What is going on with the markets?

Sorry for the multiple posts over the past few days but this is a time of "change" and as such there are a lot of market issues that need to be addressed.

For those who were wondering if I was monitoring/updating the site over the past 6 months when we were in the "good times" and I was updating infrequently (and you were wondering if I was continuing to monitor the markets and updating the site)........I guess you now know I live and breath this stuff! When there is nothing to say.......I say nothing. Where there is something important to say.........I speak....... a lot.

Simply, here is the crux of the issue........."Credit crunch".

What does that mean? Essentially all banks are hesitant to lend to one another given all their individual exposure to mortgage debt/credit card debt/auto loan dept/etc in a falling asset environment. This has led to banks unwilling to lend to one another.

As I mentioned previous; no lending = no monetary velocity = deflation= Oh, oh!

So why are they unwilling to lend to one another?

1) most exposed themselves to "exotic" toxic mortgage related tranches over the past number of years (that I have talked about previous) and they really do not know the value of those assets they hold (and by default neither does the other guy on the opposite side of the trade), and,

2) they really have no idea to what extent defaults will occur in the future in not only the mortgages they hold but also credit cars and auto loans.

In order to keep it simple, here are the biggest issues you need to understand:

First chart is the various U.S. mortgage resets (as there are numerous types of mortgages in the U.S) based upon time over the next few years (click on charts to enlarge):


I've tried to annotate the chart as best as able. The key point to note is while "sub prime" is the "flavor of the day" as far as the media is concerned (and by inference once that "sub prime" period has past all will be well), in fact there is a huge amount of additional resets that will occur over the next couple of years that could be the "2nd" tsunami. The point is we are not out of the woods on this issue for some time irrespective of what you might here in the media.

The key to note is the number of mortgage resets over the next 2 years. Initially it was thought that only the "sub prime" mortgages would be an issue but data over the past month has indicated the more "quality" mortgages are also going into default. This is very bad news for the markets going forward.

Secondly, banks have started to report 4th quarter earnings. Citi group announced almost a 10 BILLION loss for the quarter! That number sounds huge but more is yet to come....see below.


Note the huge rise in both CC debt and also auto loan debt defaults. This is the second wave of the tsunami the markets have yet to fully price in ( in addition to the 2nd tsunami in mortgage resets).

The bottom line is this is probably one of the most challenging markets in recent history. I caution you not to listen to the media and the "all is well" crowd................this is a huge event and you need to be prepared to deal with it. I cannot stress that enough.

As I have told you previous; I have positioned myself now in 100% non-equity positions. While I will not advise individuals to do the same (as I am not offering any sort of service to provide this advice); I would caution those who are long equities in the provident fund to seriously look at their positions and assess accordingly.

In my opinion, the markets are due for a "dead cat" rebound. Until proven otherwise, I will take that bounce as the "tide going out" where all the uninformed stand on the beach wondering where the tide went while the 2nd tsunami is inbound.