Markets Alchemy and Greed Stupidity

So Paulson announced his big plan to nationalize all the toxic waste from the financial industry at the expense of the US citizens and the markets rally like heroin addicts getting a relief shot after a few days of missing their dope. He announced that he will put about $1.2 trillion USD ($400 billion to save money market funds and $800 billion to buy the toxic waste).

Now, look at the chemical reaction that happens:
The world total market cap by the end of 2007 was about $60 trillion USD
supposing that the overall market fell by 25% until by the 18-09-2009, we are at about $45 trillion USD
No, Paulson, probably the biggest fool in the history of humanity, exceeding easily Bush, Greenspan and Bernanke, comes in, a thow in about $1.2 trillion USD. So basically, he's throwing in an amount approximately equal to 2.5% of the world total market cap. This figure really seems amazingly high. And hearing the news, the world markets rally by approx. 8% (!!!) in 24 hours, or about $3.6 trillion USD. Any rationality here? I call this alchemy: 1.2 trillion in = 3.6 trillion out. So this just cannot work...

But wait there's worse. Many important questions are raised by this Forbes article:
Wachovia is said to be considering a "bad bank" for toxic assets, including some portion of a potentially lethal $122 billion portfolio of alt-A mortgages on its books. Citigroup is trying to work off $500 billion of its "legacy" assets. Paulson hasn't said what limits would be set for contributions from individual banks, if any. Does that mean a bank could unload absolutely everything, or would they be required to retain a portion for their own books?
So, if Wachovia and Citigroup, just by themselves have more than 600 billion USD of toxic waste to dump in, the 800 billion USD provisioned by Paulson looks a ridiculously small amount.

Please also keep in mind the following
(Source: U.S. Global Investors):
  • Total US Money supply is $15 trillion (Paulson is going to increase it by 10%!!)
  • World GDP: $54 trillion USD in 2007 (source: CIA)
  • Total amount of derivatives: $516 trillion
  • According to the Bank for International Settlements reported the notional amount on outstanding OTC credit default swaps to be $42.6 trillion in June 2007 (Wikipedia).
  • In the US, the Office of the Comptroller of the Currency reported the notional amount on outstanding credit derivatives from 882 reporting banks to be $5.472 trillion at the end of March, 2006 (Wikipedia).
The conclusion is that even if the 1.2 trillion USD of the plan are a gigantic amount of money that will sink the US Treasuries balance sheet for decades, it remains a meaningless drop in the ocean of potential losses.

So, who will be able to dump toxic junk in this pool? Up to wich amount? How will these junk be priced? You can be sure that Paulson will keep everything as secret as possible to not hurt the banks because if you disclose these informations, the banks will slump and we are back to square one within 24 hours.

So, it is almost certain that this last final bullet will be dodged and that things will get worse: how much will the USD fall? How much will the treasuries fall and how high will the rates get? These are all very bearish for the US.

Jim Sainclair's blog:

The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION.

This appears to be Bank of International Settlement Spin to announce the largest gain in derivatives outstanding since they started to report. As of the last report it appeared that both listed and OTC derivatives was under $600 trillion. Now listed credit derivatives alone stood at $548 Trillion. The OTC derivatives are shown as $596 trillion notional value, as of December 2007. One can only imagine what number they are at now.

Well we hit a QUADRILLION. We have more than $1000 trillion dollars in all derivatives outstanding. That is simply NUTS because notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. $548 trillion plus $596 trillion means $1.144 quadrillion.

It would be an interesting piece of research to see what the breakdown is of listed derivatives according to exchange to see if it adds up to the reported number. Spin is now everywhere.

This means that no OTC derivative house can be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided.

Keep this economic law in mind. Monetary inflation proceeds price inflation and is its primary cause in economic history from Rome to present.

Nothing can stop the juggernaut of price inflation heading towards every nation like a runaway freight train down a mountain.

Gold is going to at least $1650. I am probably way too low with that estimate.

The BigPicture quote:
Here is tonite's theater of the absurd SEC headline:

SEC intends to temporarily ban short selling, but it's not clear if the commission has approved the move. Cox is briefing congressional leaders. Separately, the government is seeking congressional authority to buy distressed assets.

This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.

This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections -- especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility -- upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.
``It sounds like there's going to be a giant dumpster for illiquid assets,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. ``It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative'' to the size of the American economy, he said.

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