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Now, to answer why….
“‘Five years after excessive debt propelled a housing-market collapse into a financial crisis and recession, similar bets are being placed across the U.S”.
“Total corporate-bond debt has grown to nearly $6 trillion, up 59% since 2007, the year before the financial crisis. … Leverage by companies rated investment grade has risen 20% since 2010 … about 6% higher than in 2008…
In 2008, mutual funds held, on average, 17% of the bonds and 3% of the loans made to junk-grade companies, according to Bank of America. Today, they own about 26% of the bonds and 19% of the loans.
“Assets in mutual funds and exchange-traded funds that invest in junk bonds have grown to $285 billion in July from $92 billion at the end of 2008,”
“‘Many companies are repeating some of the mistakes of the past,’ by taking on too much debt,…”
“Overall corporate health was ‘no better than it was in 2007 and by some measures worse.”
(All quotes culled from Wall Street Journal)
For those that don’t do this all the time, here is how it works….
You buy $100 million dollars of stock X on margin… You pay 50% of the cost or $50 million, owing the remainder $50 million to your broker. The stock value rises to $150 million and you sell it…. You get the $150 million minus the $50 million owed back to your broker… You pocket an extra $50 million on the $50 million you invested… Your $50 million returned a 100% on your investment, congratulations….
If done in cash, you should have paid $100 million, and gained $50 million when sold at $150 million… Wait … is that the same exact total?… Yes, you are right, but your investment only gained 50%… not 100%
This is why borrowing for stocks is up… Worse than it was in 2007-2008?…. Yes. Correct. Despite the Dodd-Frank bill, it is worse now, than in 2007-2008…..
So then what happens if the price of stocks fall….. ???
You bought $100 million of stocks putting $50 million down and borrowing $50 million from your broker… Rule number one: you broker does not lose: you do….
Stocks fall 2%…. Your value is dropped to $98 million. You now owe the broker $2 million on top of the $50 you put down. Stocks fall again, 2%…. You value drops to $96 million. You know owe your broker an additional $2 million you put down… Getting scared? Sell at $96 million and by the time it goes through, you only get $95 million. Since you owed your broker $50 million and only get $45 million, you immediately cut him a check for $5 million dollars…. You originally put up $50 million so your investment cost you…. 10%….
If you paid cash and put the full $100 million up front, your loss to your company would have only been 5%….
So let us imagine this on the volume of the New York Stock Exchange… Where last Friday on the NYSE, $30 billion traded hands (positively for most, fortunately) … Assuming it was a bad day, and everyone was leveraged, on the minimal 5% drop outlined above, America would have to pay an minimal $1.5 billion to their brokers… In other words… Americans who leveraged, would be $1.5 billion poorer just from the NYSE one day drop alone….
At the 16,000 mark, a 5% drop means the DJIA would rest at 15,200…. or where it was back in the middle of this past October…. just 23 trading days ago….. Because of leveraging, that 5% drop means corporate America takes a 10% clip….
I don’t know if you’ve ever taken a loss of 10%, but if you haven’t… let me tell you… one does cut back on spending….
And that, is what makes this chart so scary……….
(Click image to enlarge)
Makes one understand now exactly why the market-rise continues despite the reality of our current economic situation, doesn’t it? Now…..remember what happened when Bernacke said… “Well, eventually this easing will someday have to end.”?
So….. what to do?
Quietly exit… slowly get off the ice so no one notices…. Just be totally off before all the cracking starts…. and the scrambling begins.
By now it probably goes without saying, but I’m saying just in case you weren’t paying attention. Get out of the financial markets first thing tomorrow.
Stay out until the US House of Representatives regains their senses. This uncertainty, coupled with the very disappointing returns over summer by most corporate stock, should cause last Friday’s stock drop to continue indefinitely. If you haven’t been paying attention, all this summer’s economic signs are in the gutter primarily over a decrease in top line revenues. Hurt Americans spend less then economically healthy Americans.
Hopefully you are already out. If not, get started.
A perfect storm is brewing, and as with any hurricane warning, it can blow right past. However not being aware and getting hit, can be devastating. Here is what is happening.
- Corporate profits will be under projections because purchases are under projections. After all, at this time last year we didn’t have the 2.5% Social Security Tax.
- Attacks on Syria could cause an oil spike on the global market,
- The Sequester continues tightening its belt even more beginning in September as all departments try to hit their low budgets…
- Another debt ceiling crises, this time over Obamacare. Government shut down.
- Stocks have fallen off their highs, and only good news can bring them back.
- The Fed is looking to raise interest rates.
- New outbreak of Bubonic plague.
- Possible collapse of student loan debt.
- Banks too big to fail in 2008, are even bigger now.
- % of Wealth in the top 1% equals that of 1929
Safe is better than sorry. I’ll put more on this later, but, really, things are looking worse than just before 2008. Those are the big ones.
To have political crises and economic backtracking hitting at the same time, could create a rogue wave and cause one of those major drops. When the stock market dropped in 1929, know one really knew why. It fell in September, then went back up. Then fell again in October, several days in a row, and went back up, then fell gradually until 8 months later when it finally hit its low.
Here is what you need to do with your IRA or 401K if you have never made an adjustment before. …
Call up your plan administrator at your workplace. Their name will be on the literature you get quarterly. They are your employer’s liaison with the investment company. Ask them if you can switch your accounts back and forth. Almost all plans today allow it. Your administrator herself has done it many times so ask them if it is easy. Ask them if you can move your volatile accounts over to safe ones. Ask them how it is done. Here is how doing so saves you money.
Stocks are volatile. Treasury Bonds are solid. Good stocks can give you a good return on your investment, Treasury bonds have flat growth and should only be used to protect your money during a collapse. Stocks are only as good as what people will pay for them. Treasury bonds have a regular rate they pay out over time…. Stocks can become worthless. Treasury bonds are the safest investment ever.
So if the stock market loses 30 percent and you have a value of $100,000 saved up for retirement, that is now $70,000 dollars. You lost $30,000 in your portfolio’s worth! Now if you move your money over to Treasury bonds now while stocks are high, that $100,000 stays at $100,000 while later, everyone else drops down to $70,000. As the stock market plummets, drops, and drops some more, you have “no worries mate”, your money stays right where it is in value….
Then, when the market reaches it’s lowest point and turns back around, you get out of your Treasury Bonds and again invest in all stocks. As each of those stocks rise, so does the value of your investments. So you go in at $100,000 and as the market rises its 30% back to where it was, you net a value of $30,000, and your total worth is now $130,000.
Those suckers who didn’t switch, saw their value drop to $70,000 in the crash. After several years in recovery, they will finally return to the value they once had prior to the big drop, whereas you, by not losing your money in the first place, have actually grown your money….
But what if you pull out and the market keeps climbing instead, and doesn’t fall? Should the market defy all the negatives I mentioned above (it won’t), your value will not drop, it will however stay at $100,000 while others in the market climb with the value of their stock. You may lose $1 ,$2, or maybe $3 thousand of what you could have potentially earned, but that is a long shot and long shots never happen. Even if it were, still that is a small price to pay to insure you won’t lose $30,000 in the next two months.
Bruce Ennis put forth a bill (SR8) requesting Delaware go forward with formally supporting Glass Steagall re-implementation by the US Congress.
Bryan Townsend kind of came out against it. Here is Nancy’s copy of his emailed response to her.
One must understand all legislative members in Delaware are somewhat compromised. We are a banking state. In the words of Gov. Howard Dean, MD. himself… ” Any candidate who challenges Wall Street’s status quo is going to come under an avalanche of hateful attack ads this year –“
So there is considerable reason not to be an ardent Delaware fan of the return in 2013 of Glass Steagall….. One must give the courageous Bruce Ennis a plug for being one.
But it makes so much sense. There are times in our life when one can willingly chose a very risky path of action which will occupy 100% of ones attention, as in driving a mountain road along the cliffs in Montenegro at over 100 km/h. Or, we can choose to put ourselves into a safety bubble, such as cruise control on a major interstate highway, and relax and enjoy the other things in life, since all our effort is not involved on monitoring what otherwise could become a life or death scenario.
I have read Mr. Townsend’s statement and it is accurate. However my criticism is that it deals with banks. His and our responsibility is to the people whose money is in those banks. And who are on the hook when those banks fail.
The FDIC insures deposits now up to $250,000. It should not be responsible for funds placed in hedge funds, As Elizabeth Warren accurately stated:
If we are going to insure the people’s money, it should be kept in safe investments. What point have we in insuring by default hedge funds, swaps dealing, and other risky investment banking services. When the same institutions that take huge risks are also the ones that control your savings account, the entire banking system is riskier.
The funds for checking and savings accounts of America’s families and businesses, should not be handed over to the London Whale. If a crash occurs, and the money is safe, then the losses are only on paper. But when yours and my monies are in Bangledesh, China, or Antarctica on some risky get-rich scheme, and fail… our tax money needs not be thrown away because our American Banks were involved.
Banks cried the economy was safe enough for the repeal of Glass Steagall.. History showed them wrong. Even the most vibrant time of economic growth ever seen in America (92-00), could not prevent the collapse 9 years later after 8 years of Republican control..
The only way to keep citizens money safe, is to insure it. We are lucky we have a rich nation which can do that. We barely survived the financial collapse of late 2008. Our employment numbers still show the cost.
Yes, one can take the bank’s side and say things were different in 1932 than they are in 2013. But doing so, puts one in contrast with what is best for We, the people. The simple solution is to make it clear to all, that the FDIC will only insure safe investments used for checking and savings accounts. For risky investments banks are on their own. For them a bank must use other funds it can easily afford to lose if it wants to play at the crap table… It should not be throwing our money away because it assumes the taxpayers will simply replace their losses for free.
We should not be in the business of arguing what or what not banks should or should not do. They can do that within whatever parameters we choose to give them. However our concern is simply over how much we should insure. The new Glass Steagall Act of 2013 will make that clear.
Not likely one would say today. But, hear me out. This session the corporate financial targets that got hit, all missed their revenue. That means people did not spend as was planned, but some fat on the corporate skeleton could be cut to compensate. That fat is not there for the next report…
The economy has taken a shock from $85 billion sequestered despite only $10 billion having been applied already. The $75 billion cuts are coming.
Even though the US market is the only safe place to put ones money today, the rest of the world is as unsafe as ever. Since there is no where else to go with one’s money if he US market dives,… panic will begin very quickly….
The possibility is rather good for a 30-50% correction in the US Stock market. I would still stay out and remain in Treasuries if I were you….
So, you who have put your faith and service into the United States of America, who have sacrificed a lot for principle, and enlisted or volunteered in the armed forces, are now, about to get a 20% cut in pay?
- How will your family live?
- How will you pay your bills?
- How long until the Sheriff puts your home up for auction?
And why it this?
Because Republicans don’t want billionaires to pay one more penny per dollar earned on all income OVER a million dollars……...
There is no other reason you are taking a 20% cut in pay for serving your nation in the most patriotic fashion….
You just got bumped by millionaires…. Thanks to the Republican Party of the United States of America……
So, how do you feel now?
The Dow Jones fell 216 points or 1.6%.
Because of no new news on any movement by the Republicans in regards to the sequester.
I just laid down a stinging rebuke over at Delaware Politics of the Right’s assertion that Obama caused the Sequester. The aim of their article was to blame President Obama for coming up with the sequester about to floor us on March 1st.. Nothing could be further from the truth… For in negotiations, it is not who comes up with an idea that matters, but who provides that idea with enough support, that it becomes so.
It appears that the sequester idea when it first appeared was nothing more than a leaf falling off a tree.
The sequester began in the budget crises of 2011. Here are the facts.
- For the first time in history, the Tea Party forces Republicans to put limitations upon the raising of the debt ceiling.
- On May 16 the US goes into technical default, but weaseling can extend the money until August 1.
- April 2011: Obama says debt limit must not be tied to any other deals.
- May 11th; Obama’s chief economic advisor writes that hobbling the debt limit would be “insane”.
- May 31st; 2011; Obama’s request for a clean debt limit is voted down in the House; All 236 Republicans vote no.
- Up thru August, Republicans were screaming “it’s gotta’ have catastrophic budget cuts” and Obama said “no”.
- Republicans caused Standard and Poors to collapse our rating. Republicans insisted they didn’t care and would still default.
- The White House asked: if we could “guarantee that cuts would occur in the future” would Republicans climb on board?
- They said” yes”; as long as it was solid law that the sequestration would eventually take effect, they would raise the ceiling
- Finally, when the Budget Control Act was passed, it was the Republicans who passed it. 218 voted yes for sequestration. It could not have passed without their support.
Bottom line, no matter who brought up the idea or where it came from, if Republicans had acted rational at any point along the way, we would not be on the edge of losing 700,000 jobs this March, 2013.
John Boehnor, and Delaware Politics spent much time saying that Obama is the author of sequestration….
Red State Politics disagrees….
Here is their quote…
“Republicans act as if the sequester is a natural disaster. They make no mention of the fact that they caused it and voted for it knowing that the sequester would take effect.... So why did they vote for it? None of them ever connect the dots and apologize for voting for it. The reality is that John Boehner said that he got 98% of what he wanted from the deal…..”
There you have it. If Red State proudly stands up and takes credit for engineering and forcing the sequester to tighten the vice grips upon the American economy, I certainly not going to stand in their way.
For Delaware Politics to go against Red State, and point their finger at Obama as originator of the “sequester”, can only show Delaware Politics doesn’t have the balls to be anything close to a real Conservative… They are Faux Conservatives at their best… or Ostrich Conservatives the rest of times, when they are not even close to being at their best.
Despite any words otherwise, Republicans own this sequester; good or bad.
kavips 