“In a perfect world, SIVs borrow short-term money in the commercial paper market, then invest the proceeds in debt instruments like mortgages, credit card receivables and collateralized debt obligations (CDOs). But as we observed in the September 24 edition of the Rude Awakening, “The borrowing part of this formula has dried up completely. The asset-backed issuers of commercial paper cannot find any lenders to finance their toxic cocktails of lousy mortgages and ‘new math.'”

“Since almost all the investors who comprise the free market refuse to purchase ABCP, the Federal Reserve has stepped into the breach. In other words, the Fed is now financing the very same stuff that the world’s private investors refuse to finance. What more do you need to know about the gravity of America’s credit crisis?”

Eric J. Fry
October 26, 2007

And now over to Short Fuse, writing from a chilly and damp Baltimore…


Views from the Fuse:

2 million homes will go into foreclosure in the next two years, if home prices continue to slump, said a report released by Joint Economic Committee Chairman Senator Charles Schumer.

With home prices falling at the fastest rate in 16 years, chances are this downward spiral isn’t ending anytime soon.

“State by state, the economic costs from the subprime debacle are shockingly high,” Senator Schumer said. “From New York to California, we are headed for billions in lost wealth, property values and tax revenues.”

Yup…no big surprise there. That’s why we’ve been coined it the “Subprime Time Bomb.”

Oil saw a fresh high of above $92 a barrel as the dollar hit a new low – and gold rose to 27-year highs.

As Byron King and Kevin Kerr often point out to their Outstanding Investments readers, oil at (and above) $90 a barrel is going to spur the public interest in alternative fuels that much more. However, as we say time and time again in these pages – for your money, ethanol is NOT the place to be.

“Ethanol isn’t a ‘miracle’ at all… it’s a downright disaster in the making,” Byron tells us. “For direct shareholders. For anyone in or around the industry. And for every American who believed the promises they’ve, so far, worked double-time to shove down our throats.”

Now for what’s happening in the Far East, we turn to Addison at The 5 Min. Forecast

“Chinese investors sold off in a fury early Thursday morning.  The Shanghai index fell 4.8% after Chinese officials reported a marginal cooling of economic growth, from 11.9% in the second quarter to 11.5% in the third.

“Geez Chinese people… keep it together!  The Dow would hit 16,000 if our government said growth was around 11.5%. The Shanghai composite has since stabilized… it gained about half a percent overnight.

“Benchmark indices in other nations kept their wits about them.  Hong Kong finished up 1.8%.  Australia and Japan registered a little over 1% gains.”

That’s it for today – but first, let’s check out what Dave has cooking at the DR blog…


“Constant readers know I enjoy gauging the health of the economy through rather unorthodox statstical measures – sales of iPhones and big-screen TVs, for instance,” writes Dave.

“Here comes another sign that all is not as rosy as official figures proclaim.  Call this one the Stress Index.”

We are coming to the end of our lonely exile in South America. Last night we went with friends to a Tango Club.

“The trouble with tango,” an argentine friend explained, “is that it is really not very popular with young people in Argentina. So, when people from North America come down here they always want to go to tango clubs. And they always say they want to go to ‘contemporary’ clubs…where the locals go. But the locals don’t go to tango clubs. The tango clubs are for tourists. It is like in your New Orleans. They have jazz clubs there. But I think that only tourists go to them. They are like museums.”

Our friend, Maria, took us to the best of the museums…a small place in a dicey neighborhood known as San Telmo. A handsome, middle-aged man dressed in a tuxedo greeted us at the door and opened it for us. On the inside, there were only about 20 tables…and a small stage. The area immediately in front of the stage had been cleared of tables.

We sat down at one of the tables closest to the stage. Other tables filled up. Still, only about half the tables were occupied. A few minutes later, the band took its place on stage and began to play.

Your editor is fond of tango music…and tango dancing too. As to the former, he doesn’t know much about it, but he likes to listen. As to the latter, he took lessons in Paris for several months…then, he gave up. “You northern Europeans may not be cut out for tango,” his teacher had told him, with a look of pity in her eye.

After the band had warmed up, a man with a toupee got up on stage.

“Where are you from,” he asked each group of guests.

“From Mexico,” said one table. “From Switzerland,” said another. “Peru,” said another group.

“We’re from Los Estados Unidos,” your author replied, not wanting to get into the complicated details of it.

Each time, the host made some comment…sometimes the audience laughed. We might have laughed too if we had any idea what he was saying. But microphones and foreign languages don’t work well for us. We were only able to catch a few words.

Then, at about 11PM the show actually started. The band played…and played well. The musicians were all middle aged. Still, they had some life left in them. There were a couple of singers too – a man and a woman. They seemed to be from the Barbara Streisand school of musical expression. The woman, in particular, tried to get as much out of each song as possible…extruding each note as if it were a piece of wire…and then wrapping it around her neck until she practically choked. We couldn’t pick out the words, but we sensed that something awful had happened. She was carrying a torch as big as a California forest fire and she wasn’t about to let go of it.

After the singers had worn themselves out, the dancers appeared. Aside from the couple from Switzerland, there were only young people in the bar. The man had spiky hair, in the modern fashion, and a pin stripped suit, in the tango fashion. The woman was very pretty, with a dancer’s outfit, a tight top and a skirt split up to the waist, decorated with sequins and sparklers. The music began. The couple held each other tightly…looked into each other eyes…and it was as if someone had fired the starting gun of a race. They were off! Legs flew…backs arched…shoulders and hips swiveled and swirled so violently, we were afraid body parts might fly off. It was very impressive.

When the exhibition was over, the music continued. Both dancers went around the room and asked customers if they’d like to try it.

How could we resist? We clutched the young woman in our best tango-school pose…we looked her in the eye. Her bare left leg flexed…and rose as if to stroke our right flank. So far, so good. And then… ‘Is this how you do it?’

All we can say is that we showed her some moves that she had never seen before.

We head back to London today, so this will just about do it for us until Monday.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

The Daily Reckoning