This is the truth, nothing but the truth, and the whole truth, with a waterboard as my witness!

Monday, October 6, 2008

crisis of confidence versus math and derivatives

I hear a narrative that there is a crisis of confidence in the markets. I have to shake my head as I hear that. Facts dictate circumstances, there is no crisis of confidence if there is strong capital positions.

Said another way, as the markets cut through "strike prices" in puts in larger markets, say where a call position was abandoned, a leap position no longer adequate for a straddle, as markets covered positions and made notional payments, losses continue.

Anyone who didn't see the Euro losses was incapable seeing the risk of the mortgages, CDO's, and swap instruments. It is as if the narrative that is unwilling to see the truth.

Will global zero interest rate fix the problem? No.

What also interests me is the resumption of the "carry trade" with Japan. It is as if the need for a bubble to replace a bubble, or debt to replace debt, is what we get as leadership from 'finance.'

As global markets shed trillions in losses, the real payer of these bad loans is the retirement accounts and the investment portfolios of savers globally. This is what globalism does, it allows the benefits of globalism to benefit more parties, but it also forces globally losses to be accrued.

If there were concerns that the bailout was inflationary, they were not. In this deflationary spiral the losses similar to the Nikkei 225, remove that capital from circulation as losses and the offset of capital destruction makes the bailout non-inflationary.

But will a rate cut help?

Laughing, as if more of what got us into this mess is the solution.

Lower interest rates globally is a shuffling of the chairs on the decks of the titanic, a punishing of savers, an invitation to incite a flight to gold, and precisely what is not needed.

Two predictions, you lower rates on savings, you will run banks. If credit resumes based on the realities of the markets, we get through the crisis. There is no quick fix until smart managent and money liquidates dumb management and money.

If you see a global interest rate reduction, you hear a global referendum that teh bankers themselves don't believe in themselves. You are hearing a global claim that banks do not even like themselves, do not trust one another.

Lower rates will exasperate the crisis robbing fixed earnings and deposists as the markets decline from real world issues of NPL's. This will run people to precious metals causing a bubble there (which always bursts the most violent), and the further destruction of wealth.

Given all the alternatives lowering rates globally accomplishes nothing, lending on basis of credit worthiness is the only answer.

But watching the parade of narrative on TV is amazing, these people are like heroin addicts looking for yesterday's fix.

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