Wednesday, August 27, 2008

Market Update

Let's take a second and figure out where we are at at this point in history and take a look at what's coming:

Fannie and Freddie will soon need their government bailout which will wipe out the common stockholders of the company. What will be preserved and backed is the debt (debt holders) who are mostly foreign countries. Hundreds of billions or perhaps trillions by the time it is over will be needed to make these investors whole.

The FDIC's current watch list is now at 117 troubled banks. There will most likely be many more that fail than that by the time the credit crisis runs it's course. The FDIC's reserves do not come close to what is necessary to cover all the banks and the government will have to step in and cover the remaining losses. The estimates are tougher to guess on this one. I would say $100 billion would be a low estimate up to $300 Billion if a few of the larger banks begin to wobble.

The investment banks continue every month to exchange their mortgage securities for treasuries from the Fed. Eventually the Fed's balance sheet will be full, and they will need additional funds to cover the losses for these banks. I would estimate the funds needed at $500 billion to $1 Trillion.

Our government and the Federal Reserve have no money to cover these losses. Our current deficit runs at around $500 billion per year before factoring the red ink just discussed. So as the losses continue to pour in they will be monetized, printed, and these fresh dollars will be exported overseas. Foreign central banks will continue to take in these dollars and print more of their own to keep their currencies from appreciating too fast causing a major slow down in their exports. Good article discussing that topic today:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/26/ccchina126.xml

Another good article today discussing foreign debt holdings:

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=aqu59cnYfsFY

Last one:

http://www.financialsense.com/fsu/editorials/schiff/2008/0827.html

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