The biggest flood of red ink the world has ever known by Mike Larson
How much is $1.186 trillion — or $1,186,000,000,000, written out the long way?
• It's more than the inflation-adjusted cost of the Vietnam ($698 billion) and Korean Wars ($454 billion).
• It's more than the Louisiana Purchase ($217 billion) and the Savings and Loan bailouts ($256 billion).
• It's greater than the 2007 Gross Domestic Product of all but 13 other countries in the world.
• It's equal to $3,881 for every man, woman, and child in the U.S.
• It could buy 189,760,000,000 bushels of wheat at recent prices. 26,893,424,036 barrels of oil. Or 1,581,333,333,333 cans of Diet Coke at my trusty vending machine in the break room.
Why do I bring this up? Because that $1.186 trillion figure is the projected 2009 deficit, according to the latest report from the Congressional Budget Office (CBO).
And it is downright scary.
These Numbers Are Big — Really Big!
That $1.186 trillion is such a large number — so out of control — that it's hard for most of us mere mortals to process it. Suffice it to say ... It's the biggest flood of budgetary red ink any country has ever seen in world history. And it makes last year's $455 billion deficit look like chump change.
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It's not just the absolute number, either ...
The projected 2009 figure is equal to about 8.3% of U.S. GDP. That tops the post-World War II record of 6% set in 1983.
Still not worried?
Then get a load of this:
The CBO estimate doesn't even include any potential stimulus package from Congress and the Obama administration.
We haven't gotten the final details of the stimulus plan. But it could cost anywhere from $675 billion to $1 trillion. That means the ultimate 2009 deficit could end up being larger by 60% ... 70% ... 80% ... or more!
Is the red ink a short-term problem, one that will soon go away? Not according to the CBO. Scroll through the agency's report — "The Budget and Economic Outlook: Fiscal Years 2009 to 2019" (available at: http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf) and you'll come to a nifty table on page 23.
It projects red ink as far as the eye can see: An ADDITIONAL $3.135 trillion from 2010 through 2019.
Source: CBO
Two possibilities could bail us out of this black hole of debt:
Congress and the incoming administration could really clamp down on spending going forward to stem the tide of red ink.
Or the stimulus plan could manage to completely offset all the credit, real estate, and economic problems, thereby leading to a windfall in tax receipts.
Both are highly unlikely ...
And if neither scenario comes about, this country's finances are going to be blown to hell for years and years to come.
Consequence-Free Borrowing Forever?Not Bloody Likely
Now if you're the type of person who believes consumers, corporations, or even sovereign nations can borrow money they don't have ... and spend far beyond their means ... for all eternity, then you can stop reading right now.
The amount of money Obama will need in 2009 scares the bejeezus out of me.
There's absolutely nothing to worry about.
But if you're like me, and you think numbers like $1.186 trillion are so far off the charts that they HAVE to have consequences, then you should be downright scared!
The government is already selling record amounts of debt at auction, day after day, week after week.
This week alone, Treasury sold $8 billion in 10-year TIPS and $24 billion in four-week bills on Tuesday ... $30 billion in 3-year notes and $35 billion in 70-day cash management bills on Wednesday ... and $16 billion of nominal 10-year notes on Thursday. And there's no end in sight.
Total net issuance could approach a mind-boggling $2 trillion by year's end!
At some point, investors are going to balk at all this issuance. They're going to choke on the massive amount of U.S. paper spilling out of Washington. They'll demand higher yields to buy our debt, driving bond prices down and interest rates up, just as I warned in my December 5, Money and Markets column, "The Biggest Bubble of All: Long-term Treasuries?".
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Heck, the day of reckoning could already be upon us ...
Thirty-year Treasuries plunged more than 3 points on New Year's Eve ... another 2 30/32 on January 2 ... a whopping 5 16/32 on January 5 ... and another 1 28/32 on January 7. They've lost almost 13 points in a virtual straight line, while yields on 10-year notes shot up from 2.25% to 2.5%.
My advice remains the same: Short-term Treasuries are fine as a place to park your keep safe money. But stay the heck away from long-term U.S. debt.
Until next time,
Mike
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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Showing posts with label credit markets. Show all posts
Showing posts with label credit markets. Show all posts
Friday, January 09, 2009
Saturday, September 27, 2008
Wall Street Meltdown
Emergency Edition: Wall Street Meltdown by Martin D. Weiss, Ph.D.
Our nation is suffering through a financial emergency, and I wanted to make sure you get this urgent message now, before it's too late.
Right at this moment, in an attempt to prevent a Wall Street meltdown from beginning as soon as Monday, Congress is locked in a last-ditch effort to produce a bailout package before Sunday evening when Asian markets open.
Whether they succeed in their weekend endeavor or not, three things are crystal clear:
1. The U.S. credit engine is already melting down. In fact, just this week, the all-important market for short-term commercial paper has come to a virtual standstill. This is precisely the market we warned you about. Now it's collapsing. And if this pattern continues, it's likely to drive many corporations that depend on this instant cash into instant bankruptcy.
2. Although a massive federal bailout might help rally the stock market temporarily, it is not — and will not — reverse the credit meltdown.
3. Quite to the contrary, fear is now spreading throughout the banking industry, driving many Americans to pull their money out of the financial system entirely. Yes, it makes sense to shift from weak to strong institutions, and that's rational. But the behavior we're beginning to witness is both irrational and dangerous.
Here's what we are doing.
First, as a follow-up to our white paper submitted to Congress this week, "Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis; Too Much, Too Soon for the U.S. Bond Market," we are recommending that Congress focus less on bailing out imprudent institutions and more on fortifying the safety net of individuals caught in failed financial institutions. Some urgent steps include:
Fully fund and staff the Federal Depositors Insurance Corporation (FDIC) to better prepare for the possibility of multiple bank failures occurring at the same time.
Close major gaps in the coverage provided by Securities Investors Protection Corporation (SIPC) to help make sure investors are not denied access to their accounts when they need to liquidate their securities in a falling market.
Seriously consider federal insurance to cover policyholders in failed insurance companies.
Our major point to Congress: These actions cannot wait. Just this week, data from Office of Thrift Supervision (OTS) shows that Washington Mutual suffered panicky withdrawals averaging $2 billion per day over the past eight business days. Now, in order to help prevent the spread of panic among bank, brokerage and insurance company customers, firm and swift action is needed to sew up the holes in our nation's existing safety nets.
Second, we have taken steps to help you find safety. For all the details, we hope you didn't miss out 1-hour educational video, "The X List."
Third, we are doing everything we can to help you go on the offensive to convert this massive crisis into a massive profit opportunity. And with that goal in mind, we've just posted an updated report to our Website with specific instructions.
We expect this massive crisis could come to a head very quickly, and we anticipate a Black October for the stock market. Click here now so you can act before then.
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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Our nation is suffering through a financial emergency, and I wanted to make sure you get this urgent message now, before it's too late.
Right at this moment, in an attempt to prevent a Wall Street meltdown from beginning as soon as Monday, Congress is locked in a last-ditch effort to produce a bailout package before Sunday evening when Asian markets open.
Whether they succeed in their weekend endeavor or not, three things are crystal clear:
1. The U.S. credit engine is already melting down. In fact, just this week, the all-important market for short-term commercial paper has come to a virtual standstill. This is precisely the market we warned you about. Now it's collapsing. And if this pattern continues, it's likely to drive many corporations that depend on this instant cash into instant bankruptcy.
2. Although a massive federal bailout might help rally the stock market temporarily, it is not — and will not — reverse the credit meltdown.
3. Quite to the contrary, fear is now spreading throughout the banking industry, driving many Americans to pull their money out of the financial system entirely. Yes, it makes sense to shift from weak to strong institutions, and that's rational. But the behavior we're beginning to witness is both irrational and dangerous.
Here's what we are doing.
First, as a follow-up to our white paper submitted to Congress this week, "Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis; Too Much, Too Soon for the U.S. Bond Market," we are recommending that Congress focus less on bailing out imprudent institutions and more on fortifying the safety net of individuals caught in failed financial institutions. Some urgent steps include:
Fully fund and staff the Federal Depositors Insurance Corporation (FDIC) to better prepare for the possibility of multiple bank failures occurring at the same time.
Close major gaps in the coverage provided by Securities Investors Protection Corporation (SIPC) to help make sure investors are not denied access to their accounts when they need to liquidate their securities in a falling market.
Seriously consider federal insurance to cover policyholders in failed insurance companies.
Our major point to Congress: These actions cannot wait. Just this week, data from Office of Thrift Supervision (OTS) shows that Washington Mutual suffered panicky withdrawals averaging $2 billion per day over the past eight business days. Now, in order to help prevent the spread of panic among bank, brokerage and insurance company customers, firm and swift action is needed to sew up the holes in our nation's existing safety nets.
Second, we have taken steps to help you find safety. For all the details, we hope you didn't miss out 1-hour educational video, "The X List."
Third, we are doing everything we can to help you go on the offensive to convert this massive crisis into a massive profit opportunity. And with that goal in mind, we've just posted an updated report to our Website with specific instructions.
We expect this massive crisis could come to a head very quickly, and we anticipate a Black October for the stock market. Click here now so you can act before then.
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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Welcome to the Slow Duck Tips where you'll find: internet marketing, marketing, internet advertising, internet marketing, internet advertising, internet marketing, internet advertising, internet marketing, internet advertising, home business, advertising, website promotion, internet advertising, promotion, internet advertising, home business, internet advertising, home business, advertising, home business, advertising, home business, advertising, home business, advertising, home based business, small business, consulting, internet consulting, promote, online promotion, online marketing, online advertising, internet consult, web, entrepreneur, small office, home office, business, businesses advertise, sales, selling, sell, bulk email, email, free information, free, strategies, information, tips, money, profits, profit, MLM, services, strategy. Marketing Tips strategies for internet marketing, online advertising & website promotion increase profits for small offices home based businesses. Entrepreneurs or home offices access free information marketing tips to promote products & increase profits. As an internet consult, Marketing Tips services show how businesses advertise on the web to sell and make money
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Create your own water hybrid for under $150!
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What is the Best Ab Workout for Belly Fat Loss?
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Friday, September 26, 2008
Credit Market Hurricane!
Category 5 Credit Market Hurricane! by Mike Larson
Dear Subscriber,
I'll never forget Hurricane Jeanne, which struck Florida four years ago this week.
My wife, young daughter, and I huddled in the shower of our older house as the battery-powered TV flashed tornado warnings and updates on the storm's 115-MPH winds.
Every now and then, I'd peek out the only unshuttered small window we had, only to see it raining sideways and watch electrical transformers exploding in flashes of blue flame.
And I'll always remember how the walls of the house practically "breathed" — flexing inward and outward ever so slightly — as Jeanne's winds tugged at them.
Scary times, to say the least. It reminds me a lot of what's happening in the credit markets right now, only what we're seeing there is no Category 3 like Jeanne ...
It's the Biggest, Baddest Category 5 Financial Cyclone The Markets Have Ever Seen!
Jeanne was relatively tame compared to the storm hitting the credit market!
Just look at what's happening out there ...
#1. London Interbank Offered Rates (LIBOR, for short) are surging. For instance, three-month U.S. LIBOR jumped 29 basis points (0.29 percentage points) today after rising 27 basis points yesterday. At 3.77%, LIBOR is well above the federal funds rate of 2%.
These are the rates at which banks lend short-term money to each other. The surge in rates shows that banks are hoarding cash, rather than lending it out.
#2. The yield on the 3-month Treasury Bill is plunging — to as little as 0.46% this week from 1.66% two weeks ago. This is the lowest T-Bill rates have been since at least 1954. This shows that investors are fleeing any and all forms of risk, pursuing safety above all else.
#3. A major U.S. money market fund — the Reserve Primary Fund — recently "broke the buck." In other words, losses on Lehman debt forced its net asset value below the $1 level.
Money market funds are supposed to be extremely safe, and breaking the buck is exceedingly rare.
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#4. The TED spread — the difference between the yield on three-month Treasury bills and three-month LIBOR rates — blew out to 326 basis points. That's the highest level I can find, and my Bloomberg data goes back to 1984. Think of this as a risk spread — how much riskier financial institutions think it is to lend money to each other rather than the U.S. government. The fact it's off the charts speaks volumes.
#5. Two-year swap spreads have exploded, hitting 166 basis points at one point this week. This is the highest level in at least a couple of decades. And it's yet ANOTHER sign that financial market players are panicking over the credit quality of their counterparties and the possibility of a full-scale meltdown.
Clearly, the credit market problems Martin and I have been warning about over and over again for the past few years are coming home to roost.
We suggested some ways for Congress to deal with the crisis without busting the U.S.'s own credit and causing counterproductive moves in interest rates. You can read our paper here. It appears that the actual bailout plan is somewhat different, though final details and all the implications of them are still being worked out.
The Biggest Question of All: Will the Bailout Work? That Depends on Your Definition of "Work" ...
Washington's bailout is no sure thing …
First, it may help some banks avoid some additional losses, but it won't help all banks do so.
Depending on what the government pays for these crummy assets going forward, the plan could actually cause even MORE losses.
Plus, the sheer magnitude of bad debt out there is enormous. Even if the government buys some bad paper, plenty more loans will still sour, plenty more banks will see earnings tank, and plenty more banks will fail.
Second, the bailout package won't magically make lenders take on huge risks again.
After all, they've been burned big time. I don't think we'll see the ridiculously easy residential mortgage, commercial mortgage, auto loan, credit card, and leveraged buyout lending that we saw from 2002 through 2007 for a long, long time. I'm talking years, not months or quarters.
Third, the cost of this bailout will be gigantic.
Even before this latest proposal, the U.S. had committed hundreds of billions of dollars to various rescues. That includes more than $25 billion to bail out Bear Stearns, $100 billion each for Fannie and Freddie, and $85 billion for AIG.
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Treasury is also talking about spending at least another $50 billion to backstop money market funds (the ultimate cost is unknown).
Not to be left out, the auto industry looks like it's getting its own $25-billion bailout in the form of government-supported low interest loans.
And of course, the latest package has an initial price tag of up to $700 billion.
All told, we're looking at more than $1 TRILLION in bailouts — and it's not like we have all that money sitting in a bank somewhere. We're a nation that spends much more than it earns, and borrows the rest.
The White House was ALREADY projecting that the 2009 federal deficit would be $482 billion. Now, with the additional bailouts announced and proposed, we could be looking at tacking another $1 trillion — or more — onto that number. This would push the budget deficit so far into the red, we'll all be swimming in crimson ink.
To fund those deficits, we're going to have to borrow an ASTRONOMICAL amount of money. The Treasury just held a record $34 billion sale of 2-year Treasury Notes. That was followed by a $24 billion sale of 5-year Notes, the biggest such sale in more than five years. Those numbers will only go higher with time.
In fact, Congress is raising the federal debt ceiling to a whopping $11.3 TRILLION to account for this additional borrowing.
The likely impact: All the additional supply will drive bond prices LOWER and interest rates HIGHER. Heck, 10-year Treasury Note yields have already surged from around 3.4% to almost 3.9%. That will blunt the impact of the bailout by driving financing costs higher on all loans whose rates are benchmarked to Treasuries.
Last, this crisis long ago stopped being just a financial one.
This bailout bill won't prevent the "real" economy from sliding into recession. Factories are closing. Layoffs are rising. Spending is slowing. And the downturn that began in the U.S. is spreading to other economies overseas.
Heck, just yesterday we learned that durable goods orders plunged 4.5% in August — more than double the decline economists were expecting.
Meanwhile, initial jobless claims soared to 493,000, the highest since the period right after the 9/11 terrorist attacks. Some of that gain stemmed from Hurricanes Ike and Gustav. But the trend higher is clear, and a sign of real economic weakness.
So I still think you have to be cautious with your investing strategy ...
I suggest keeping the lion's share of your money in safe havens such as Treasuries or Treasury-only money funds.
And for your more speculative funds, I think it's a good time to target some of the stocks that will get hit the hardest as the post-bailout euphoria wears off. For more on my favorite way to do that, click here.
Until next time,
Mike
P.S. With this credit market storm hitting in full force, I'll be giving you frequent updates on my blog. Be sure and check in regularly!
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
From time to time, Money and Markets may have information from
Dear Subscriber,
I'll never forget Hurricane Jeanne, which struck Florida four years ago this week.
My wife, young daughter, and I huddled in the shower of our older house as the battery-powered TV flashed tornado warnings and updates on the storm's 115-MPH winds.
Every now and then, I'd peek out the only unshuttered small window we had, only to see it raining sideways and watch electrical transformers exploding in flashes of blue flame.
And I'll always remember how the walls of the house practically "breathed" — flexing inward and outward ever so slightly — as Jeanne's winds tugged at them.
Scary times, to say the least. It reminds me a lot of what's happening in the credit markets right now, only what we're seeing there is no Category 3 like Jeanne ...
It's the Biggest, Baddest Category 5 Financial Cyclone The Markets Have Ever Seen!
Jeanne was relatively tame compared to the storm hitting the credit market!
Just look at what's happening out there ...
#1. London Interbank Offered Rates (LIBOR, for short) are surging. For instance, three-month U.S. LIBOR jumped 29 basis points (0.29 percentage points) today after rising 27 basis points yesterday. At 3.77%, LIBOR is well above the federal funds rate of 2%.
These are the rates at which banks lend short-term money to each other. The surge in rates shows that banks are hoarding cash, rather than lending it out.
#2. The yield on the 3-month Treasury Bill is plunging — to as little as 0.46% this week from 1.66% two weeks ago. This is the lowest T-Bill rates have been since at least 1954. This shows that investors are fleeing any and all forms of risk, pursuing safety above all else.
#3. A major U.S. money market fund — the Reserve Primary Fund — recently "broke the buck." In other words, losses on Lehman debt forced its net asset value below the $1 level.
Money market funds are supposed to be extremely safe, and breaking the buck is exceedingly rare.
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#4. The TED spread — the difference between the yield on three-month Treasury bills and three-month LIBOR rates — blew out to 326 basis points. That's the highest level I can find, and my Bloomberg data goes back to 1984. Think of this as a risk spread — how much riskier financial institutions think it is to lend money to each other rather than the U.S. government. The fact it's off the charts speaks volumes.
#5. Two-year swap spreads have exploded, hitting 166 basis points at one point this week. This is the highest level in at least a couple of decades. And it's yet ANOTHER sign that financial market players are panicking over the credit quality of their counterparties and the possibility of a full-scale meltdown.
Clearly, the credit market problems Martin and I have been warning about over and over again for the past few years are coming home to roost.
We suggested some ways for Congress to deal with the crisis without busting the U.S.'s own credit and causing counterproductive moves in interest rates. You can read our paper here. It appears that the actual bailout plan is somewhat different, though final details and all the implications of them are still being worked out.
The Biggest Question of All: Will the Bailout Work? That Depends on Your Definition of "Work" ...
Washington's bailout is no sure thing …
First, it may help some banks avoid some additional losses, but it won't help all banks do so.
Depending on what the government pays for these crummy assets going forward, the plan could actually cause even MORE losses.
Plus, the sheer magnitude of bad debt out there is enormous. Even if the government buys some bad paper, plenty more loans will still sour, plenty more banks will see earnings tank, and plenty more banks will fail.
Second, the bailout package won't magically make lenders take on huge risks again.
After all, they've been burned big time. I don't think we'll see the ridiculously easy residential mortgage, commercial mortgage, auto loan, credit card, and leveraged buyout lending that we saw from 2002 through 2007 for a long, long time. I'm talking years, not months or quarters.
Third, the cost of this bailout will be gigantic.
Even before this latest proposal, the U.S. had committed hundreds of billions of dollars to various rescues. That includes more than $25 billion to bail out Bear Stearns, $100 billion each for Fannie and Freddie, and $85 billion for AIG.
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Treasury is also talking about spending at least another $50 billion to backstop money market funds (the ultimate cost is unknown).
Not to be left out, the auto industry looks like it's getting its own $25-billion bailout in the form of government-supported low interest loans.
And of course, the latest package has an initial price tag of up to $700 billion.
All told, we're looking at more than $1 TRILLION in bailouts — and it's not like we have all that money sitting in a bank somewhere. We're a nation that spends much more than it earns, and borrows the rest.
The White House was ALREADY projecting that the 2009 federal deficit would be $482 billion. Now, with the additional bailouts announced and proposed, we could be looking at tacking another $1 trillion — or more — onto that number. This would push the budget deficit so far into the red, we'll all be swimming in crimson ink.
To fund those deficits, we're going to have to borrow an ASTRONOMICAL amount of money. The Treasury just held a record $34 billion sale of 2-year Treasury Notes. That was followed by a $24 billion sale of 5-year Notes, the biggest such sale in more than five years. Those numbers will only go higher with time.
In fact, Congress is raising the federal debt ceiling to a whopping $11.3 TRILLION to account for this additional borrowing.
The likely impact: All the additional supply will drive bond prices LOWER and interest rates HIGHER. Heck, 10-year Treasury Note yields have already surged from around 3.4% to almost 3.9%. That will blunt the impact of the bailout by driving financing costs higher on all loans whose rates are benchmarked to Treasuries.
Last, this crisis long ago stopped being just a financial one.
This bailout bill won't prevent the "real" economy from sliding into recession. Factories are closing. Layoffs are rising. Spending is slowing. And the downturn that began in the U.S. is spreading to other economies overseas.
Heck, just yesterday we learned that durable goods orders plunged 4.5% in August — more than double the decline economists were expecting.
Meanwhile, initial jobless claims soared to 493,000, the highest since the period right after the 9/11 terrorist attacks. Some of that gain stemmed from Hurricanes Ike and Gustav. But the trend higher is clear, and a sign of real economic weakness.
So I still think you have to be cautious with your investing strategy ...
I suggest keeping the lion's share of your money in safe havens such as Treasuries or Treasury-only money funds.
And for your more speculative funds, I think it's a good time to target some of the stocks that will get hit the hardest as the post-bailout euphoria wears off. For more on my favorite way to do that, click here.
Until next time,
Mike
P.S. With this credit market storm hitting in full force, I'll be giving you frequent updates on my blog. Be sure and check in regularly!
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
From time to time, Money and Markets may have information from
Monday, September 15, 2008
Dow plunges 504! Here's what's next
Dow plunges 504! Here's what's next ... by Martin D. Weiss, Ph.D. and Mike Larson
Dear Subscriber,
With the Dow plunging 504 points today ... with Lehman dead and Merrill sold off ... with AIG on the brink and Washington Mutual not far behind ... you'll soon hear the Wall Street pundits arguing that this is the "climactic capitulation" that will end the decline. Don't fall for it!
In reality ...
The Dow is still not far from its all-time peaks, with a lot further to fall. Our forecast is unchanged: 7,200 on the Dow.
The recession is still in its early stages. Expect outright contractions in GDP in the coming quarters, and despite a lot of talk and some action, don't count on the government to turn it around any time soon.
America's oversized debt pyramid has just begun to wind down. It could take several years to clean up the mess.
We warned you this crisis was coming and it came. We named the names of the companies that would fail and they did. We told you how to avoid the dangers. We even recommended inverse ETFs that have been surging thanks to the market's plunge.
Our message for you today is this: If you ignored our warnings before, it's not too late to act now. Sure, you may have missed the first phase of this debacle. But that's water under the bridge. Looking forward, all that matters is what you do right now, before the next, deeper phases.
Here's What's Happening and What We See Coming Next ...
The financial failures you've seen so far are just the tip of the iceberg ...
Lehman Brothers is merely the first to fail. Expect more in the weeks ahead, possibly starting with those that have the smallest capital cushion.
Bank of America is making a horrendous mistake. It's already bogged down with its earlier purchase of Countrywide Financial, a classic pig in the poke. Now, on top of that bad move, it's taking on all the debts and risks of Merrill Lynch.
AIG, the biggest insurance firm in the country, is desperately trying to shore up its balance sheet after suffering $18.5 billion in losses over the past three quarters. It's planning to dump assets, raise capital, and asking the Federal Reserve for a $40 billion bridge loan. Don't be surprised if AIG is taken over by insurance regulators in the days ahead. And don't be shocked if more insurance company failures follow.
Look out for bigger financial troubles in the banking industry, including not only the names that are in the news, like Washington Mutual and Wachovia, but also at Citicorp, HSBC ... and yes ... Bank of America.
Late this afternoon, Treasury Secretary Paulson tried to inspire some confidence. But he failed as the shares in most of these companies plunged: Washington Mutual, down 27%. Wachovia down, 25%. AIG down 61%, the worst single-day stock decline for any major insurer in memory.
The market and the economy WILL recover eventually, but only after the nation's bad debts are liquidated, a process that will be extremely painful and traumatic.
Here's What to Do ...
First, if you have shares that we have not recommended, go online or call your broker to sell HALF immediately, at the market. Then stand by for our next alert regarding the second half.
Second, put all the proceeds away in the safest, most liquid investment in the world: Treasury bills or Treasury-only money market funds like Capital Preservation, the Weiss Treasury-Only Money Market Fund or any of the several we have recommended repeatedly here in Money and Markets.
Third, for the stocks that you hold (including those we recommended), if you have not bought inverse ETFs or put options to help protect you against losses, get ready to do so at the very next opportunity.
Fourth, for a hard-hitting, detailed forecast of the NEXT phase of this crisis, be sure to watch the recording of our 1-hour video webcast, "Plague to Pandemic," which we just posted on our Website this afternoon. Just turn up your computer speakers and click here now.
Never before in our lifetimes has there been a more urgent need for this guidance! And never before have we been more concerned about investors who might miss it! Be sure to take advantage of it now while you still can.
Best wishes,
Martin and Mike
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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Dear Subscriber,
With the Dow plunging 504 points today ... with Lehman dead and Merrill sold off ... with AIG on the brink and Washington Mutual not far behind ... you'll soon hear the Wall Street pundits arguing that this is the "climactic capitulation" that will end the decline. Don't fall for it!
In reality ...
The Dow is still not far from its all-time peaks, with a lot further to fall. Our forecast is unchanged: 7,200 on the Dow.
The recession is still in its early stages. Expect outright contractions in GDP in the coming quarters, and despite a lot of talk and some action, don't count on the government to turn it around any time soon.
America's oversized debt pyramid has just begun to wind down. It could take several years to clean up the mess.
We warned you this crisis was coming and it came. We named the names of the companies that would fail and they did. We told you how to avoid the dangers. We even recommended inverse ETFs that have been surging thanks to the market's plunge.
Our message for you today is this: If you ignored our warnings before, it's not too late to act now. Sure, you may have missed the first phase of this debacle. But that's water under the bridge. Looking forward, all that matters is what you do right now, before the next, deeper phases.
Here's What's Happening and What We See Coming Next ...
The financial failures you've seen so far are just the tip of the iceberg ...
Lehman Brothers is merely the first to fail. Expect more in the weeks ahead, possibly starting with those that have the smallest capital cushion.
Bank of America is making a horrendous mistake. It's already bogged down with its earlier purchase of Countrywide Financial, a classic pig in the poke. Now, on top of that bad move, it's taking on all the debts and risks of Merrill Lynch.
AIG, the biggest insurance firm in the country, is desperately trying to shore up its balance sheet after suffering $18.5 billion in losses over the past three quarters. It's planning to dump assets, raise capital, and asking the Federal Reserve for a $40 billion bridge loan. Don't be surprised if AIG is taken over by insurance regulators in the days ahead. And don't be shocked if more insurance company failures follow.
Look out for bigger financial troubles in the banking industry, including not only the names that are in the news, like Washington Mutual and Wachovia, but also at Citicorp, HSBC ... and yes ... Bank of America.
Late this afternoon, Treasury Secretary Paulson tried to inspire some confidence. But he failed as the shares in most of these companies plunged: Washington Mutual, down 27%. Wachovia down, 25%. AIG down 61%, the worst single-day stock decline for any major insurer in memory.
The market and the economy WILL recover eventually, but only after the nation's bad debts are liquidated, a process that will be extremely painful and traumatic.
Here's What to Do ...
First, if you have shares that we have not recommended, go online or call your broker to sell HALF immediately, at the market. Then stand by for our next alert regarding the second half.
Second, put all the proceeds away in the safest, most liquid investment in the world: Treasury bills or Treasury-only money market funds like Capital Preservation, the Weiss Treasury-Only Money Market Fund or any of the several we have recommended repeatedly here in Money and Markets.
Third, for the stocks that you hold (including those we recommended), if you have not bought inverse ETFs or put options to help protect you against losses, get ready to do so at the very next opportunity.
Fourth, for a hard-hitting, detailed forecast of the NEXT phase of this crisis, be sure to watch the recording of our 1-hour video webcast, "Plague to Pandemic," which we just posted on our Website this afternoon. Just turn up your computer speakers and click here now.
Never before in our lifetimes has there been a more urgent need for this guidance! And never before have we been more concerned about investors who might miss it! Be sure to take advantage of it now while you still can.
Best wishes,
Martin and Mike
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Rob Schmidt Recommends Commission Blueprint for Your Success
Click here for Income From Photography. Let this guide motivate you to unlock the money making power of your mind and your camera... http://make200aday.biz
Create your own water hybrid for under $150!
Free Registry Cleaner and Spyware Remover Scan
Google is Paying Out Big Money
Discover a More Effective Training Method for Fat Loss and Heart Health!
What is the Best Ab Workout for Belly Fat Loss?
Save the Romance
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Boston Terrier Secrets. Breakthrough New Book Reveals How To Have The Happiest, Healthiest And Most Well Behaved Boston Terrier
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SEX, LOVE and RELATIONSHIP
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Health Internet Business
WOW! You had best get on this QUICK Shhhh! … Click Here to Add Just 1-Line of Code that Forces Any Site to Magically Make Money!
Click here for Income From Photography
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