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| Bye Bye American Pie, II |
| The Day Wall St. Died |
| Jake Watts (Fotos: unasletras/Eugenia Montalván) |
 Mérida, Yucatán, 12 de noviembre de 2008. Don McLean’s classic song, American Pie (http://www.youtube.com/watch?v=vZszDTZKs_g),
marked the end of the easy rolling 50’s and 6o’s and the start of the
rough and bumpy 70’s. Today, we are at the end of another era. Gone are
the easy games of leveraged paper flipping and sky high bonuses. The
air is out of the balloon and the rip is too big to reflate. Long gone
are the investment casinos, we are staring down the narrow barrel of
tight money. Now, we are talking about saving, what a concept.What
happened? Start with real estate, the investment that never goes down
in value and keeps going up to the sky. At this time 25% of the
mortgaged houses in the US have mortgages larger than the value of the
property. They are “underwater” in financial parlance. Five states are
at the top of the list: Nevada 49%, Michigan 39%, Florida 29%, Arizona
29%, and California 27%. There is one zip code in California, the city
of Mountain House located 60 miles east of San Francisco, where 90% of
the houses are underwater. The overall number of residential properties
underwater is around 10 million. How long people will keep paying on an
underwater mortgage is anybody’s guess. Many have already voted with
their feet.
Next up for the big bubble pop are stock markets. The US, Asian and European stock markets are down around 40% on the year, with some glamour stocks like Las Vegas Sands, a could not miss authentic casino, down in market value for the year from 51 billion to 1.8 billion today. Many emerging markets are in even worse shape, Brazil down 60% and Argentina around 70%, not including currency losses. Many currencies have been hammered, including the Mexican and Argentine pesos.
How about the banking system? Well, here comes the 700 billion dollar bailout and now everybody wants to be a bank with American Express the latest to “convert” to a bank so it can have a shot at the government money. Guess what, the 700 billon is not going to be near enough. No transparency from the Federal Reserve, they will not say which banks received 2 trillion, yes trillion, worth of “loans” and what “collateral” was accepted.
And, our last bastion of manufacturing, the automobile industry, the three giants are all on the ropes. General Motors will run out of money in January and there is real chance they could just liquidate. The stock is worth less than a cheap bottle of wine, two bucks fifty. Ford and Chrysler are in about the same shape with auto sales headed down on a yearly basis by about 15%.
Then there is the derivatives market, financial “instruments” whose value is derived from the value of an underlying asset. In our wonderful world of paper profits, the underlying asset can be just about anything under the sun; commodities, bonds, exchange rates and mortgages, to name a few. The real fun starts when the value of the derivative contracts is actually greater than the underlying asset. Again, we are talking trillions of dollars worth of derivatives that have yet to be “unwound”. Derivatives have been a mainstay of the hedge funds; another can’t lose financial “investment”. Renowned financial wizard, Warren Buffett, rightly called them “financial weapons of mass destruction”.
My favorite is the carry trade where investors borrow low-yielding and lend high-yielding currencies. This has played havoc with the Japanese yen and Australian dollar when the latter lost value over-night in a spiral of panic selling.
So far, the only answer “the masters of the universe” have come up with is a fire hose financial rescue plan, with money flooding the world. Will this work? Not likely, it is like the old adage that you can’t push on a string; until the system is fully deleveraged it is good money after bad. In the end, maybe, just maybe, we can go back to saving instead of investing.
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