on both counts – it’s up and not particularly volatile. That’s about par for the course. Another good example of why I don’t fool around with public securities.

Should be an interesting week…

[Author]

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