Earn a Bunch of Money Become a Banker
PIM of SPAIN | November 11, 2009 at 11:43 amby
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"The Second Wave Begins." is the headline of a report from John Hussman. The substance is that a 'second wave' of foreclosures already may have begun.
The Top 50 metro areas in the US are reporting, "sharp increases in foreclosure activity.”
"Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation's foreclosure epicentres in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave," writes James J. Saccacio, CEO of RealtyTrac. "While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009."
“Financiers have the world's financial system in a ‘doom loop,’” says the Bank of England. “The bankers take money from the government and use it to speculate, not to lend. "Excess" reserves are at a record high as consumer credit continues to decline.”
Most people find it both annoying and absurd to see bankers getting $10 million bonuses while there is over 10% unemployment. Why doesn't Goldman go to an unemployment line and make them an offer?
"Any of you guys want to earn a $5 million bonus?" For sure capable people will be interested. And Goldman would save $5 million/head.
Borrowing from the Fed at 1% and lending it back to the Treasury at 4%, is a trade that quickly can be learned.
Over the last 7 months, there was almost no way ‘fed-financed’ traders could lose money. They borrowed dollars at next to zero interest rate. It didn't matter what they did with it, they could trade it for Japanese Yen, Brazilian Real, buy stocks in Singapore or even gold. Almost everything went up against the dollar.
“Institutional investors - such as those managing money for banks - are judged on how well they do against the benchmarks, the averages, not on how much money they make or how many losses they avoid. If their colleagues are making money, they have no choice. They have to get in the game too.”
In other words they are in a "doom loop," where they continue to bid up asset prices - even at the beginning of a depression.
Meanwhile, back to the real economy, deflation continues. David Rosenberg writes:
"It is like a magic show - the US economy is somehow out of recession with both employment and consumer credit outstanding still in full- fledged contraction mode.”
"In September, total consumer credit fell $14.8bln making it the eighth month in a row of debt repayment - an unprecedented string of declines. Over this period, the amount of consumer credit (not including mortgages) that has come out of the system has totalled $163bln at an annual rate (or -6.3% at an annual rate). Looking at the fact that total household debt still exceeds long-turn norms of 60% by a factor of more than two, we are still in the early stages of a secular credit contraction that could well end up seeing another $5 trillion of debt collapse. This is a highly deflationary process; it will take time; and while we are bullish on gold and commodities strictly on global supply- demand imbalances, bonds remain a very good place because deflationary episodes provide solid real yields to investors."
How long will it take to de-leverage the private sector, in order to calculate how long this depression will last? Assuming a 6% a year debt repayment in the private sector, which has twice as much debt as it should have that will take about 7 years to get down to a more normal debt level.
But it's not that simple. Because as the private sector pays down its debt, the feds try to prevent it, while they leverage up the public sector with even more debt. This will make a real recovery to take even more time.
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