@ Supply Chain Management

From time to time, I check out Dr. Doom himself – Marc Faber

Breaking News on the wire about what is about to take place, or at least, what our wise leaders have in store for us – we can thank the Italian PM for at least letting the cat out of the bag – Berlusconi Says Leaders May Close World’s Markets. We all hate big mouths until we really need them to open just a teeny-weeny bit to let us – the people – know what’s going on…

Where are we at: The credit markets are frozen up and therefore there is very little if any lending (interbank or otherwise) going on. So much so that the Fed itself came out earlier this week with a lot of dough intending to "unclog" the credit market – Fed Tries to Unclog Credit Markets With $900 Billion.

The lending lockup is a key reason why the U.S. economy is faltering. Unable to borrow money freely or forced to pay a high cost to borrow, employers are cutting jobs and reducing capital investments. Consumers have retrenched.

To better open the lending spigots, the Fed said 28-day and 84-day cash loans being made available to banks will be boosted to $150 billion apiece, effective Monday. Those increases will eventually bring the amounts outstanding under the program to $600 billion.

Loans that will be made available in November to banks also will be increased to $150 billion each. That makes a total of $900 billion in credit potentially outstanding over year end, the Fed said.

The Fed also said it will begin paying interest on commercial banks’ reserves, another way to expand the central bank’s resources to battle the credit crisis.

I think the Fed created this current round of turmoil and panic – first by bailing out Bear Stearns and then letting Lehman go bust. When they "facilitated" the sale of Bear Stearns, they created a hazard by signalling to many that they were in the business of stemming this tide come hell or high water. The financial markets and super-intelligent and certifiably insane high-finance honchos heaved a sigh of relief as they found out that their shenanigans would be absorbed by – who else – us. When the Fed realized that many of these honchos were counting on such "facilitation", they had to let one fail. And in that game of musical chairs – Lehman came out the cropper.

Now, we’re experiencing the swing to the other side – relief transforms into fear that seems to have taken root not only within the credit markets but also the stock markets – for no good reason, you’d think. But what a tangled web we have woven – I’m guessing that numerous margin calls are being made to institutions and clients unable to unwind their positions in time, as the share prices plummet and no financing to be had to cover the calls, liquidate at all costs will kick in or has already kicked in. If these institutions and brokers have not already shut down their automated trading systems, or have these home-grown (rushed to market without proper testing) systems hiccup, falter and seize up – they’re probably finding out – at their peril, no less.

And so what is the solution – Close the markets -close everything down?

What happened to the bailout plan that had to be passed? It Passed – but is it Passe? Already?

"We need another bailout," says one.

I’m sure that we will hear that, "Capitalism has finally failed." And that "The third way is the only way."

"We need to close the markets down, if only for a day or two," says another.

And before I finish the post, the White House responds – White House dismisses idea of market suspension. It almost makes me believe that this wealth destruction is intentional – not in a conspiracy minded fashion, mind you. Here’s the basic scenario that I’m thinking off –

1. Begins with liquidity (you know, to solve the previous crisis) – all those dollars that went abroad in exchange for the productive capacity of the world – be it IT help desks, computer code or Walmart trinkets and what have you

2. Part of that liquidity went into inflating the real-estate bubble of the last few years. The other part was Fed policy of lowering interest rates post 9/11.

3. A large chunk of those dollars – spent and borrowed, came back into the US as "strategic" investments fuelling the bubble even further.

4. What complicates things further is that oil prices (and other commodities are sent soaring) increase because of greater demand (caused by the increased productive capacity around the world itself), devalued dollars and the disruptions of the Iraq war.

5. A number of investment banks leverage themselves several times over any sensible (What is sensible btw?) limit as they are being flooded with overseas cash – petrodollars as well as other sources. The flow of petrodollars is starting off booms in the middle-east as well.

6. Then the real-estate bubble shows signs of popping. And so does the commodities bubble. It’s crunch time. Highly levered banks are toast. Mortgage players are indeed mortified and subsequently mummified.

7. Wealth destruction takes places because of the crunch, not only stateside (i.e. retirement accounts and home values) but also overseas "strategic" investments are not that strategic anymore.

But my question is – Has the Fed closed the cycle/loop?

8. The Fed takes over all these toasted crisp banks and alleged investment securities for the worthless junk that they represent and burn up all those dollars that they printed in the first place.

And they’re already setting the next inflationary cycle in motion…

Too fanciful – I know!

And who do we have for presidential candidates this cycle – A change empty suit whose ideas of change were discredited in the last century and a doddering gramps whose notion of governance are well notions whose true meaning might unfold somewhere down the line. Pardon my snarkiness but we are not well served by either gentlemen. Nay, we are ill-served by the notions of leadership that abound.

Meanwhile, sleep easy, eat better – Value is value. It just takes a little time for it to shine through. As long as you’ve been chipping away at real value, the artificial wealth creation and destruction matters little. Run with the herd or use the herd to determine true value and you may not be able to stop at the precipice.

Shut the markets?, Credit Markets, A fanciful history!

Something of a required reading for these times… be it point or counterpoint.

America’s Great Depression

No, we’re nowhere near a depression but forewarned is forearmed as they say…

America’s Great Depression, Mises Institute

I’m sure that you’re drowning in the much bandied about term – Credit crisis or Credit crunch or liquidity crisis or the like. And I’ve come across some explanations of what event or series of events underlie this crisis. For a very good explanation of the problem and the failed bailout by the current Treasury Secretary Paulson, I refer you to this site – Understanding Tax.

As I pointed out in the previous post – Are you ready for the Supply Chain Shock?, a credit crisis is not a laughing matter and a serious credit crisis will send numerous shocks through the numerous supply chains of the world. The author of the article also points that out,

You might think of short-term money as the lubricant that keeps the world’s economic engine turning over smoothly. If there’s no lubricant,the engine freezes. No paydays, no goods on the shelves. Seriously.

So what is the purpose of the bailout bill? Let’s be clear about the probable scope of the current crisis – it’s not going away tomorrow if the bill is somehow passed in the House.

Note that Mr. Paulson’s proposal was not intended to solve the teaser-rate mortgage problem, either now or in the future. In the transactions that created the teaser-rate mortgages in the first place,both parties made bad decisions – the lender and the borrower. Mr.Paulson’s proposal was not intended to help either. One of its unavoidable side effects, however, was to relieve lenders of the consequences of their bad decisions, while leaving borrowers to suffer the consequences of theirs. This made it politically less palatable.
In addition, at least $500 billion more of teaser-rate mortgages are scheduled to reset over the next several years. In all likelihood, they too will go into default and become toxic waste. Nothing in Mr.Paulson’s original proposal was intended to do anything about this next$500 billion installment – or, indeed, to prevent lenders from making more teaser-rate mortgages in the future.
Similarly, Mr. Paulson’s proposal was not intended as a general Wall Street bail- out, although to some extent it would have had that effect.Note that the outstanding overhang of credit default swaps alone is estimated to be between $45 and $60 trillion – three to four times the size of our annual gross domestic product. The requested $700 billion, although the single biggest appropriation request in U.S.history, was miniscule when compared with the toxic waste problem as a whole. Mr. Paulson’s proposed solution was to cost just 1% of the size of the problem and was aimed only at a small part of that problem. (It is unnerving to realize that the U.S. government – the