Sent: Tue 1/22/2008 2:06 AM
Subject: Rant: Most Analysts are idiots

Hi ------,


Most Analysts are idiots. Sorry, but I keep reading about "the fundamentals are strong", "fairly tight United States job market", etc.

What are these guys thinking???

The entirely financial system is insolvent. Banks have been using 3rd parties to get liabilities off their books in order to avoid reserve requirements and regulations. Here are just a few of the ways banks offloaded liabilities onto the third parties:

*** Through SIV.
*** Through bond insurers.
*** Through credit default swaps with hedge funds.

Besides allowing banks to overextend themselves into ever riskier markets (subprime), these third parties increased the systematic risk because they are not regulated and have no reserve requirements. All this means there are billions (if not trillions) of dollars of losses from insolvent counterparties that have yet to be recognized.

Against this backdrop, how can anyone say there are strong fundamentals?

Sorry, I just needed to get that out.

Love,


Eric



---------------------------------------------------
Markets Plummet Worldwide, but Is Investors’ Panic Justified?
By LANDON THOMAS Jr.
Published: January 22, 2008

The fear is spreading.

For months now, investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the credit squeeze plaguing the United States market.

But the broad international sell-off on Monday — and the prospect of a steep market decline in the United States on Tuesday — raised fresh concerns that a looming recession and the fallout from subprime mortgages could have global repercussions.

Some analysts saw the sell-off, with leading indexes off 4 percent to 7 percent worldwide, as being driven by fear more than by fact.
“I don’t think it’s warranted by the fundamentals,” said Edward Yardeni, an independent strategist. “The resilience of the global economy in the face of a credit crunch has been impressive.”

Mr. Yardeni warned, however, that in a time of panic and fear, less attention is paid to fundamentals, like a fairly tight United States job market and strong growth and the extraordinary buildup of foreign exchange reserves in emerging markets. The result is panic selling and the prospect of a global recession. “People are creating the financial violence that they hoped to avoid,” he said.

http://www.nytimes.com/2008/01/22/business/22stox.html?_r=1&oref=slogin

Sent: Fri 2/1/2008 10:39 PM
Subject: Drastic lending cutbacks to consumers have begun

Hi ------,


The stock market and the economy seem to be living in different worlds. The economic data/financial news increasingly confirms that the US is rapidly sliding into an unusually severe recession, Meanwhile the stock market is rallying. I have no idea how long the market can keep rallying while ignoring reality (rally seems driven by short covering and momentum trading). One thing I know for certain: the stock market hasn't priced in a recession.

Drastic lending cutbacks to consumers have begun

I offer two pieces of evidence of this:
1) Credit cards are to be withdrawn from 161,000 Egg (Citigroup subsidiary) customers who the company believes to be increasingly risky. (story below)
2) ---------‘s American Express card's credit limit was lowered from ------- to ------- this week.

In the next few weeks, I expect us to hear more about cutbacks in lending. I also expect to hear a lot more about massive layoffs (there were quite a few firms laying people off last month). Finally, all the major bond insurers should be downgraded before the end of the month (Moody announced that its outlook for the industry is worsening and it will complete its review of MBIA by mid-February, if not sooner).

Where is market heading?
Next few days: No idea
Next few weeks: off a cliff

Love,


Eric



Egg cracks down on bad customers
Egg has given some customers 35 days notice

Credit cards are to be withdrawn from 161,000 Egg customers who the company believes to be increasingly risky.

The provider is writing to 7% of its customers to give them 35 days notice of the withdrawal.

Cardholders will still be able to continue with minimum monthly repayments but will not be able to use their card after the deadline.

The move comes after a "one-off" review after the internet brand was bought by Citigroup last year.

In a statement, the bank said it was not demanding immediate repayment of balances or making any changes to customers' terms and conditions, or their interest rates.

The 35-day notice period starts on receipt of the letter, which also provides details of how to appeal against the decision. Letters will be followed up with emails to customers.

Review

Internet bank Egg was sold to US banking giant Citigroup for £575m in May 2007 by life insurer Prudential.

It prompted the review which picked out customers considered to have "a higher than acceptable risk profile".

The 161,000 customers whose cards are being withdrawn had a deteriorating credit profile since they had signed up, according to Egg spokeswoman Rachel Roe.

This could include those who have missed repayments or exceeded their credit limit.

The decision could be a signal of the tightening credit market, with consumers facing more difficulty in repaying debts and cutting spending.

But Ms Roe said the appraisal was the result of an unusual set of circumstances owing to the change of ownership last year.

"There are no plans for a future review," she said.

Sent: Fri 2/8/2008 2:02 AM
Subject: *****The Financial and Economic Bust of 2008 - The Destruction of Capital*****

Hi ------,


The article at the end of this email really hits it on the nail.

What I believe:

There is an enormous unregulated, off balance sheets credit market made up of credit default swaps and other exotic derivatives. This invisible credit market has done two things over the last twenty years:

1) It has been responsible for the easy credit, and this easy credit boosted the economy, home prices, and has allowed consumers to go debt crazy through all kings of loans (credit cards, car loans, home equity loans.)
2) It has become the credit bubble of unimaginable proportions. A financial bubble to end all bubbles. Worse of all this bubble is completely hidden, since it is unregulated and off balance.

FOR TWENTY YEARS, THE CREDIT BUBBLE HAS GROWN AND AMERICA HAS ENJOYED THE BENEFIT OF ARTIFICIALLY EASY CREDIT. LAST SUMMER, THE CREDIT BUBBLE BURST. AMERICA IS NOW SHIFTING TO A PERIOD OF ARTIFICIALLY TIGHT CREDIT. With the availability of credit shifting into reverse gears, companies, consumers, local governments, etc are now facing extremely hostile lending conditions and sky high interests rates. Say goodbye to leveraged buyouts that have been so popular (a perfect example of the credit bubble).

***I expect a destruction of wealth equaling or exceeding that experienced during the last great depression. BOTH STOCKS AND BONDS ARE GOING TO FALL. Since the credit bubble was responsible for lifting assets prices all over the Earth, no market will escape the coming financial cataclysm.***

The decline in the stock market over the last few months is nothing compared to what is ahead. Before the summer is over, I expect everyone to be referring to this as the second great depression.

Here is an example of what I meant when I talk about the invisible credit bubble:

"Bill Gross, chief investment officer at Allianz SE's Pacific Investment Management Co, or Pimco, recently told investors that if defaults in investment-grade and junk corporate bonds this year approach historical norms of 1.25% (versus a mere 0.5% in 2007), sellers of default insurance on such bonds could face losses of $250 billion on the contracts. That, he said, would equal the losses some expect in the subprime-mortgage arena.

With no central trade processing of credit-default swaps, defining trading-partner risks can be a Herculean task. Mr. Buffett learned the difficulty of unraveling such complex instruments in 2002 when he directed General Re Corp., a reinsurer that had been acquired by his Berkshire Hathaway Inc., to pull back from the business of these swaps and other derivatives. It took General Re four years to whittle the business from 23,218 contracts to 197 by the end of 2006.

"Doing so involved tracking down hundreds of counterparties to General Re's trades, many of which Mr. Buffett and his colleagues had never heard of, he says, including a bank in Finland and a small loan company in Japan, to name just two. One contract, Mr. Buffett says, was designed to run for 100 years. "We lost over $400 million on contracts that were supposedly" safe and properly priced, "and we did it in a leisurely way in a benign market," Mr. Buffett says. "If we had to unwind it in one month, who knows what would have happened?"
http://declineandfallofwesterncivilization.blogspot.com/2008/01/credit-default-swaps.html

I can't understate how bearish I am on the market right now.


Love,

Eric


The Bush Financial and Economic Bust of 2008 - The Destruction of Capital

Sent: Thu 2/21/2008 2:51 AM
Subject: ******************---Deflation or Inflation?---******************

Hi ------,


I don't know if you noticed, but, in all the emails I sent you, I have never really talked about deflation, inflation, or the value of the dollar. The truth is, until today, I was divided about these issues.

The bearish conventional wisdom

As you may have notice in a lot of the pessimistic articles I emailed you, the consensus among bearish analysts is that the credit crush will:

A) Make the stock market crash
B) Force the fed to drastically slash rates (to 1% or 2%)
C) Lead to inflation or hyperinflation

Because of these beliefs, most of today's bearish commentators advise putting some or all of your money into foreign currencies and commodities, mostly by investing in gold. While I have always agreed that the credit crush would crash the market and cause the fed to cut rates, I always doubted the last bit bearish conventional wisdom: inflation.

Deflation

I doubt the conventional wisdom about inflation for three reasons

1) History

Looking to the past, I see only two periods which closely mirror to today's financial environment: America in 1929 and Japan in 1989. Both of these periods had all today's economic ills: falling housing prices, bad loans, crashing stock markets, etc. However, following the crashes in both 1929 and 1989 were two periods monetary deflation, not inflation. The bearish consensus about inflation doesn't hold up these historic examples. The fundamental truth is that all recessions have an inherit deflationary effect.

2) Economics

"Mainstream economists overwhelmingly agree that high rates of inflation are caused by high rates of growth of the money supply." --wiki

If inflation is caused by growth of the money supply, does it make sense to expect both a colossal destruction of wealth and inflation? No.

2) The myth of decoupling

Part of the bearish case for inflation rests on the argument that demand in emerging markets will force prices higher in spite of the slowdown in the US. This is based on the myth of decoupling and is false. The idea of that the world's economies have/are decoupling is incredibly stupid. The truth is that the exact opposite has happen:

*** Improvements in communications and transportations allow for the easier flow of good
*** Financial institutions around the world are more closely linked than ever. The best example of this libor. If the world is decoupled, why are so American morgages linked to London's Interbank Offered Rate? (The same people that argued that financial derivatives are great because the spread risk around the world are also the ones saying that the world economies are decoupled. Go figure)

If the global economy was a person, America would be the right arm. And If your right arm develops a gangrene (credit crush), you have a problem. In fact, if your right arm develops gangrene (credit crush), it probably means you weren't very healthy to begin with.

---------------------------------------------------
What I expect will happen

Phase I — Inflation

Until the stock market bottoms out, I expect inflation to continue. There are several reasons for this:
*** Expectations: when the fed cuts rates, people expect inflations, and inflation expectation are a self-fulling prophesy
*** The Fed: although most of the money is being destroyed far faster than the fed can print
*** Demand in Emerging markets: Although emerging markets won't be speared by the credit crunch, the effects will be delayed. This means that the worse of the global will probably hit places like China only after the US's stock market has finished crashing.
*** Speculations: when the credit crunch hit over the summer, the destruction of wealth scared investors out of the credit markets. A lot of this money was poured into stocks, which is why the market was hitting new all-time highs in October. Now that the credit crunch is scaring investors out of stocks, a lot of them are flocking to commodities (gold).

Phase II — Deflation

I expect the stock market to bottom out at around the same time as gold tops off. Here is why:

*** The destruction of wealth: The fed doesn't control the money supply. The money supply is actually created by the financial institutions the fed interact with. The financial institutions took what the dollars given to them by the fed and then leverage it out into loans. The availability of these loans represents the true money supply. Leading up to the credit crunch, financial institutions took each dollar and leveraged it out into 100 dollars of loans through there off balance sheet facilities. Now financial institutions are deleveraging that 100 dollars of loans, and the fed can't print money fast enough to replace what is being lost.
*** Inflows of money will end: once stocks stop falling, the inflows propping up commodities will weaken substantially.
*** Devastation in Emerging markets: I don't think people appreciate how unprepared emerging markets are for a depression. Here in America, we have already had a great depression so are more equip to weather its effect. Places like India and China, however, are not. India and China don't have unemployment insurance for example. Most of India's and China's populations (being young) have never experienced an economic downturn, and their political institutions are substantially weaker than here. I mean, stop and think of what would happen in India and China if they experienced depression. The result would be a complete economic meltdown and anarchy. So while things will get very bad here, they are going to get much worse over in the third world. And when China, which accounts for so much demand in terms of commodities, self-destructs demand is going to drop like a rock: deflation.

---------------------------------------------------

That concludes my little analysis of inflation/deflation. What did you think of it?

Love,

Eric

Sent: Thu 2/28/2008 11:27 PM
Subject: *******Last email for a while*******

Hi ------,


This will be my last email for a while, but not because I am more optimistic on the stock market. There is so much bad news everyday that it is impossible for me to keep up with it. I will only email if there is something significantly worse than normal. Until then, this will be my last email.

I think I have already managed to convey my level of concern about the economy. Here are a few last comments:

About Banks

Don't be over the FDIC insured limit at any bank.
Not right away, but within the year I expect Citibank and other banks to reach the brink of insolvency. Whether or not they ultimately survive, it is highly possible that depositors lose access to their savings (there will probably be runs on banks). Although FDIC will step in and reimburse depositors, access to cash might be cutoff for periods of time (up to several weeks depending on speed and size of bank failures). Make sure you have some cash on hand.

About inflation

It might be a safe bet to buy some gold to hedge against inflation in the short term. For at least the next 3 to 6 months, inflation is going to skyrocket. However, longer term (1+ years) I bet on deflation. China's and India's economies are going to get crushed, and, when that happens, oil, gold, grain, and other commodities are going to drop like rocks. So within 6 to 12 months, I expect deflation to begin, so I don't recommend investing too heavily in commodities.

About stocks

Stay away from them. I expect a drastic decline in the next few weeks, followed by another drastic decline later this year as banks start failing. Before the market reaches bottom, stocks as a whole might fall another 60%, and some stocks will be completely wiped out (Citibank). The true bottom of the market will only happen near the end 2008 or later, which might provide a golden investment opportunity. Keep in mind that investors during the great depression lost a lot of money by jumping into stocks too early (remember, I expect at least 2 more drastic declines).

Good luck. I hope you found my emails useful.

Love,


Eric