"Wayne.B" wrote in message
...
On Sun, 11 Nov 2007 15:05:18 GMT, "Canuck57"
wrote:

"Wayne.B" wrote in message
. ..
On Sat, 10 Nov 2007 22:49:44 -0500, " JimH" ask wrote:

Explain how the "Republicans" caused the increase in gasoline prices.

That's easy:

- The Iraq war
- Huge federal defecits
- Weak dollar
- Poor energy policies
- Huge trade imbalance

They are all intertwined with high energy prices in various ways.

Well put. And to pay for it the fed "created" too much money diluting the
greenback. Supply and demand. Oversupply of currency and far too low
interest rates generally mean lower value of the currency itself.

But I think most of us didn't anticipate the size and speed of the
devaluation of the USD. As this moves through the supply chain it is
going
to drive a mean kick on inflation and probably interest rates too.

Sub-prime for example. Who wants risky debt, liquidity issues for an
interest rate below inflation? But if they jumped rates to 12+% the cash
would come. Rates are artificially low. That is why there is a crunch.

Most people should think of paper currency just like stock. And
devaluation
depreciates the stock it is going to take more stock to buy the same other
item as it did before. You feel it first with gasoline as inventories are
short. The real value of oil has not changed that much in a year.


The issue with the Fed and low interest rates is more complicated,
dating back to the "dot.com" stock market bust and the desire to avoid
a recession. The fact that rates were maintained too low for too long
led to the real estate bubble and created the demand for sub prime,
high risk lending. Yes, actually created the demand by stimulating
the so called "carry trade". The carry trade is Wall Street's name
for borrowing money at low interest in a venue like Japan, and
investing it at high interest rates somewhere else. It's a can't lose
proposition in a stable investment climate, limited only by your
ability to borrow large amounts of money and safely reinvest it. Since
Japan had virtually unlimited amounts of money to lend, the ability to
reinvest was the primary limitation. Banks and other lending
institutions in the US had already found it profitable to bundle up
various kinds of debt obligations and resell them as bonds to
institutional investors. They were percieved as low risk, high yield
investments and were very popular. They were also very profitable for
the banks who were packaging the loans and selling them off. There
is only so much high quality debt available for repackaging however so
that sparked the sub-prime high risk lending business to create more
opportunities for selling bonds. Like all things the reality is even
more complicated, but that is the one paragraph view from 30,000 feet.

Might be 30,000 feet, but very interesting view point. I didn't follow
sub-prime that closely. In fact, I divested almost all my mortgage/bond
instruments some 4-5 years ago now as to me the risk/reward curve was wrong.
3-4% is a joke given "real" inflation rates.

But what you say, also means quite a bit of loan/bond "paper" is just that,
a big paper write down. Because if they borrowed Japanese Yen last year at
this time, they owe 20-30% more in USD today above it's face value. Sort of
like a uncovered put option gone bad.

It will be interesting to see how the Fed/Banks work this one. But bet it
isn't going to be pretty. Maybe even see $150/barrel yet. Or maybe they
can't afford to let that happen and jack rates fast. Hard to tell. But my
bet is to watch closely what the big Fed related banks are doing. If they
start buying discounted paper the bottom is near. But that may be a ways
off.

On Sun, 11 Nov 2007 18:41:02 GMT, "Canuck57"
wrote:

Might be 30,000 feet, but very interesting view point. I didn't follow
sub-prime that closely. In fact, I divested almost all my mortgage/bond
instruments some 4-5 years ago now as to me the risk/reward curve was wrong.
3-4% is a joke given "real" inflation rates.


It took me a while to figure out why big name, first tier financial
institutions were interested in sub-prime lending at all. It only
makes sense in terms of creating high yield bonds for the "carry
trade" customers. Unfortunately the big guys not only swallowed some
of their own medicine but also got caught holding inventory as well. I
believe there are some other "bag holders" out there that haven't been
forced to report their losses yet.

But what you say, also means quite a bit of loan/bond "paper" is just that,
a big paper write down. Because if they borrowed Japanese Yen last year at
this time, they owe 20-30% more in USD today above it's face value. Sort of
like a uncovered put option gone bad.


Yes, real bad. It's a classic case of not understanding all of the
risks, and not managing them well. The bond rating agencies like S&P
share some of the blame and there may be some big lawsuits as the
fallout spreads.

It will be interesting to see how the Fed/Banks work this one. But bet it
isn't going to be pretty. Maybe even see $150/barrel yet. Or maybe they
can't afford to let that happen and jack rates fast. Hard to tell. But my
bet is to watch closely what the big Fed related banks are doing. If they
start buying discounted paper the bottom is near. But that may be a ways
off.

Time will tell. The Fed has only limited control at this point and
all of their choices have negative political ramifications sooner or
later.