How far will you ride the market down ?

[Gone4Good]

Only because deposits were not insured. It's not suprising that if everbody's bank is going under and individuals lose all their money, that you are going to have fundamental issues with your economy.

I'm skeptical that a collapse today would have the same result.

Insured deposits are a relatively small part of the financial universe.

In an earlier post I mentioned that Citigroup alone has $1,800,000,000,000.00 in liabilities. Only about $800B are deposits, not all of which are insured. That leaves a potential $1 trillion loss for various participants in the economy. What do you think will happen to the financial system once we know there are $1 trillion in losses to be recognized but we don't know where exactly they are? The answer . . . everything gets sold and all cash is withdrawn from everywhere. Every institution, financial or otherwise, would be suspect.

That $1 trillion doesn't even include the entire undfunded portion of revolving bank lines that Citi is on the hook for. Countless companies rely on these bank lines for liquidity. Without which they'd be hosed.

When Lehman went bankrupt companies started drawing down on their revolving credit lines to make sure they'd have access to the cash. Lehman was such a small player in the bank loan market compared to Citi (a "Money Center Bank"). If Citi went down, every bank on the planet would be flooded with requests to draw on the lines . . . a.k.a. a run on the bank.

Lights out, game over, thanks for playing.

 

[ziggy29]

And Don't Lend $ to the Kids or Grandkids.. They can come Live with you instead..That usually changes their minds and go out a get extra Jobs or cut their Cable and Cell Phone Bills....LOL

Actually, this mess has my mom more interested in gifting a portion of her estate to her heirs while alive than ever. I'm trying to convince her not to go overboard with it, but in all honesty good estate planning would probably dictate that she should start transferring some now. All bets are off on the estate tax exemption moving forward, I think, so maybe it's better to transfer some under the annual gift tax limit while we KNOW it's tax-free...

 

[tulak]

Insured deposits are a relatively small part of the financial universe.

In an earlier post I mentioned that Citigroup alone has $1,800,000,000,000.00 in liabilities. Only about $800B are deposits, not all of which are insured. That leaves a potential $1 trillion loss for various participants in the economy. What do you think will happen to the financial system once we know there are $1 trillion in losses to be recognized but we don't know where exactly they are? The answer . . . everything gets sold and all cash is withdrawn from everywhere. Every institution, financial or otherwise, would be suspect.

That $1 trillion doesn't even include the entire undfunded portion of revolving bank lines that Citi is on the hook for. Countless companies rely on these bank lines for liquidity. Without which they'd be hosed.

When Lehman went bankrupt companies started drawing down on their revolving credit lines to make sure they'd have access to the cash. Lehman was such a small player in the bank loan market compared to Citi (a "Money Center Bank"). If Citi went down, every bank on the planet would be flooded with requests to draw on the lines . . . a.k.a. a run on the bank.

Lights out, game over, thanks for playing.

Maybe, but I believe the losses would be a lot less than a trillion (not all of the liabilities are worthless). You'd let them fail, government would back up losses (instead of throwing cash at the problem) and take the hit once.

It wouldn't be pretty, but it also wouldn't prolong the pain as we are doing now...

 

[audreyh1]

We have just gone through a decade and a half when it was easier to make money with financial tricks than it was making and selling real stuff. Not just for the banks, either. For lots of companies and people as well.

Most of that’s gone away. It’s not now so easy to just make money out of nothing, and a lot of the wealth generated is either gone or going away.

Right now this is bad – but later it will be good. Kind of like when you say to you kids “you’ll understand this when you are older”

It’s bad right now because income and wealth is being lost and there is economic confusion. That is causing financial hardship. It’s also bad because of the uncertainty and fear that results for the absence of a clear vision of a positive future. More people are affected by uncertainty and fear than financial hardship.

It’s good because businesses and people will now turn away from this artificial financial stuff and get back to making and selling real stuff. The work force will be larger as more people work longer to fund their lifestyle and retirement. This keeps a lid on labor costs and helps keep inflation under control. It also stimulates demand because working people consume more than non-working people.

It’s good for the US because we import much of the real stuff we consume, so the weakening in demand affect others more now and later the strengthening in demand will create more opportunity for US businesses to satisfy.

Businesses that aren’t competitive will fail and be absorbed by their competitors. This will help boost productivity – and also profits. It becomes a whole lot easier to distinguish effective business leadership and management from the mediocrity and rest of the herd.

The relationship between risk and reward becomes clearer and strengthens. That is a very positive thing for equity investors.

This isn’t happening yet, and it may be too soon to be fully exposed to equities, but the writing is on the walls. If the past decade (and a half) is the lost decade, this upcoming decade will be the revitalization of capitalism. And it will be great for investors.

Terrific post! Just read it again today.

Audrey

 

[audreyh1]

I went to my Vanguard account ready to sell and go to all cash and I could not pull the trigger . I did sell some stock that I was tired of owning . I now have 10 years in cash and safe investments and I've turned off CNN and went back to enjoying my life and trying to ignore the markets . I was spending too much time worrying about them and I have found out that the things you worry about rarely happen . It is the other crap that ends up happening and changing your life .

Good for you! Now that was a rational action. This is not an all-in or all-out proposition. It's really a short-term versus long-term needs tradeoff, and you just need to figure how to cover yourself short-term. Feeling like you can go back and live life and ignore the markets indicates you have achieved your objective! And you didn't have to go all cash to do it.

I rebalanced on the way down, but I held the line at crossing under 11 or so years expenses in cash + bond funds. Not all the bonds in my bonds are super safe, but enough are that I feel like I am covered for a decade easily. Plenty of time for my equities and lower grade bonds to recover and in the meantime bring in those yields! Plus I have another two years in money markets and CDs outside my investment portfolio.

Audrey