How Strong is Central Back Epoxy?

We were at a dinner party last night. Among the guests were three bankers – two French bankers…and an investment banker with Lehman Bros. (NYSE:LEH) in London.

“This credit crunch is hitting harder than most people realize,” said the man from Lehman Bros. “It’s not just a subprime problem any more. You can put together a great deal…you still won’t be able to get financing for it.

“But so far, only people in the financial industry are affected. And, let’s be honest, none of us are really hurting. We made so much money in the last few years…we could all retire if we wanted to. And I don’t think the crunch will last too much longer or go much deeper. There’s just too much going on.”

Bob Diamond, president of Barclay’s Bank, is quoted in the Financial Times:

“We have a ‘real cracking of the liquidity bubble,’ he said.”

The question is whether the crack can be mended with a little central bank epoxy. Most people think so…all hope so. And all are working on it. Goldman (NYSE:GS) put $2 billion of its own money into its troubled hedge fund. The Bank of America (NYSE:BAC) bought $2 billion worth of Countrywide Financial (NYSE:CFC), America’s biggest mortgage lender. And central bankers all over the world are providing as much liquidity as the market is willing to take.

What separates us from the rest of the financial commentators is not our knowledge; we don’t know what will happen any more than anyone else. It is our desires. While others desire a speedy recovery on Wall Street, we’re rather hoping for a long, dreadful illness…punctuated by periodic reports that the patient has died. A correction is what the U.S. economy needs, because Americans are not making any real financial gains. Corrections are painful. But no pain, no real gain…that is, unless you are positioned properly. Then times like this are where you make the real gains…

And our old friend Rick Ackerman writes:

“Here’s a front-page headline from the New York Times that gave us a chuckle the other day: ‘Few Heard Ticking Credit Time Bomb.’ Few who are not deaf, dumb and blind, perhaps. However, for the millions of sentient humans who live outside the warp in which the Times evidently is fabricated each day, the ticking of the credit time bomb was about as hard to detect as a giant asteroid bearing down on Cleveland. It seems no one at the Gray Lady thought to Google the words ‘credit crisis’ in recent years, since that would have turned up millions of leads that some enterprising reporter could have checked out.

“Both the Times and The Wall Street Journal have been doing some heavy catching up recently in the wake of revelations concerning the true condition of the U.S. real estate market. It took the bankruptcies of some big mortgage lenders, as well as subprime leverageur Bear Stearns’ narrow scrape with death, to call attention to potentially disastrous problems that the financial-newsletter world has been heralding for years.

“The Times, the Journal, and other status quo purveyors of news must surely regard the mortgage crisis as something to be resolved in due time, presumably by an inevitable upswing in home prices and a little help from the central bank. But such thinking only confirms that they are as clueless now as they were when the real estate crisis reached critical mass nearly two years ago. And, we are certain, they will be equally clueless when the expected upswing in home prices fails to materialize and deflation tightens its death-grip on the U.S. and global economies.

“By then, the praise and respect the news media have mindlessly heaped on former Fed Chairman Alan Greenspan will be under reconsideration. For the record, let us say that he has already been tried and convicted by the vast newsletter world as the main instigator of a credit blowout that could only have ended as this one is about t In a global bust. Three generations after the start of the Great Depression, the eggheads, pundits and wonks are still looking for a culprit. Was it the Smoot-Hawley tariff? Too-tight credit after the market crashed? The next time around, when the saga of the Second Great Depression is told, they need look no further than a Federal Reserve that succeeded in turning the concept of ‘free lunch’ into America’s only mainstream religion.”

Americans must have been wearing some heavy-duty earplugs to miss out on the ticking of the credit time bomb – especially the subprime bomb.

The Survival Report’s Mish Shedlock reports: “More than 1.3 million borrowers took out over $389 billion worth of pay-option adjustable mortgages in 2004 and 2005. Many of these started to reset in 2006, just as the property market started to tank. Many more are set to reset this year, in 2007.

“As much, in fact, as $1 trillion in pay-option loans and other creative ARMs over the next 12 months alone – sending an atomic shockwave across the U.S. economy between now and January 2008!”

It doesn’t end there…keep reading…

And apparently, it’s not just America that has been affected by the subprime debacle…today, the Bank of China announced they hold nearly $10 billion in U.S. subprime backed mortgages.


And lastly, another reader suggestion on our move from Maryland to Florida:

“Your ‘expert’ reader who analyzed states without income taxes missed New Hampshire. Not only are there no income taxes here, but also there’s no sales tax. Moreover, incidentally, it’s a good place to die.

“When you look in Florida, don’t miss Anna Maria Island. It’s the best-kept secret in Florida. West of Bradenton, it’s the last barrier island just above Long Boat Key. We bought there in 2005. An hour to Tampa airport, half an hour to Bradenton/Sarasota airport, and brilliant white sandy beaches like you’ve never seen before. Unique. Old Florida. Casual elegance. No pretense. No phonies. Chamber of Commerce slogan:

“‘Florida without the attitude.'”

We shall keep it in mind.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning
August 24, 2007

P.S. Our latest book effort, Mobs, Messiahs and Markets, was released for preorder yesterday…and it has already hit #9 on Amazon’s overall bestseller list – and #1 in the business section. Let’s see if we can get it to #1 overall – click here to order your copy:

Mobs, Messiahs and Markets

More views…

…from Short Fuse in Los Angeles…


Views from the Fuse:

*** Gold has just been kind of hanging out lately – but in our recent days of dollar lows, stock market record highs…and then record lows, a bursting housing bubble and a major credit crunch, a commodity that is just there, being stable and steadfast, sounds pretty good to us.

We aren’t the only ones. David Galland, who is the managing editor of Doug Casey’s International Speculator has this to say about the yellow metal:

“Any number of the investors who entered the gold trend early look at the price action of the yellow metal over the last year – which has been flat to slightly down – and worry that this is a sign that this gold bull market is over.

“What they are doing is letting their emotions run their investment portfolio, a classic reaction during the ‘Wall of Worry’ stage of any bull trend. They have made big money in gold shares, they understand the fundamental arguments, yet declining prices or volatility in the shares (which is especially prevalent in the summer months) gets them to thinking, then worrying, then selling.

“Big mistake.”

*** Wheat shot up to an all-time high yesterday, as bad weather and tight supplies panicked people into a buying frenzy.

The price of wheat has jumped 110% over the past year, settling at $7.54 a bushel today. Bad weather in Canada, Europe and Australia is majorly disrupting wheat supplies.

Grains have been on Kevin Kerr’s radar screen lately – and for good reason. He recently told his Resource Trader Alert readers, “I expect wheat exports to be remarkably high this year globally. My friend and market guru Marc Faber agrees. In an e-mail from Aug. 16, he said, ‘Agriculturals are the most favorable, along with cotton and sugar… agricultural commodities are “still extremely low” in real terms and “look relatively attractive” because of potential weather disruptions.'”

The demand for grains isn’t going to ebb anytime soon – after all, everyone has to eat. For more from Kevin Kerr.

*** And a British paper seems surprised that the credit crunch has found its ‘scapegoat’: Sir Alan Greenspan.

This makes us chuckle a bit…we aren’t sure that ‘scapegoat’ is completely accurate…’culprit’ may be more like it. And the fact that this paper seems so surprised that anyone would think to blame Greenspan for the “recent volatility in share prices, the tightening of credit that has made several proposed private-equity deals uneconomic, and the collapse of the subprime mortgage market and with it several hedge funds,” calling it the “first attack” on the former Fed chief.

Heh. This writer clearly doesn’t read The Daily Reckoning.

Until tomorrow,

Short Fuse
The Daily Reckoning