The ActiveRain Addiction

One of my 10 predictions at the start of the year was despite the forecasts of most, was the US dollar was going to strengthen against foreign currencies during the year.  Well in the last couple weeks the dollar has been on an absolutely impressive tear against almost every currency in the world.  The ferocity of this move has simply been amazing, with it moving almost nearly 3% against a basket of currencies in just the last 24 hours.  Think of it this way, your dollar in your pocket just got 3% more valuable in the last day, even if it may not seem like it to you.

Basically we're seeing signs of mass liquidations of risky assets (stocks, bonds, commodities, derivatives) around the world and the resulting money is flowing into US dollars, strengthening the dollar against other currencies.  While our banking/financial system has it's problems the simple fact of the matter is it's in better shape than many around the world.

The speed at which this move is occurring will likely generate significant effects (problems), but it's very tough to predict in what form they might be.  One of the many things that's got my radar up in the last couple days, trying to determine what's likely to happen.

It's now been just over a week since the FED, treasury and central banks around the world made some massive interventions to try and stabilize the credit markets.  My prediction is that these interventions would do very little to unlock the credit markets the main issue is trust, not liquidity.  I've been watching many different indicators very closely for signs of recovery over the last week.

One of the main indicators of health in the credit markets is call the TED Spread.  I've discussed it many times on this blog but it's basically the spread between three month treasuries and three month LIBOR rates.  The higher the spread, the more stress in the system.  Historically it averages 30 basis points, over 200 is signs of a crisis, and it had reached 454 basis points before the interventions.  In the week or so since it's collapsed back to 266 basis points.  While still in critical condition this is appears to be a very good sign, and the financial media have been crowing about the credit markets being on their way to normalization.

Why it might be a false signal?

Something didn't smell right to me about the recovery and today's Treasury auction have shed some light on where the smell was coming from.  Most of the recovery in the TED spread has been in the yield of short term treasuries increasing not LIBOR rates coming down (though they have come down substantially).  The increase of treasury yields would typically indicate people are leaving their bunkers and starting to move their money back into riskier assets, BUT...  The treasury auction demonstrated the yield increase is not coming from the demand side, but the supply side.  Yields are increasing on short term treasuries not because people are moving out of bunkers but the US Treasury is absolutely flooding the market with short term debt.  This is not good, not good at all.

Here's a chart of the t-bill issuance by week, as you can see it appears to be going parabolic.

I've also seeing many "weird" movements in asset classes from currency to bonds to commodities that are setting off my alarm system.  I haven't been able to figure out what exactly they mean but something is emitting a very bad smell right now...

I got home from the gym today to find a package I'd been expecting sitting on the porch.  It contained a few of the pieces for my upcoming Halloween costume that I'd been waiting for.  I like to have some fun with Halloween, but this year I'm not above making a statement too.  Personally these two characters scare me more than about anyone right now.  So who should I be for Halloween?

Hank Paulson?

Ben Bernanke?

This question has been in my mind a lot lately.  Anybody who reads my blog knows my outlook on the economy over the next several years in pretty bleak.  I believe and have believed for some time now that we're not just heading for a protracted recession, but a downturn that will fit the definition of a depression before it's over.  I believe the stock market declines are far from over, despite any any short to intermediate term rallies we may get.  I believe the biggest asset bubble, the bond bubble has yet to begin it's collapse and I believe we've yet to see the true economic fall out of our credit market issues.

Pretty pessimistic, right?  Yet, I left my secure position to start a new company where I don't have a secure paycheck for who knows how long.  Doesn't sound like something a pessimistic person would do, does it :)

My belief is the best opportunities to build a business occur in the down times.  Today an essay was passed onto me, Why To Start A Startup in A Bad Economy by Paul Graham, that I thought was an interesting read and echo's some of my thoughts. 

"When Microsoft and Apple were founded.

As those examples suggest, a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way.

If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders.

Which means that what matters is who you are, not when you do it. If you're the right sort of person, you'll win even in a bad economy. And if you're not, a good economy won't save you. Someone who thinks "I better not start a startup now, because the economy is so bad" is making the same mistake as the people who thought during the Bubble "all I have to do is start a startup, and I'll be rich."

Less Competition

In bad economies only the strong survive while weak companies will often flourish during booming times.  Not only will competitors begin dropping like flies but new competition will have problems getting funded or be so scared they go an hide in their bunker.  Advertising/Marketing budgets will get slashed by big competitors allowing the smaller, more innovative people to flourish.

Startup/Operational Costs Become Lower

In a sinking economy the pool of potential employees increases significantly, and this will reduce the cost of bringing in talented people, often pretty significantly.  Other types of costs such as office space will also be reduced and there is opportunities to buy things much cheaper from companies that didn't make it.

Better Business Plans

Being in a economic downturn forces you to be much more conservative and rational in your business planning.  Too many companies built in the upturns, plan around an ever increasing market opportunity and cheap capital, which leads to many unsustainable companies being built.  Think back to all the idiotic business plans that turned into well funded companies in the dot com boom and even more recently in the web 2.0 and real estate bubbles.

Now almost everyone here on ActiveRain can think of themselves as a startup, since pretty much all real estate agents work for themselves.  Educate yourself, be realisitic in your analysis of what is happening, and use that to look for opportunities that others who simply hide in their bunkers will miss.

Read this post on BigStartups.com...

In the past year hedge fund manager Andrew Lahde has become quite famous for correctly predicting and betting on the problems in the sub prime mortgage market and more recently in the commercial real estate market (these problems are just starting).  His hedge fund produced a return of over 1,000% in only a year on these bets, at the vast majorities of hedge funds have literally melted down.

He sights several reasons for leaving the business, but one of the main ones is the risk going forward of a full scale financial system collapse.  "Our entire banking system is a complete disaster,”, “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.”  I can not say I disagree with that analysis. 

I did find his very candid goodbye letter, to investors informing them he is liquidating and closing the hedge fund rather interesting...

“Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life."

Read the rest of the letter...

The truth behind the credit market lockup has nothing to do with liquidity or lack of capital in the system, it is literally about TRUTH itself.  Let me list a few examples that illustrate my point.

1. In March, Bear Stearns' CEO goes on national TV and claims they are well capitalized and don't have a liquidity problem.  This statement is backed up from the SEC a regulatory agency in charge of monitoring Bear Stearns.  Only a week later Bear Stearns collapses and we later learn, they did not just have liquidity problems but were in fact insolvent (effectively bankrupt) by a wide margin.
2. In July, Indymac issues a statement saying they are well capitalized to handle there problems.  The OTS/FDIC issue a similar statement saying they don't see any problems with Indymac's capitalization.  Only about a week later IndyMac fails, is seized by the FDIC, and we later learn as their assets begun to be liquidated, that they are in fact insolvent by over $8B.  This is against total assets of only $32B, so that is not even close to being solvent.
3. Fannie Mae and Freddie Mac along with regulators repeatadly issue statements that they are in a solid financial position and well capitalized.  In September the government seizes and nationalizes these two GSE's and the truth comes out that the bailout is going to cost tens of billions if not hundreds of billions of dollars.  In fact they were no where near solvent or well capitalized as claimed.
   
4. Lehman Brother's makes numerous statements on their capital adequacy throughout the summer and early fall.  When they finally blow up the CDS auctions show that bond holders are only expected to receive about 9 cents on the dollar once assets are liquidated.  They were insolvent by a huge margin.
5. Washington Mutual and Wachovia, two of the largest banks in the US, effectively fail and received arranged shotgun marriages with the help of the FED and FDIC.  As part of these shotgun marriages they each write down tens of billions of dollars in bad loans they'd been holding on their books and claiming in financial statements were good.
6. Wells Fargo's CEO gets on national TV and claims Wells Fargo has never done risky lending such as subprime, stated income, interest only, no ratio.  Cough, cough, bullshit, they're sitting on a metric ton of that stuff.
   

Starting to see a pattern here?  Not only are companies repeatedly cooking the books and lying to everybody involved about their true financial state, but the regulatory agencies are not calling them on it and in some cases helping to cover it up.  These regulatory agencies have literally had staff inside these corporations monitoring their financial state on a day to day basis so you are left with two choices.  Either the regulators are more incompetent the Michael Brown of Hurricane Katrina fame or they are flat out lying to the same public they are supposed to protect.

So here's my point.  Now that we've had a few major failures and people realize that not only are companies lying about their financials, but regulators are not making them come clean, everybody is assumed guilty by players in the financial system.  That is why the credit markets are locking tight, LIBOR skyrocketing and spreads blowing out..  It has nothing to do with companies not having capital to lend, in fact there maybe more liquidity in the system than ever.   It's the fact that lenders don't trust that they'll get the money back if they do lend it.  The government can throw as much liquidity into the tornado as they want but they can't force the institutions to lend. 

This is why despite the absolutely massive liquidity injections, backstopping and bailouts the credit market lockup continues to get worse.  More liquidity can not solve a trust problem.  The ONLY way you can unlock the markets is to force transparency in the system, expose those companies who are insolvent and deal with them.  If you don't you don't do this, all companies will be assumed to be lying and insolvent whether they are or not and nobody will lend.  This is why the government's expensive bailout plans are literally doomed to fail.

Tonight we found out how the first $250B of the taxpayers $700B bailout of the financial system would get used.  According to the bill passed by Congress this money would be used to buy bad assets off of bank balance sheets.  Instead it is being used to purchase non dilutive preferred stock mainly in a small number of large banks.  We were also told by treasury officials that they only expected to need about $50B of that money a month, and just wanted to the full amount in their back pocket.  Well they are already going back to Bush to authorize the next round. 

Ok, so the details (from NY Times)

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

Now here's where I get pissed

1. NON DILUTIVE PREFERRED, that is the definition of moral hazard, you are bailing out a company yet rewarding those who made bad investments.  We were told during congressional hearings by Paulson it was important for this money to be used in a way that didn't reward the stock holders.  The plan was to take large dillutive equity chunks out of banks that were bailed out via warrants or preferred stock.  Guess we were LIED to!!!

2. Lets see Wells Fargo and Bank of America get rewarded with an extra $5B for getting a sweat heart FED back deal to take out a competitor.  Yeah that gets a sets a good precedent.  What do you want to bet, Wells and BofA knew about this little kickback when they were at the bargaining table?  Seriously, it appears the plan is too consolidate the whole banking system into a dozen or so "winners" that the Treasury has chosen to survive this mess.  My putting their support behind the large banks it undermines the ability of the smaller ones to gain depositors and investment further hastening this consolidation.

3. It was absolutely critical for us to pass that bailout bill without much time for debate, yet a week and a half later, we're using the money for a purpose not even authorized in the bill.

I guess my suspicions that this is simply a looting operation by the major banks has now been confirmed.  This could not have been carried out in a way more beneficial for the bankers and the shareholders and less beneficial for the taxpayers.  Hope you like your Citigroup, JP Morgan/Chase, Morgan Stanely, Bank of America overlords...

* The image on the right is what I think of Hank Paulson right now, and yes that's the mask for my Halloween costume this year.  These guys are more concerned with bailout out there buddies right now that solving the real financial crisis that is getting worse by the day, not better.

Boy, it's Monday and there is already a years worth of news to report on the bailouts, credit markets and the global economy.  The central banks the world game out of the G7 meetings with a real fire lit underneith them, some might say desperate and have been enacting financial measures almost hourly in an attempt to unstop the credit markets.  There seems to be a lot of throwing *#$ against the wall to see what sticks, if the markets don't react something that is announced, forget about it and announce something different.

Lets start with the US

An updated bailout plan has been reported by the Wall Street Journal that is significantly different in many ways that what was submitted in approved by Congress. 

1. $250B of the money will be used to purchase equity (preferred stock) in over 2,000 banks in the US, which essentially is a partial nationalization of our banking system.  Preferred stock will be purchased immediately in the top 9 banks which the FED and Treasury just finished meeting with.  Some of the banks were reportadly not to happy with the plan but didn't have a whole lot of choice in the matter.  I suspect most of this will likely go to small number of choosen banks (Citi, BofA, Goldman, Morgan) into which most of the smaller banks will be consolidated over time.
   
2. The FDIC expected to temporarily lift the insurance limits for non-interest bearing bank deposit accounts.
3. The FDIC will insure all new FDIC preferred debt issued by banks and thrifts.  This basically means that if I'm a big fund and I want to invest $5B into Mr. Bank, the FDIC will insure my investment.  The idea is to try and jump start external recapitalization of the banking system, by insuring the investments of big investors.

We've also got a report from Saturday in Bloomberg that Fannie and Freddie (recently nationalized) have been instructed to purchase $40B in under performing mortgage bonds (mainly subprime and ALT-A) off banks balance sheets each month.  In effect this is additional debt being purchased by the US government off above the $700B authorized by Congress. The three plans above are easily going to require additional government borrowing of several trillion dollars.  Again, where is this money coming from?  I believe the current policy actions are almost guarenteeing a bond market crash and double digit interest rates in the near future.

Now onto Europe

1. Germany commits $681B to bank bailouts, given our GDP is 4.3x theirs, that is the equivilent to the US doing a $2.4 Trillion bailout.  On a side note if you think our banking system is in bad shape the German banking system is so levered, a mere 2% drop in bank asset value wipes out the net worth of their banking system.
   
2. Britain nationalizes the Royal Bank of Scotland and HBOS, and there are discussions about nationalizing utility and transportation companies if things get any worse.
3. The French commit about $480B to bank bailouts, given our GDP is 7x theirs, that is equivilent to the US doing a $3.4 Trillion bailout.
   
4. The Dutch commit $200B to bank bailouts, lets see 1/20th our GDP so, that's like them doing a $5 Trillion bailout
5. Spain is committing $100B, so at a GDP 1/12 ours so, that's similar to us doing a $1.2 Trillion bailout

There's some other ones in there to, but that is an absolute ton of money being thrown around, money that quite frankly that doesn't exist.  Either the collective central banks are bluffing and hoping that the credit markets will unstick without having to follow through, or a ton of new worldwide debt will need to be issued.  Supply and demand again says long term interest rates worldwide are probably about to do a rocketshot northward.  Here's a hint, you can't borrow your way out of a debt crisis.

Did they unstick?

Despite all of these additional bailouts over the weekend in Europe, LIBOR and the TED Spread barely came down, meaning the credit markets did not unstick themselves to any material degree.  The US bond markets where closed today so it's hard to get a good read on things, but tomorrow morning should be very telling.

I thought this was interesting enough to repost on my blog as it is Sequoia Capital's take on our current economic situation.  For people that don't know Sequoia Capital is one of the most respected of the large VC firms.  There portfolio of companies reads like a who's who of well known Internet firms, many of whom everybody here would be familiar with.  I'd had this meeting described to me on Friday, and I was able to get a copy of meeting notes today from another source. 

This is particularly relevant to me, as I am in the process of building a new startup company.  Given that I've seen this situation coming for sometime my business plan is built around many of the assumptions.  I'm building it in a way I can self fund without raising outside capital and being cash flow positive as fast as possible is my top priority.

Update: I also found the slideshow had been shared online.

Speakers:

· Mike Moritz, General Partner, Sequoia Capital (he moderated the speakers).

· Eric Upin, Partner, Sequoia Capital (Eric ran the $26-Billion Stanford Endowment Fund and knows a few things about Economics and investing.)

· Michael Partner, Sequoia Capital (Michael was recruited to start Sequoia’s very first hedge fund, coming from Maverick Capital and Robertson Stephens. I know him from my BEA days.)

· Doug Leone, , General Partner, Sequoia Capital
Slide projected on the huge conference room screen as people assembled inside the conference center to take their seats: a gravestone with the inscription: RIP, Good Times.


Mike Moritz:

· The only time Sequoia’s assembled all CEO’s like this was during the dot.com crash.
· We are in drastic times. Drastic times mean drastic measures must be taken to survive. Forget about getting ahead, we’re talking survive. Get this point into your heads.
· For those of you that are not cash-flow positive, get there now. Raising capital is nearly impossible if you’re too far off of cash flow positive.
· There will be consequences for those who hesitate. Act now.

Eric Upin:

· It’s always darkest before it’s pitch black.
· Survival of this storm means drastic measures must be taken now, so you will have the opportunity to capitalize on this down turn in the future.
· We are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem. [many slides on historical charts of previous recessions, averaging 17 year cycles.]
· The credit market [versus the Equity markets] are the issue and will take time to recover.
· Inflection point: Make changes, slash expenses, cut deep and keep marching. You can’t be a general if you turn back.
· This is a global issue and not a ‘normal’ time.
· There is significant risk to growth and your personal wealth.
· Advice:
o Manage what you can control. You can’t control the economy, but you can control everything else.
§ Cut spending. Cut fat. Preserve Capital.
§ Don’t trust your models and spreadsheets. All assumptions prior to today are wrong.
§ Focus on quality.
§ Reduce risk.

Michael Beckwith:

· Note: Michael had a lot of slides that were charts, data points and comparisons.

· A “V” shaped recovery is unlikely [√]
· Cuts in spending will accelerate in Q4/Q1. Look at eBay—this is just the beginning.
Doug Leone:
· This is a different animal and will take years to recover.
· Getting another round if you’re not profitable will be rough.
· Do everything possible to get to cash flow positive. Now.
· Nail your Sales and Marketing message.
· Pound your competitors shortcomings. They’re hurting and they will be quiet. Take the offensive.
· In a downturn, aggressive PR and Communications strategy is key.
· M&;A will decrease dramatically and only lean companies, with proven sales models will be acquired.
· Spectrum discussion:
o Capital Preservation ß----------------------------------à Grab Market
o Everyone should be far to the left (capital preservation)
· Requirements of our companies:
o You must have a proven product
o You must cut expenses. Now and deep.
o Your product should reduce expenses and drive revenue [NOTE: I want to revisit this with the Management team. Our solution does both, we need to quickly and crisply define the sound bite here.]
o Honestly assess your solution vs. your competitors.
o Cash is king [have you gotten this message yet?]
o You must get to profitability as soon as possible to weather this storm and be self-sustaining.
· Operations review:
o Engineering: Since you already have a product, strongly consider reducing the number of engineers that you have.
o Product: What features are absolutely essential? Choose carefully and focus.
o Marketing: Measure everything and cut what is not working. You don’t need large Product Marketing, Product Management teams.
o Sales &; Business Development: What is your return on this investment? The Valley has gotten fat with Sales people: Big bases, big variables. Cut base salaries on sales people, highly leverage them with upside (increase variable) and make people pay for themselves via increased sales productivity. Don’t add sales people until you’ve achieved your goals with sales productivity. Be disciplined.
o Pipeline: Scrub the shit out of it and be honest with yourself.
o Finance: Defer payments, what is essential? Kill cash burn.
· Death Spiral (Nobody moves fast enough in times like these, so get going and research later.)
o The death spiral sucks you in, you’re in it before you know it and then you die.
o Survival of the quickest.
o Cutting deeper is the formula for survival.
o You should have at least one year’s worth of cash on hand.
o Tactics:
§ Assess your situation. Drop your assumptions, start with a blank page and start zero-based budgeting.
§ Adapt quickly
§ Make your cuts
§ Review all salaries
§ Change sales comp
§ Bolster your balance sheet—if you can add $5M to your coffers, take it and save it.
§ Spend like it’s your last dollar.
· Get Real or Go Home.

I will review and clarify any points with you tomorrow. This is the real deal folks. Let’s buckle down, change the way we operate, be very agile and look at things differently. We need to change things around and get aggressive

Sorry, I didn't get a chance to do updates during the week, things were moving so fast that I barely had the time to keep on top of them myself.  Pretty much everybody is fixated on the "crash" in the stock markets with major US indexes plunging about 17% on the week, but equity markets are just a symptom, it's important to look at the cause. 

The deterioration in the credit markets on a daily basis was simply stunning, and resulted in a near lock down of both intrabank lending and financial commercial paper markets by the end of the week.

Bond market dislocates

We saw what is referred to as a dislocation in the bond market early this week, and these types of dislocations, historically without fail have lead to stock market crashes.  Basically we had money fleeing long term US treasury bonds, causing their price to plummet and thus the yield to increase.  This happened at the same time the opposite occurred in short term US treasury bonds as people flocked to safety, and at times in the week even drove the yield on 13 week treasuries negative.  Talk about fear when the lender is willing to pay interest.

There is a very strong correlation between equities (stocks) and bonds, as money moves out of stocks it typically moves into bonds and vice versa.  So, if stock prices are going up, bond prices almost always going down at the same time.  We saw this correlation totally destroyed this week, as stocks were crashing, long bond prices were plummeting (yields increasing). This indicates capital, probably foreign capital fleeing long term US treasuries.  Chart below of the ten year treasury yield and second the DOW during the week. Yes, this is VERY bad.

What caused the dislocation?

Simply put it was CAUSED by the $700B bailout and the FED's buying of the commercial paper early this week.  The reason is simple supply and demand economics. It was something many people saw coming and I mentioned was one of the reasons I was so adamant the bailout had to be stopped.  The bailout means the US Treasury has to issue significantly more long term US Treasuries to fund it, while at the same time the demand for them is staying essentially flat or possibly even decreasing.  Increased supply with flat demand means prices of long term treasuries are going way down and yields (interest rates) are going way up.  It's not rocket science. Even though the treasuries have yet to issued the bond market is beginning the process of pricing it in.

The more we try to bail things out the higher we will force long term interest rates, ultimately extending and deepening the real economic pain.  If the stock market had not crashed at the same time forcing money into bonds to hide, we would have seen an absolute explosion in long term rates this week.

What does it mean?

As a real estate agent or loan officer the implications will probably scare the you know what out of you.  Rates are almost certainly going much higher over the next few months, and I think there is a possibility of a 1930's style bond market collapse being triggered.  If this type of bond market collapse does occur, we're not talking a 1 or 2% increase in rates, we're talking at minimum double where they are now and in the space of a year.  Yes, I know it that seems improbable, but it's happened before under similar circumstances.

Below is a chart of the 1930's bond market collapse, and we are almost matching the event chain perfectly (we're finishing the flight to quality stage).  While i hope history does not repeat, our policy makers seem dead set on following the exact same ill fated path and the bailout may have pushed us across the event horizon.

* Lower bond prices mean higher yield/interest rates.

Credit market indicators

I mentioned above many indicators of stress in the credit markets went through unbelievable deterioration on a daily basis during the week.  One of the main ones I watch is the TED spread which is the spread between 3 month treasury yields and 3 month LIBOR rates.  The higher it goes the more stress. This is because short term treasury yields drop in times of fear because they are considered the safest place to stash money while LIBOR will increase as banks become more fearful of lending.

The long term average spread is about 30 basis points and anything over 200 basis points is crisis mode.  We started the week at 382 basis points and continuously ramped to finish at 464 basis points.

As indicated by TED spread LIBOR rates continued to explode during the week.  Overnight LIBOR rates ramped to well over 4% as banks became fearful of lending to each other, until collapsing on Friday due to coordinated central bank action.  But 3 month LIBOR continued on it's ramp and is now close to double what is was just two months ago. LIBOR rates are extremely important because there is over $300T in worldwide debt that is in someway tied to these rates.  So they go up, borrowing costs for banks and businesses go way up, and almost every business is reliant on credit to some degree.

From a banking perspective banks often borrow at LIBOR and lend at a rate tied to the the FED's target rate.  So the increasing spreads and other effects on the yield curve are absolutely destroying the ability of the banks and other financial institutions ability to make money.

Other significant events

* Iceland's banking and financial system collapses during the week forcing them into official bankruptcy on Friday

* Hungary's bond market collapses

* Japan's main banks began firewalling themselves off from other world banks and refusing to lend

* World equity markets plunged, in most cases worse than US's, with trading suspended indefinitely by several of them including Russia

* G7 meetings going on this weekend and everybody is scrambling for a solution

Stock market stuff

Even though I'm a very active trader myself I generally avoid talking about stock markets on my blog here at ActiveRain.  I try to keep it to credit markets that have a direct impact on rates and loan availability and thus the real estate industry.  The stock plunge we've seen in the last couple weeks has certainly been pretty devastating, for comparison here's the 2000 dot com crash on a monthly chart vs. our current one.

For many reasons both technical and fundamental I think we are very overdue to a violent snap back rally in this bear market, probably starting this week, but we also have a long ways to go still before we put in an ultimate bottom in the bear market.  So be safe...