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Financial Distress

Thursday, November 13, 2008, 12:25 PM

The broad stock market is now testing the recent lows.  But the real story is in the financial stocks themselves.

This is as close to an all out breakdown as I can imagine.

For starters, I have been keeping a close eye on Citigroup because they hold massive amounts of both derivatives and so called "Level III assets", those unknowable piles of junk assets that management gets to park off to the side at whatever value they want to put on them because there is no open market for them.  

This chart says "bankruptcy coming soon."

Citigroup is now down more than 50% in just a few weeks and over 10% just today alone.  If Citi goes under, it will make the Lehman bankruptcy look tame by comparison.

Oddly, the breakdown in the stock markets this week is reminiscent of the declines that preceded the G7 meeting a month back and which led to the US bailout plan being hurried through Congress.

And here we are going into the G20 meeting with a similar scare-raising decline.

What is a "financial company"?  Hard to say anymore since many companies are involved in financial activities as a supplement to their main activities.  For instance, for many years the finance arm of GM created the bulk of GM's profitability leading some wags to state, "GM is a finance company with a car division bolted on."

Look at the behavior of these other financial companies today:

I've put GE in there because they've got enormous financial exposure through their GE Capital division and are eyeball deep in various derivative holdings and issuances.

Together, these financial stocks are indicating that there is still some unpleasant news out there waiting for us.  

Until we get official word, I am keeping a very close eye on the financial and insurance companies, because that's where I think the next shoe to drop will be.

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31 Comments

jdb123's picture
jdb123 (not verified)
Re: Financial Distress
And last month Citi turned down Goldman without thinking twice when GS was looking for a quick marriage partner ( like the MER--BAC hook up ).......so what's that tell you about GS...? And they were at what $120 or so at the time....???  A lot more meat on that bone to be ripped off.
miranda's picture
miranda
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Re: Financial Distress

wouldn't citigroup be way 'too big to fail'? wouldn't Paulson etc. do everything to not allow it's failure/bankruptcy?

Or is Chris implying that there's not enough bullets left to save this sized problem?

alas, i do have money in citibank. is it time to take it out? (not over the FDIC limit, however)

gregroberts's picture
gregroberts
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Re: Financial Distress

Interesting article about the G20 meeting this weekend...

http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-27996

KBX's picture
KBX
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Re: Financial Distress

Well if Citigroup drowns - God bless

Everything happening faster than expected...

Reuben Bailey's picture
Reuben Bailey
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Posts: 138
Re: Financial Distress

Personally, if it were my money, I would be running to the bank to remove it.  I would keep some amount completely out of the banking system, and moving the rest to a "safer" bank - one that is smaller, conservatively run (if that is possible to find), and has a high rating at Veribanc.com (Blue Ribbon) and TheStreet.com.(B+ or better).

All the best.

 

Edit:  Yes, this is a paraphrase/partial quote of Chris'.

 

Damnthematrix's picture
Damnthematrix
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Re: Financial Distress
[quote=miranda]

wouldn't citigroup be way 'too big to fail'? wouldn't Paulson etc. do everything to not allow it's failure/bankruptcy?

Or is Chris implying that there's not enough bullets left to save this sized problem?

[/quote]

This crisis is bigger than Ben Hur. IMHO, it's the end of Capitalism. Period.

No one, Nothing is too big to fail. The entire Matrix is failing.

Exponentially spiraling debts need exponentially spiraling growth to service the debts. Can't be done. We don't have the resources (especially NETT ENERGY) to do it.

The debts can NEVER be repaid. The only way out of this quagmire is a JUBILEE. Cancel all debts. Start from scratch. Hopefully we won't allow the bastards anywhere near the new system.... they should all be in JAIL!!

Damnthematrix's picture
Damnthematrix
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Re: Financial Distress
[quote=gregroberts]

Interesting article about the G20 meeting this weekend...

http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-27996

[/quote]

 "To end the Great Depression in 1933 Franklin Roosevelt devalued the dollar via Executive Order #6102, confiscating gold and raising its price 69.3%, effectively kick starting asset reflation."

Maybe I'm not understanding this.....  but what is the point of reflating grossly over valued items like housing? 

Woodman's picture
Woodman
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Re: Financial Distress

My original bank Maine National became Bank New England became Fleet became Bank of America, which is unfortunately now on Chris's watch list above.  I'm split between two different banks just in case.   

 To illustrate how shaky they could be, they haven't taken away my paid off HELOC; which if I was ever stupid enough (or desparate enough) to max to the limit would put me way upside down, even before housing prices fell, and there's no way I could afford to pay it back.

Orangedem's picture
Orangedem
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Re: Financial Distress

My wife made this observation: about 10 years ago, retailers in the US got out of the business of selling merchandise and began selling credit. Everyone wanted you to get their credit card, or agree to their financing.

 The chickens are coming home to roost.

Ruhh's picture
Ruhh
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Re: Financial Distress

Now forgive me for only knowing pretty much only what I've learned here about the economy. I know this comment will sound a bit naive so I guess I'm just venting.

I've always been an environmentalist and I'd even go as far to say that I'm somewhat of an anti-capitalist. I've always been convinced that the world is going to hell in a handbasket with infinite growth economics and consumerism but I didn't really think it would look like this.

I realize it's too late to save this now but I think a possible solution would have been not necessarily to save the economy as it is now but to transform it. The money that governments used for all of these bailouts should have been used instead to give a major kickstart to green energy and other green technologies and solutions. Use the kind of focus they've got going now to prop up the tough times they've been so scared about having if we were to meet Kyoto type targets. It's important that to recognize that it's not just climate change we have to worry about but we must find ways to stop poisoning the earth, air and water in addition to squandering all other resources. 

It's just really too bad all they're trying to save is the status quo.

thefroggydude's picture
thefroggydude
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Re: Financial Distress

@Ruhh wrote:

Now forgive me for only knowing pretty much only what I've learned here about the economy. I know this comment will sound a bit naive so I guess I'm just venting.

 You may not be an economist but you have a lot more common sense than either Bernanke or Pulson.  I would rather have you in charge than either of these two.  The problem however is that the current fiat money system is to blame.  As Chris points out in The Crash Course, the present debt based monetary system requires exponential growth in order to survive.  Is this possinle?  I think not.  So in reality your solution is just looking for the next bubble to create this unattainable exponential growth.  Having said that, I believe most taxpayers would support your solution over the Paulson/Bernanke solution.  Neither one would work in the long run but at least yours would be beneficial to a greater number of people.  The B&P solution is nothing more than socialism for the super-rich.

Doug's picture
Doug
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Re: Financial Distress
I heard Paulson being interviewed tonight.  He says the big financial institutions are now stabilized, hence his about face yesterday.  Although he tries to pussy foot around it, he basically wants us to start buying and borrowing again.  We recognize, of course, that this would be nothing more than a quick fix that would return us to the same ruinous path we've been following for the past few decades.  Remains to be seen whether enough consumers fall for it with the holidays coming up.
GDon's picture
GDon
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Re: Financial Distress

Damnthematrix -

I read the same article on revaluation - I suppose it's a possibility, although today's Central Banks hate (and I do mean hate) gold  (too much honesty in all that...).

The point is not necessarily "reflation" of assets by revaluing against gold with new currencies -

The point is to eliminate/reduce the actual pain of debt, by "paying" it back with "devalued" currency. 

This has ALWAYS been the statist and fiat-currency advocates approach to public (and private) debt.

If I owe you $100 dollars, the "most painless" way to pay it back (if you are a Goverment), over the term of the loan, is to make $100 worth much less (in terms of purchasing power), by devaluing (inflating) the currency, and THEN pay it back.

That is the intention -

There is NO WAY the USA can possibly pay off the current (and exponentially growing) $12Trillion Debt ($60Trillion unfunded).  The only recourse will be a devaluation of one means or another.

Given the global comaradarie in fiat-currency proliferation, the devaluation will need to be "coordinated".  In addition, since there is no current "standard" like gold, to devalue against, the currencies may need to now consider "pegging" to either gold or a mix of commodities (with gold included).

Could happen....maybe.....if it does, gold will be "valued" much higher against the current purchasing power of the $USD, absorbing the debt, as it were.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
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Posts: 3998
Re: Financial Distress
[quote=GDon]

If I owe you $100 dollars, the "most painless" way to pay it back (if you are a Goverment), over the term of the loan, is to make $100 worth much less (in terms of purchasing power), by devaluing (inflating) the currency, and THEN pay it back.

That is the intention -

There is NO WAY the USA can possibly pay off the current (and exponentially growing) $12Trillion Debt ($60Trillion unfunded). The only recourse will be a devaluation of one means or another.

[/quote]

But isn't that plain old INFLATION?

Print the money, and it will be worth less, making anything of fixed 'value' like a mortgage debt quickly valueless, UNLESS interest rates go skywards as happened in the 1980's..... 

Davos's picture
Davos
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Re: Financial Distress

Ruhh: The FoggyDude said it well.

I used to despise capitolism. Then I came in contact with some very financially successful people, one is really suppporting the alternate energy and environmental movement, he probably won't see the fruits of his labor given the time the genisis will take, yet each day he devotes all his time to it.

In that sense, it is good to know that not all of capitolism goes to waste, nor do some of the incredible minds with such vision that they can see the entire process. They, even support the canditates that will do the most good (or the least bad.)

But I truly think you are right, if we don't embrace this we will be faced with an even greater problem then the current one. Hard to fathom something worse than this doom and gloom. It is also ironic that this one (depression) is putting off the other one (turning Earth into Mars), yet this one (depression) is also crippling the cure (financial seed money) for the second. 

Davos's picture
Davos
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Interesting Article:

http://www.motherjones.com/washington_dispatch/2008/10/credit-rating-agencies-we-sold-our-soul-to-the-devil.html

 

"Internal documents show that while rating firms publicly defended their practices, executives privately wondered when the house of cards would fall."

"For years, credit rating agencies—the referees of Wall Street—insisted they were an impartial source of information, despite their financial reliance on the companies they rated. Then came the market meltdown—and a chorus of accusations that firms had artificially inflated their risk ratings to please their clients and gain a competitive edge. And now there's plenty of evidence to suggest the "referees" were unduly influenced by the players.'

*** 

The rest of the article contains other models of rating companies, claims that there was no way they could have foreseen this 

And of course Rep. S. Lynch (D-Mass.) got his emphasis whining about the defrauding of his people. He had no complaints about Phil Gramm and the Congress that allowed this to happen and continue to happen. (repealing the Glass-Segal Act and passing the CFTC act http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.htm )

 

James Wandler's picture
James Wandler
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Posts: 219
Re: Financial Distress
[quote=Ruhh]

I realize it's too late to save this now but I think a possible solution would have been not necessarily to save the economy as it is now but to transform it. The money that governments used for all of these bailouts should have been used instead to give a major kickstart to green energy and other green technologies and solutions. Use the kind of focus they've got going now to prop up the tough times they've been so scared about having if we were to meet Kyoto type targets. It's important that to recognize that it's not just climate change we have to worry about but we must find ways to stop poisoning the earth, air and water in addition to squandering all other resources. 

[/quote]

Ruhh,

I agree with your approach.  The way out of the Depression in the 1930s was Keynesian economics where the government stepped in and spent money to employ people in productive work to kick start the economy again.  Eventually I believe they will get around to this and this will be the solution once again.  When they do I hope that the focus will be on the green technologies you've mentioned. 

However solving the current economic problem won't allow us to tackle the peak oil and natural resource limitations that Chris has mentioned - nor the demographic issue.  Green technologies will help but we need more than just effortless power...we also need lives full of meaning, relationships with people we want to be with, healthy food that bursts with flavor, and a connectedness to the natural world around us.

The answer is to move toward individual and community self-sufficiency.  Get a small house on a few acres of land where the zoning by-laws will allow you to grass feed some animals.  Feed your soul by reading The Self-Sufficient Life and How to Live It by John Seymour who speaks of this life more eloquently than I can:

"...Now we have had the Industrial, the Technological, and are in the midst of the Information Revolution, which again is bringing about great changes.  It is bringing great material prosperity to the few who have their hands on or adjacent to the levers of power.  Elsewhere most of humankind lives in appalling conditions, forced to work in slum cities for starvation wages and sing to the tunes of the big multinationals.  Farmers and farm workers are either starving or being forced to adopt methods that they know are damaging the land.  All over the earth the soil is going, eroded by tractor cultivation and slowly poisoned by chemicals from agribusiness.  And so we have created lifestyles that are simply not sustainable or pleasant.  But there are many simple changes that individuals can make to their lifestyles that could change all this.  And, if we are wise, we will not wait for the apocalypse before making some adjustments.  I do not ask you to blindly follow my suggestions, but merely to consider them as you think about the future..." (my emphasis added in italics)

If you live in suburbia and want to begin with the transition to self-sufficiency you can do that with a few simple tools and the labor we possess using the GROW BIOINTENSIVE (trademarked name) gardening method will allow suburban households to grow bushels of their own vegetables.  For more info please pick up a copy of How to Grow More Vegetables (and fruits, and nuts, berries, grains, and other crops) than you ever thought possible on less land than you can imagine by John Jeavons.  I believe this method is the solution for the developing world as well because it only takes 5,000 sq. feet of land (including pathways) to sustainably feed one person and still allow the soil to regenerate itself.  In North America this could be done on far less suburban land by just buying compost produced elsewhere. 

Don't get me wrong, both (physical) technology and money (an example of a social technology) increase our possibilities for the future.  The trouble is that if we continue to persist solely in a money world we will remain chained to the illusion that material possessions will bring us happiness...while simultaneously and silently leading us towards an Orwellian nightmare.

Your comment at the bottom of your post is most telling: "Things need to get worse before they can get better."  Hardship is going to be the pathway most of society is going to unknowingly select.  However, to varying degrees, we all have a choice in our hands to evade the money world and make things better now. 

Why wait?

All the best,

James

Damnthematrix's picture
Damnthematrix
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Re: Financial Distress
[quote=James705ca]

Ruhh,

I agree with your approach. The way out of the Depression in the 1930s was Keynesian economics where the government stepped in and spent money to employ people in productive work to kick start the economy again. Eventually I believe they will get around to this and this will be the solution once again. When they do I hope that the focus will be on the green technologies you've mentioned.

[/quote]

There's only one problem with that:  where's the enrgy coming from?  Some enterprising soul calculated that just tomanufacture enough solar stuff for our state of ~ 2.8 million we'd need to build six new coal fired power stations...

Things are very different now than they were in 1930, and I'm not at all convinced the same solutions will work.  In 1930, the US was awash in oil... 

T's picture
T
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Posts: 11
Re: Financial Distress
[quote=miranda]

wouldn't citigroup be way 'too big to fail'? wouldn't Paulson etc. do everything to not allow it's failure/bankruptcy?

Or is Chris implying that there's not enough bullets left to save this sized problem?

alas, i do have money in citibank. is it time to take it out? (not over the FDIC limit, however)

[/quote]

Why save Citigroup or any more bank?  It's after the election. The Federal Reserve Banks are people's banks now so every other bank is optional.  If they fail they post their entire asset as collaterals to the Fed and the game continues.

T's picture
T
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Re: Financial Distress
[quote=T][quote=ruhh]

The answer is to move toward individual and community self-sufficiency.  Get a small house on a few acres of land where the zoning by-laws will allow you to grass feed some animals.  Feed your soul by reading The Self-Sufficient Life and How to Live It by John Seymour who speaks of this life more eloquently than I can:

[/quote][/quote]

Only one problem.  Unless we have another generation before we hit the wall, there is not enough time.  Without time eradication is the only solution.

fujisan's picture
fujisan
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Re: Financial Distress
[quote=gregroberts]

Interesting article about the G20 meeting this weekend...

http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-27996

[/quote]

I've read this article yesterday. I may got it wrong but IMO it's irrealistic because diluting the debtors would equally dilute the creditors. The Chinese, Arabic, Russians and other creditors will never accept to loose almost all their savings (T-bonds...)

Do not expect too much from the coming G20. Everyone will try to save its own interests. Also I doubt Bush & Co would take big decisions in place of Ob.

Big shocks might come from China & Russia. They already agree to ditch $ in their trade. No doubt they would love to see everyone ditching $. Russia gave clear signals the day after Ob election by deploying missiles in Kaliningrad which means "remember we still have nuclear missiles". China & Russia also hate, really hate, beeing "dictated" by others: US as well as Europe.

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Maenad
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Re: Financial Distress

Just this week I noticed a sudden rash of Citibank ads on payTV (Australia) offering gold and silver credit cards at an interest rate of just over 2%, specifically marketed for paying off other credit cards. Knowing that they've already bought a lot of bad debts and were looking like going under, I couldn't help but wonder WTF they are up to.

Maenad

 

Maenad's picture
Maenad
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Re: Financial Distress

IMHO if Bush is doing anything at G20, it's probably ensuring his own personal interests and those of his mates, paying back favours and such. His efforts in this regard have never turned out well for the average person so I just hope he's unable to achieve anything.

 

Maenad

joe2baba's picture
joe2baba
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Re: Financial Distress
i believe the way out of the depression was WW2
Davos's picture
Davos
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Posts: 3620
Re: Financial Distress
 American Research Group shows tholiday season 
Year Average Spending Percent Change
 
2008 $431 -50%
2007 $859 -5%
2006 $907 -4%
2005 $942 -6%
2004 $1,004 +3%
2003 $976 -6%
2002 $1,037 -1%
2001 $1,052 + 9%
2000 $968 + 3%
1999 $939 + 1%
1998 $928 + 34%
Davos's picture
Davos
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Re: Financial Distress
Long Beach and Los Angeles 

fujisan's picture
fujisan
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Posts: 296
Re: Financial Distress

Baltic Dry Index (BDI)

The index is based on professional assessments made by a panel of international shipbroking companies.

redoxide's picture
redoxide
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Posts: 1
Re: Financial Distress

Citigroup to cut 75,000 jobs. http://news.bbc.co.uk/1/hi/business/7733575.stm

will there be worse yet to come?

DeeDee's picture
DeeDee
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Re: Financial Distress

Have you any idea what the conversion rate would be from US $ to whatever the new currency would be for the US?

When monetizing the national debt begins and with interest rates probably high I think it would be best to have very few US$. Chris always says to pay down our debt. I still have to pay off the remainder of my house. I have the cash to do it but have never wanted to because of the income tax deduction that I receive. I guess my question is would I be further ahead financially to pay off my house with (what will probably be inflated US dollars in the future) or to wait and pay if off with the new currency? What are the pros and cons? Thx!

Taint Boil's picture
Taint Boil
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Re: Financial Distress

http://patrick.net/housing/contrib/schiff.html

This is a must see and a good laugh ... I guess Peter Schiff was right 

 

thefroggydude's picture
thefroggydude
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Re: Financial Distress
DeeDee wrote:

Chris always says to pay down our debt. I still have to pay off the remainder of my house. I have the cash to do it but have never wanted to because of the income tax deduction that I receive. I guess my question is would I be further ahead financially to pay off my house with (what will probably be inflated US dollars in the future) or to wait and pay if off with the new currency? What are the pros and cons? Thx!

You are playing a very dangerous game.  You assume that the coming inflationary period will be like the inflation of the 70's.  It won't.  In the 70's general prices, asset prices and wages kept chasing each other upward in an ever increasing spiral.  In the coming inflation (co-existing with deflation) prices of necessities will indeed increase but wages and asset prices of non-essentials will fall or remain stagnant.  The answer to your question is that you should pay down your debt.  You will not get a better return than investing in your own mortgage since when you think of it this is really a risk free investment.

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