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Market
mechanisms identified below apply variously to
markets, including stock, commodity, bond,
vegetable, and real
estate. All market participants are human and
subject in varying degrees and combinations to damaging and
distorting forces
that impact human psychology. |
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There are few freely-operating markets today. Price discovery, rational
evaluation of ask and bid prices, optimism for the
buyer's purpose, and questioning of the seller's financial needs combine
to confuse market participants, widen spreads, and
stifle deal making. |
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The world's largest
sink hole -- today's global credit clutch -- was caused
by exotic derivatives. Potential buyers and sellers
of these instruments failed to understand or value
the computer-generated instruments. They originally
carried valuations and certifications of valuation
stamped on each by respected ratings agencies. It is
now known that the ratings agencies issued
mal-ratings. Buyers failed to understand that they
were purchasing soon-to-be illiquid instruments.
Buyers failed to see that due to the complex mixing
of varieties of components and their tranched
characteristics, these derivatives would become
impossible to value, deconstruct, or trade. |
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Buyers and sellers have become unwilling to trade
many derivatives due to being unsure that they can reach a fair deal.
Both sides of a trade need to avoid bad deals. For several months
potential deals in the derivative markets have appeared bad for both sides. |
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Today's markets are
sink holes. They have floors and walls made of
quicksand. When these sink holes stop expanding,
when their walls and floors are no longer quicksand, when bottoms and sides stabilize
and become solid enough to stand a trade upon,
markets will be
begin to conform to orderly interactions wherein trading
will initiate cautiously. |
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Over recent months
market participants have learned that the government
will be a regulator that intends to inhibit free
market ability to discover valuations. Price
discovery enables buyers and sellers to
reach fair prices that are acceptable to both. Socialism and communism interfere with
all trading in all markets. Caps inhibit
risk takers from taking risk. Caps on potential
profits force risk takers to expand risk
premiums before doing deals. And, participants see
that just
about when economic recovery begins, increased taxation will
additionally inhibit price discovery, steal profit,
and change the risk-reward relationship of most
deals. |
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Just as
markets cautiously begin to open, two forces
will weigh in to reinforce inhibited trading styles
and deal making. One inhibiting force is increased
taxation. This force can be quantified, calculated,
and traders on both sides can factor numbers into
their bid and ask prices, thus identifying feasible
deals. |
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The second inhibiting
force is emotional. It is the broken psychology that
resulted from the quicksand uncertainties of recent
months and inestimable future months and years of
implacable government meddling. The
optimistic, risk-taking buoyancy that had been
dormant during the 1970s and was unleashed in August, 1982, has been
killed. It is dead. The opening
bell in 1982 signaled Americans and other economies around the world to
start trading. That bell started history's greatest
increase in global wealth. |
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The ascension of
socialism to the top of the US government ensures
that a serious bear market caused by corrupt,
unscrupulous global selling of derivatives certain
to have brought large losses will develop into a
global depression. |
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American real estate
was caught at absurdly high valuations during 2006 and 2007.
During 2007, markets perceived the real possibility that a socialist could come to
power in America. Socialism alive in America popped
over-inflated bubbles. |
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Markets had been bubblized and obfuscated by derivative
mechanisms, constant cash infusions by Fannie and
Freddie enabled by investment banking securitization
of sub-prime and Alt-A loans into derivatives having
AAA ratings that were being sold around the world to
lazy, unsuspecting buyers thinking they bought high
quality investments. The strong possibility of socialism
coming to America froze markets in their beleaguered
tracks. |
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Effectively, no
entity had a high enough credit rating to justify
lending to it. There evolved such market uncertainty
that no lender could be assured of receiving its
interest payments -- or even of having its initial
investment returned. |
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During 2008, lending
became more infrequent when lending institutions
perceived internally inhibited lending capabilities.
They were caught holding derivatives on their own
books. |
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Credit markets
locked. Institutions began to not trust their
correspondent institutions. In late 2008, when major
banks received billions of dollars of TARP funding,
they applied it to their own books -- effectively
paying themselves back to account for loan losses. |
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Today the
ramifications of socialism -- and even Soviet-style Communism --
make price discovery difficult for human minds. Uncertainly is
always lurking. Today buyers are
predators looking to scalp sellers. Sellers,
admiring their items for sale or under pressure to
sell, want deal values
higher than predatory buyers are willing to pay. Buyers believe
they should under-bid because they believe sellers
must eventually sell. In today's frozen, precarious
markets, deals often consummate at distressed
valuations or buyers and / or sellers walk away. |
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No market
contains
an intrinsic motivator that mandates its operation to return to
free-market capitalism. Following 2009, not even in
the US is there a guarantee of free-market
capitalism remaining in place. |
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It may be months,
years (or never) before liquid,
free-flowing markets return -- to America. |
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To doubt this is to
ignore today's eastern German economy and social
structure. The portion of Germany relevant here is pre-1989 East
Germany. After 20 years
and trillions of dollars invested by the new
German government, the IMF, and foreign businesses, old East Germany remains locked in
a welfare-demanding, quasi-functional condition. Real estate,
manufacturing, and service industries have never
opened to vibrant market activity and remain
stagnant in the old East Germany. |
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Stagnation exists
because the [East German] people were trained and
broken under Soviet-style Communism. They know not
of productive capitalism nor do they have confidence
in their own potential. They are welfare-bred and
accept stymied lifestyles, even when handed
opportunities galore by West German and outside
industries. |
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This is the breeding
that the current US administration plans to instill in
Americans. If they are successful, free capital markets and
profitable real estate deal-making are of the past. |
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Inflation Concern:
Potential For The Appearance Of Inflation
Following Economic Recovery: |
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There is no guarantee
of a true recovery within the next several years.
The US' Great Depression of the 1930s was filled with
government intervention yet lasted until it was
killed by WWII's industrial expansion starting in
1940. |
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The US Great
Depression of the 1930s did not contain the hundreds
of trillions of dollars of derivatives as now are
locked in unknowable valuation around the world. |
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The US Great
Depression of the 1930s did not suffer under an
unworthy, leveraged under-class as we do today.
There appear to be a large portion of the American
population that is ready to wait for BO to hand them
taxpayer and borrowed money, force lenders to reduce
principle and interest rates, and simply walk away
from their obligations. There are people who
exhibit a eerie propensity to abandon their homes! |
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The US will be
burdened with excess real estate. A considerable
portion of potentially excess housing was
mal-investment. These houses were built in locations
that never should have been considered for housing,
such as next to railroad tracks, too close to
highways, and more. Housing was built using inferior
materials which will not stand up over time. Both of
these housing groups will revert to their true
valuations -- lower than original asking prices.
This decreases most higher quality housing
valuations since there will always be people who
accept lower quality at lower price. |
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Of course not all
real estate is equal to all other real estate, but
massive excess supplies tend to approach fungibility
barriers in specific classes within given locations. Many people in today's nihilistic culture
care little about precisely where they live or how
they live. That fact tends to normalize large
portions of real estate across large areas. |
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Inflation is not
possible without relative high demand and
relative inadequate supply. in order for
inflation to develop, that unbalanced
combination must be spurred toward further imbalance
in the supply-shortage direction and / or the demand
direction by the facilitator, excess capital. Excess capital
alone will not produce inflation following a
recovery from the current global crisis. |
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Excess money in
consumers' hands, along with their psychology to
spend with little fear for consequences, is also
required to fuel inflation. Consumers will tend to save
rather than over-spend when recovery appears.
Consumers will be cautious and want to prevent
getting caught in the next downturn, so they will
tend to save. They will want to avoid returning to the hard
times of the recession/depression we are now
experiencing. |
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Businesses will be
slow to invest following the difficult times
inherent in the current deflationary phase. Consider
Japan, the world's second largest economy and its
mal-functioning since 1990. |
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Without relatively
high consumer demand, inflation cannot
persist. Consumers will save. Business investment
and borrowing will be inhibited. Many areas of the
nation will require several years to dissipate the
over-built supply of real estate, condos and
single-family units. |
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Increasing Tax Rates |
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The US government's need to fund the trillions
of dollars of outstanding debt combined with the
multi-trillions being added each year from 2009 onward
necessitate US borrowing from the global economy for foreseeable decades.
(In fact, there is no realistic scenario foreseeable
that will decrease US debt!) Potential lenders know and
understand that the US is nearer unsustainable
debt levels that ever before. (A debt equaling ~10% of GDP is not a
sustainable debt level, especially for the US with a shrinking GDP!) Potential lenders know that
they can increase rates received if they simply buy
less -- or threaten to buy less -- US debt. |
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Taxes will of
necessity increase to partially service US debt and
inhibit debt servicing costs. Tax increases
formulated for this reason (excuse) alone will take
money from consumers and businesses. This
effectively curbs investment and demand. This
portion of the tax burden increases the costs of all
goods and services in relation to each tax payer's
income. This portion of the tax burden decreases
business' ability to invest. |
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This portion of the
tax burden nets to pseudo-inflation from taxpayers'
(business and consumer) standpoint. It decreases
investment and demand for goods and services which
further inhibits production. The unpredictable
balance may or may not be toward inflation. Supplies
will tend to decrease in lowered investment
conditions while businesses and consumers have
decreased disposable incomes. |
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President BO will
budget for and attempt to increase taxes on business
and wealthy individuals. His attempt will further
inhibit the stock market and economic expansion over
the near and intermediate terms. Businesses will be
unable to pass increased taxes on to the consumer
for the foreseeable future. The economy will
stagnate under BO's budgetary plans even if passed
by Congress with little change. However, in the
post-phony "stimulus" period of mid-2009, his
budgeted tax increases will not easily pass through
even the Pelosi-Reid Congress. |
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Interest Rate
Conundrum -- Financial War |
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China and
other nations could decide to go to war against the
US the easy way. That is, go to
war with the stroke of a computer's keyboard, rather
than any traditional means simply by not purchasing US
debt. There is no bloodshed, no entreaties, no mess.
Just destruction of the US economy. |
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Sovereigns
can simply cut back -- or cease buying -- the amount
of US debt they purchase. If they cease funding US
extravagance and competition, they strangle the US
economy. The means are available
and could be implemented overnight. |
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By itself, forcing
sales of US government debt upon less-willing
sovereigns has the potential to
force domestic US rates up hundreds of basis points. |
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US Debt Conundrum --
US Financial Civil War |
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Consider the new US
administration's ultimate goal: Redistribution of
resources. It is conceivable that the new US
administration could decide to default upon US debt.
It has admitted little respect and it does not
treasure American values and standards. This
administration could willingly abandon the "Full
Faith And Credit Of The United States" axiom. |
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Of course the
administration would not call it a "default". It
would be declared a moratorium of repayment... or
some such obfuscation believable only by the
administration's followers, never in financial
circles or by foreign nation's banks and people. |
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The loss of the USA's
never-defaulted status would significantly increase
US borrowing costs for generations. and that after
this administration is increasing the US
indebtedness by trillions of dollars. |
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The dollar would be
vulnerable to devaluations and loss of status as the
world's reserve currency. This is financial civil
war. |
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Inflation -- that
genuine, daily, unending
1970s-style inflation -- is not Americans' worst
worry. Under socialism and massive national debt,
the American standard of living will get squeezed in
the social service spending -- interest rate vice. |
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Inflation Visualized |
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In order to analyze
the potential for inflation each of these items --
demand, supply, capital, opportunity costs, money
supply, and
interest rates -- must be accurately represented as
vectors. |
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A meaningful
discussion of potential inflation must include
vector representations of these items in order to
discover potential net inflationary and deflationary pressures.
Without representing each as a vector, or multiple
vectors, is to discuss, but never reach a useful
conclusion. |
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Each element --
a vector representation -- must be quantified in
magnitude and direction and then assembled in the
relativism of the universe of all forces that might
impact the relevant potentially inflationary sub-universe.
This must be contemplated before it is possible to
(perhaps) reach useful conclusions regarding
inflationary potentials. Updating this model is a
full time job. |
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There will be no
complete and accurate mechanism available for an extended period
following the recovery. That is likely years
away. |
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There is likely
little chance the US will avoid a period of high
inflation. But that can only arrive following a
prolonged economic recovery. Consumer and business
psychology regarding spending, saving and investment
will determine the magnitude of inflation when it
does develop. |
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Fungible Products &
Real Estate: |
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Even amidst today's
global credit clutch, we
observe smooth-flowing markets. Apparently
smooth flowing markets include stock, bond, and
commodity markets. |
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These markets are
today relatively free-flowing because they have
large
numbers of participants. Each participant has
immediate electronic access to buy, and sell, and
place limit orders, and wait for price changes. This
capability builds and fills order books, providing
liquidity, and enhancing additional interest in
participation. These markets generally have narrow spreads allowing
participants on both sides of potential trades to
easily stand by or hit bid and ask prices, thereby completing
deals. |
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These free-flowing markets
maintain their characteristics because of a key
differentiating feature: The items traded on these
markets are fungible. That is, in a commodity
market, a grain of corn is
specifically known to be a certain type, color,
etcetera. All
grains of corn of that type are interchangeable with
all other grains of corn of that type.
Stock exchanges operate similarly. All stock of
a specific company and specific class -- BAC, common, preferred, etcetera -- is fungible. Trading these
items on exchanges empowered with globally connected
telecommunications and electronic trading platforms
is relatively straightforward. Bid and ask prices
can be tossed in the electronic mixing machine,
matches can be derived, and deals struck -- in
milliseconds. |
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Real estate suffers
from the lack of fungibility. Real estate
markets are defined by major differentiating aspects,
including location, size, condition, and on and on
and on and on. |
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Buyers may not have
any idea why a property is up for sale. Sellers may
not know why a buyer wants his property. This
knowledge can be very relevant to the price
discovery process. Because it often is lacking,
potential buyers and sellers may easily read into
any bid or ask price several factors presumed to be
relevant -- but perhaps nonexistent, but likely
unquantifiable to the counter party. Some elements, such as need for cash, need for an
investment, and more, are easily contrived by buyers
and sellers. These presumed factors may or
may not be relevant to the person on the other side of the
potential trade.
A deal will be struck only at the point where the
bid and ask match in netting all factual factors
regardless of all irrelevant factors. |
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It is up to each side
of the potential deal to present sufficient evidence to the
other side to suppress certain tangible and
intangible factors and emphasize
others. It is up to each side to present its price,
make its case, and hold firm, walk away, or finagle
a deal. |
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So, as some real
estate, are today's complex
derivative markets around the world clogged for lack of fungible
products. There are seemingly unlimited supplies of CDOs, ABSs,
MBSs, and CDSs that are locked in limbo. Estimates
run into numbers beyond the tens-of-trillions of
dollars range. Most of
these derivative forms cannot be dissected to learn
of their content and thereby estimate their value. There
is no market to effectively value nor trade these
instruments. There are instruments such as CDSs
whose counter party has vanished as a viable
financial entity. |
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Optimism |
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There is reason for
more optimism today than yesterday. America is today one
day closer to the return of minimally-regulated,
free market capitalism... however many years it may
require to return -- or require to be won back. |