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Big Ben's Mistake
We have repeatedly been warning you about how the bursting of the U.S. housing bubble
would lead to a MASSIVE MORTGAGE DEBT CRISIS and a GLOBAL FINANCIAL SHOCK!
Last week’s events further proved the amazing accuracy of our predictions as seen below:
1) Goldman Sachs (one of the biggest investment banks in the world) was forced to inject $2 Billion into its Global Equity Opportunities hedge fund after that fund suffered more than $1 Billion in losses last month alone and two other Goldman hedge funds (Global Alpha and
North American Equity Opportunities) also suffered huge losses,
2) Over-heated global stock markets got walloped as the MSCI Emerging Markets Index fell 7% by Thursday,
3) Countrywide Financial (the largest mortgage lender in the U.S.) was forced to borrow $11.5 Billion from a group of 40 banks as it’s traditional sources of funding dried up and its banking division was faced with a classic “run on the bank” as depositors lined up outside its branches to pull out their savings. CFC stock is down 50% so far this year,
4) Shares of Thornburg Mortgage (another prominent U.S. mortgage lender) fell 70% in the last one week after it warned that it was facing margin calls and liquidity pressures,
5) First Magnus Financial Corp. (one of the biggest privately held mortgage lenders in the U.S.) announced
that it has laid off nearly 6,000 employees, closed 300 offices and is considering filing for bankruptcy,
6) Japanese banking giant Mitsubishi UFJ Bank reported $43 million in appraised losses due to its exposure to U.S. subprime mortgage loans,
7) Australian mortgage lender RAMS Home Loans Group saw its shares drop by 66% after it warned that
it was facing liquidity shortages due to unprecedented disruptions in the U.S. credit markets,
8. Canadian mortgage lender Coventree saw it’s shares drop by 85% in the last month after it reported that it was unable to issue new asset-backed commercial paper, and so on…
Last week we said, “What the market does next is going to be determined by who wins the battle between free market forces and the market manipulators.” Well, just when it looked like free market forces were asserting themselves forcefully and global markets were sliding
lower signifying the end of the global credit bubble, the Fed has come out and done something EXCEPTIONALLY STUPID… it cut the Discount Loan Rate by 50bps to 5.75%
yesterday, in an obvious attempt to try and artificially prop up the U.S. stock market which looked ready to fall off a cliff on the heels of a global stock market sell-off that began Friday morning in Asia.
Although the Fed did not touch the Federal Funds Rate this time, yesterday’s actions leave no doubt that the Fed is preparing the markets for an imminent cut
in the Fed Funds rate… perhaps as early as the next Fed meeting on September 18th.
We had been quite supportive of Big Ben’s mildly hawkish monetary stance over the last few months as it seemed the Fed was staying focused on clear and present inflationary pressures and refusing to give in to Wall Street’s constant sniveling and repeated calls for rate cuts.
Unfortunately, the Fed’s latest actions suggest that Big Ben is now following in the footsteps of the Greenspan Fed… which actively helped inflate one of the biggest equity bubbles of all time by flooding the system with liquidity at the slightest sign of market turmoil during the late nineties…a phenomenon that became known in trading circles as “the Greenspan Put.” A quick look back at the brutal 2000-2002 bear market should suffice to prove our point that “artificially inflated” stock market bubbles
of the kind that occurred in the late nineties, inevitably burst under their own weight and end up causing far bigger capital losses and economic turmoil in society than what would happen if the Fed allowed periodic corrections and bear markets to occur due to the normal ebb and flow of free market forces.
Apparently Big Ben has learnt absolutely nothing from the mistakes of his predecessor!
Given the Fed’s new pusillanimous posture, prudent investors may need to reconsider their cautiously bearish stance soon. Obviously, nobody knows for sure what the markets will do next week, but what we do know is that: 1) the U.S. housing market continues to deteriorate rapidly as even mortgage giant Fannie Mae is now predicting further declines in U.S. home prices in 2007 and 2008,
2) corporate earnings will come under severe pressure the next few months due to an imminent slowdown in consumer spending as a result of declining home prices, high energy prices, rising unemployment and growing credit constraints,
3) inflation continues to be a problem as seen in the latest CPI and PPI reports, and
4) Global financial institutions are most likely saddled
with HUNDREDS OF BILLIONS OF DOLLARS in unrealized capital losses due to the U.S. mortgage debt crisis! Indeed, ratings agency Moody’s seemed to be echoing our views on this topic last week as it warned that current credit market turmoil could result in “the failure and disorderly liquidation of a major hedge fund” and lead to “sizeable impairment losses at many banks.”
So unless stocks start another major rally and reach new 52-week highs in coming weeks, we are going to give the recent downtrend the benefit of the doubt and we expect to see at least one more round of panic selling in global stock markets soon. Having said that, we would also suggest that investors who are over-committed on the bearish side should either lighten up positions
immediately or use close stop loss orders, as the Fed is clearly supportive of the market manipulators now.
We also suggest keeping a close watch on the $USD which somehow managed to stay afloat last week even after the Fed’s interest rate cut. Unless the greenback suffers a sharp decline next week, we would be inclined to think that it is near some sort of important short-term bottom.
We have repeatedly been warning you about how the bursting of the U.S. housing bubble
would lead to a MASSIVE MORTGAGE DEBT CRISIS and a GLOBAL FINANCIAL SHOCK!
Last week’s events further proved the amazing accuracy of our predictions as seen below:
1) Goldman Sachs (one of the biggest investment banks in the world) was forced to inject $2 Billion into its Global Equity Opportunities hedge fund after that fund suffered more than $1 Billion in losses last month alone and two other Goldman hedge funds (Global Alpha and
North American Equity Opportunities) also suffered huge losses,
2) Over-heated global stock markets got walloped as the MSCI Emerging Markets Index fell 7% by Thursday,
3) Countrywide Financial (the largest mortgage lender in the U.S.) was forced to borrow $11.5 Billion from a group of 40 banks as it’s traditional sources of funding dried up and its banking division was faced with a classic “run on the bank” as depositors lined up outside its branches to pull out their savings. CFC stock is down 50% so far this year,
4) Shares of Thornburg Mortgage (another prominent U.S. mortgage lender) fell 70% in the last one week after it warned that it was facing margin calls and liquidity pressures,
5) First Magnus Financial Corp. (one of the biggest privately held mortgage lenders in the U.S.) announced
that it has laid off nearly 6,000 employees, closed 300 offices and is considering filing for bankruptcy,
6) Japanese banking giant Mitsubishi UFJ Bank reported $43 million in appraised losses due to its exposure to U.S. subprime mortgage loans,
7) Australian mortgage lender RAMS Home Loans Group saw its shares drop by 66% after it warned that
it was facing liquidity shortages due to unprecedented disruptions in the U.S. credit markets,
8. Canadian mortgage lender Coventree saw it’s shares drop by 85% in the last month after it reported that it was unable to issue new asset-backed commercial paper, and so on…
Last week we said, “What the market does next is going to be determined by who wins the battle between free market forces and the market manipulators.” Well, just when it looked like free market forces were asserting themselves forcefully and global markets were sliding
lower signifying the end of the global credit bubble, the Fed has come out and done something EXCEPTIONALLY STUPID… it cut the Discount Loan Rate by 50bps to 5.75%
yesterday, in an obvious attempt to try and artificially prop up the U.S. stock market which looked ready to fall off a cliff on the heels of a global stock market sell-off that began Friday morning in Asia.
Although the Fed did not touch the Federal Funds Rate this time, yesterday’s actions leave no doubt that the Fed is preparing the markets for an imminent cut
in the Fed Funds rate… perhaps as early as the next Fed meeting on September 18th.
We had been quite supportive of Big Ben’s mildly hawkish monetary stance over the last few months as it seemed the Fed was staying focused on clear and present inflationary pressures and refusing to give in to Wall Street’s constant sniveling and repeated calls for rate cuts.
Unfortunately, the Fed’s latest actions suggest that Big Ben is now following in the footsteps of the Greenspan Fed… which actively helped inflate one of the biggest equity bubbles of all time by flooding the system with liquidity at the slightest sign of market turmoil during the late nineties…a phenomenon that became known in trading circles as “the Greenspan Put.” A quick look back at the brutal 2000-2002 bear market should suffice to prove our point that “artificially inflated” stock market bubbles
of the kind that occurred in the late nineties, inevitably burst under their own weight and end up causing far bigger capital losses and economic turmoil in society than what would happen if the Fed allowed periodic corrections and bear markets to occur due to the normal ebb and flow of free market forces.
Apparently Big Ben has learnt absolutely nothing from the mistakes of his predecessor!
Given the Fed’s new pusillanimous posture, prudent investors may need to reconsider their cautiously bearish stance soon. Obviously, nobody knows for sure what the markets will do next week, but what we do know is that: 1) the U.S. housing market continues to deteriorate rapidly as even mortgage giant Fannie Mae is now predicting further declines in U.S. home prices in 2007 and 2008,
2) corporate earnings will come under severe pressure the next few months due to an imminent slowdown in consumer spending as a result of declining home prices, high energy prices, rising unemployment and growing credit constraints,
3) inflation continues to be a problem as seen in the latest CPI and PPI reports, and
4) Global financial institutions are most likely saddled
with HUNDREDS OF BILLIONS OF DOLLARS in unrealized capital losses due to the U.S. mortgage debt crisis! Indeed, ratings agency Moody’s seemed to be echoing our views on this topic last week as it warned that current credit market turmoil could result in “the failure and disorderly liquidation of a major hedge fund” and lead to “sizeable impairment losses at many banks.”
So unless stocks start another major rally and reach new 52-week highs in coming weeks, we are going to give the recent downtrend the benefit of the doubt and we expect to see at least one more round of panic selling in global stock markets soon. Having said that, we would also suggest that investors who are over-committed on the bearish side should either lighten up positions
immediately or use close stop loss orders, as the Fed is clearly supportive of the market manipulators now.
We also suggest keeping a close watch on the $USD which somehow managed to stay afloat last week even after the Fed’s interest rate cut. Unless the greenback suffers a sharp decline next week, we would be inclined to think that it is near some sort of important short-term bottom.
