It looks like the dollar is losing value

[bigrebnc1775]

William

That has been said for awhile. Why do you think it will happen over the next 12 months? I don't know, you might be right. I'm just enquiring about your reasoning.

The rush into junk bonds here is really picking up speed, insolvency at the state level is becoming a bigger problem (remember the mantra short treasuries and go long munies?) and the worries about EU and Japanese insolvency. I estimate only a 20% probability per year of blow up for each of those three cases or basically a coin flip that none will pop. However there are all sorts of other minor probabilities of a credit crisis that will trash the US bond market: gridlock in DC, a major oil find that destabilizes the ME and Latin America and so on for a 3 to 1 odds that way.

So what happens if junk bonds, munis, Japan and the EU straighten out? There will be a flight from safety and treasuries will sink lower over the next year causing a funding crisis. That is the same cause I am imputing to an external crisis: a sharp decrease in rates followed within weeks by a flight from safety towards higher returns. A series of recoverable crises in rapid succession is the only way to maintain current rates without de facto devaluation and I don't see that being possible. But I will assign lucky and smart at the Fed a probability of 5% for odds of 19 to 1 that there will be a bond crash in the next year. Being lucky and smart only works indefinitely in movies.

this wreaks of hackjobs who think they have an mathematical angle on the sportsbooks. not credible.

Explain please

 

[antagon]

The rush into junk bonds here is really picking up speed, insolvency at the state level is becoming a bigger problem (remember the mantra short treasuries and go long munies?) and the worries about EU and Japanese insolvency. I estimate only a 20% probability per year of blow up for each of those three cases or basically a coin flip that none will pop. However there are all sorts of other minor probabilities of a credit crisis that will trash the US bond market: gridlock in DC, a major oil find that destabilizes the ME and Latin America and so on for a 3 to 1 odds that way.

So what happens if junk bonds, munis, Japan and the EU straighten out? There will be a flight from safety and treasuries will sink lower over the next year causing a funding crisis. That is the same cause I am imputing to an external crisis: a sharp decrease in rates followed within weeks by a flight from safety towards higher returns. A series of recoverable crises in rapid succession is the only way to maintain current rates without de facto devaluation and I don't see that being possible. But I will assign lucky and smart at the Fed a probability of 5% for odds of 19 to 1 that there will be a bond crash in the next year. Being lucky and smart only works indefinitely in movies.

this wreaks of hackjobs who think they have an mathematical angle on the sportsbooks. not credible.

Explain please

i'm regularly harangued by broke sportsbetters looking to bankroll their latest theory on a horse, stock car or spread with a day with one of my shovels or rolling around under my fords. this post bears the hallmarks of their pseudoscientific logic.

first, the precise but arbitrary probability is not credible to me, whatsoever. next, brewing a perfect storm from carefully picked co-factors and paying no acknowledgment to the capacity for markets and regulators to react or intervene is not credible. if you want to welcome the implications of the post, you could willfully suspend the disbelief which comes to mind when william crunches odds on his 'minor probabilities', but this isn't a sci-fi flick. i don't see the point.

 

[RetiredGySgt]

What does this mean to the People of America? What will happen if the U.S. dollar is considered actually worthless?

Currency Exchange Rate Quote - Canadian Dollar to US Dollar(/CADUS) - MSN Money

Actually a weak dollar is good for trade. It will only be worthless if we keep on spending 50 cents on every dollar of Government money borrowed.

 

[william the wie]

this wreaks of hackjobs who think they have an mathematical angle on the sportsbooks. not credible.

Explain please

i'm regularly harangued by broke sportsbetters looking to bankroll their latest theory on a horse, stock car or spread with a day with one of my shovels or rolling around under my fords. this post bears the hallmarks of their pseudoscientific logic.

first, the precise but arbitrary probability is not credible to me, whatsoever. next, brewing a perfect storm from carefully picked co-factors and paying no acknowledgment to the capacity for markets and regulators to react or intervene is not credible. if you want to welcome the implications of the post, you could willfully suspend the disbelief which comes to mind when william crunches odds on his 'minor probabilities', but this isn't a sci-fi flick. i don't see the point.

I'll simplify for you.

no crunch = a continuing rush to risk for greater return leading to a bond bear when risk premiums sink below risk adjusted inflation adjusted return of zero because only idiots will be in the bond markets and massive leverage will be needed to get an aftertax return.

Crunch survivable = at this point will reinforce risk seeking of returns and leverage because of lower interest rate policies and QE leading to the above.

Crunch non-survivable = need I say more?

As to probabilities consult Reinhardt and Rogoff's "This Time is Different" and/or Graham and Dodd's "Security Analysis" and do the math. Don't forget Sovereign Wealth Fund returns in terms of individual funds for other factors. But I don't suspect a 50 page post filled with equations would be very readable. Do your own research and don't be an ignorant, innumerate smart ass who doesn't recognize summarized quotes from noted analysts when he sees them.

 

[antagon]

i'll make it simple for you, william, states don't go fleeing from bonds over returns, and they're not idiots. i haven't picked up a calculator on the topic and contend that your suggestion that doing so will come any closer to reality is not necessarily credible, either. a holistic appreciation for the factors at play must be sanely undertaken first. have you considered how inter- and intra-central banking might mitigate the extremes of the private reactions you bank your conclusions on?

 

[william the wie]

Illinois has been in partial default for over year.
Mississippi is still in default from the panic of 1837.
If you meant nations Iceland, Argentina and Russia are in default now.

As to mitigation Minsky's Instability Hypothesis refutes its longrun possibility, Mandelbrot's "The (Mis)behavior of Markets" also demonstrated this refutation in the now defunct US Onions futures. The onions futures market blew up in a price explosion in the 1950s for no known reason and futures trading in that commodity is banned still. Continuous successful mitigation encourages seeking higher rewards through greater risk the same path that led to the junk bond crisis, the S&L crisis, the dot com crisis and the housing bust. These outcomes are inevitable because much of the prerequisites of risk management involve stuff that does not exist such as the following:

An absence of Knightian uncertainty which requires approximately 200 data points for all inputs and outputs within the range of variability as in 200 years of sales data. That is kind of rare because the average listed security involves companies with a probable life of about 20 years so seasonal analysis for example generally involves very low certainty estimates. This prerequisite is never met so there is a continuous discovery of finding out that correlation is not causation which sort of interferes with mitigation. Thus the absurd claim of Long Term Capital Management that they had hit two 25 sd events in a row (0.15 e25 squared) when they went belly up. Their team was made up of mostly current and former ivy league economics professors including two Nobel Prize winners and a former Fed governor (central banker) who were extremely aware of Knightian uncertainty, which leads to me my second point.

Measurement and computing tools that avoid introducing error. But since 8 decimal place accuracy for 3 variables was what created the Chaos branch of math this prerequisite is never met. What can be said is that chaotic oscillation in N dimensions is the normal state of affairs. This had not sunk in for economists in 1998. Chaotic in this case means that the data is sufficiently misleading to clean your clock.

So how can mitigation work continuously when the tools needed to use it do not exist?

 

[antagon]

so, what?

 

[william the wie]

so, what?

It means your counter-hypothesis is mythical. If you had run the numbers you would not have attempted your refutation because you would have looked and seen that successful mitigation leads to more frequent and larger crashes as has been the case since roughly 1970.

 

[loosecannon]

that successful mitigation leads to more frequent and larger crashes as has been the case since roughly 1970.

while I tends to agree with antagon's basic argument I also fully agree with the statement above.

But in the short term, mitigation has also fended off a real correction since at least 1990. Who is to say a bond bubble can't be supported another few years or a decade.

 

[antagon]

so, what?

It means your counter-hypothesis is mythical. If you had run the numbers you would not have attempted your refutation because you would have looked and seen that successful mitigation leads to more frequent and larger crashes as has been the case since roughly 1970.

i mean 'so what' like what numbers make you think that iceland's fate is anything like the state of the US and the dollar. i'm not impressed by running the numbers, william. the conclusions about collapse substantiated by states like iceland and argentina indicate to me that 'the numbers' (or those which you've accounted for) fail to account for the alternative outcomes which i attribute to major reserve currencies supported by major, diversified economies like the US and the dollar.

i refute the idea that mitigation leads to more volatility or more frequent crashes -- quite the opposite. i can't, however, deny the potential for bigger bubbles where the natural propensity for corrections is forestalled.

 

[antagon]

Illinois has been in partial default for over year.
Mississippi is still in default from the panic of 1837.
If you meant nations Iceland, Argentina and Russia are in default now.

As to mitigation Minsky's Instability Hypothesis refutes its longrun possibility, Mandelbrot's "The (Mis)behavior of Markets" also demonstrated this refutation in the now defunct US Onions futures. The onions futures market blew up in a price explosion in the 1950s for no known reason and futures trading in that commodity is banned still. Continuous successful mitigation encourages seeking higher rewards through greater risk the same path that led to the junk bond crisis, the S&L crisis, the dot com crisis and the housing bust. These outcomes are inevitable because much of the prerequisites of risk management involve stuff that does not exist such as the following:

An absence of Knightian uncertainty which requires approximately 200 data points for all inputs and outputs within the range of variability as in 200 years of sales data. That is kind of rare because the average listed security involves companies with a probable life of about 20 years so seasonal analysis for example generally involves very low certainty estimates. This prerequisite is never met so there is a continuous discovery of finding out that correlation is not causation which sort of interferes with mitigation. Thus the absurd claim of Long Term Capital Management that they had hit two 25 sd events in a row (0.15 e25 squared) when they went belly up. Their team was made up of mostly current and former ivy league economics professors including two Nobel Prize winners and a former Fed governor (central banker) who were extremely aware of Knightian uncertainty, which leads to me my second point.

Measurement and computing tools that avoid introducing error. But since 8 decimal place accuracy for 3 variables was what created the Chaos branch of math this prerequisite is never met. What can be said is that chaotic oscillation in N dimensions is the normal state of affairs. This had not sunk in for economists in 1998. Chaotic in this case means that the data is sufficiently misleading to clean your clock.

So how can mitigation work continuously when the tools needed to use it do not exist?

oh, brother. it can indeed be said that n dimension oscillations are run of the mill.

back in our dimension, i dont think that anyone is looking to mitigate any and all volatility all the time. to think the dollar is going to evaporate via your simple mechanism of fleeing investors is not wholly plausible, however. it assumes no response from central banks. no bump on interest rates in the face of inflation. no disposition on the masses of assets which the fed's assumed. no balancing effect from reserve investors not likely to flee to equity markets. it discounts the value which a weaker buck in reasonable volatility could afford a productive economy like the US.

i furthermore can't reconcile what onions, mississippi, and shady arbitrageurs like ltcm has to do with your argument.

 

[loosecannon]

WTF?

US Dollar Index Future - Spot Price, DXY Index Quote - (NASDAQ) DXY, US Dollar Index Future - Spot Price Index Price

 

[Toro]

this wreaks of hackjobs who think they have an mathematical angle on the sportsbooks. not credible.

Explain please

i'm regularly harangued by broke sportsbetters looking to bankroll their latest theory on a horse, stock car or spread with a day with one of my shovels or rolling around under my fords. this post bears the hallmarks of their pseudoscientific logic.

first, the precise but arbitrary probability is not credible to me, whatsoever. next, brewing a perfect storm from carefully picked co-factors and paying no acknowledgment to the capacity for markets and regulators to react or intervene is not credible. if you want to welcome the implications of the post, you could willfully suspend the disbelief which comes to mind when william crunches odds on his 'minor probabilities', but this isn't a sci-fi flick. i don't see the point.

Any and all investment theses are based on the assumptions of probability, whether implicit or explicit. When I hear someone like william say there is a third chance of this and a half chance at that, I don't see it as an exact arbitrary prediction to the fifth decimal point of a future situation but instead a rough approximation as he sees it. He very well may be wrong - and all of us who have done this for a long time have been wrong many times. However, you simply cannot invest without there being an assumption of probabilities regarding a future event. If you aren't able to roughly approximate future events, or mitigate your inaccuracies, then you will do very poorly at investing.

 

[Toro]

back in our dimension, i dont think that anyone is looking to mitigate any and all volatility all the time. to think the dollar is going to evaporate via your simple mechanism of fleeing investors is not wholly plausible, however. it assumes no response from central banks. no bump on interest rates in the face of inflation. no disposition on the masses of assets which the fed's assumed. no balancing effect from reserve investors not likely to flee to equity markets. it discounts the value which a weaker buck in reasonable volatility could afford a productive economy like the US.
.

It is my opinion that the dollar will remain the reserve currency for a very long time, if for no other reason that there is no alternative. I can give you many other much more viable reasons, but frankly, there really is no alternative.

Having said that, per the above post regarding probabilities, I think the probability of the dollar collapsing is much higher than it was a decade ago, and much higher than the general population believes. Now, what is that probability, 20%, 10%, 5%? I don't know. But whatever it is, I think it is higher than common perception.

There is no doubt that the policy of the United States, both the federal government and the Federal Reserve, has been to devalue the dollar. It has been for eight or nine years. The US government has embarked on a variety of policies that are bad for the dollar. We are highly reliant on the kindness of strangers, given that one half of all our marketable debt is held by foreigners. A better question that one should be asking is why shouldn't foreigners sell our debt? Again, I can give you a number of reasons why they should, but I can also give you reasons why they will eventually say no mas.

If you have time, and if you haven't seen Niall Ferguson, I would highly suggest you watch this clip. It is over an hour long, but he argues that empires often end by the accumulation of excess debt, and it tends to happen quicker than most people think.

FORA.tv - Niall Ferguson: Empires on the Edge of Chaos

 

[william the wie]

back in our dimension, i dont think that anyone is looking to mitigate any and all volatility all the time. to think the dollar is going to evaporate via your simple mechanism of fleeing investors is not wholly plausible, however. it assumes no response from central banks. no bump on interest rates in the face of inflation. no disposition on the masses of assets which the fed's assumed. no balancing effect from reserve investors not likely to flee to equity markets. it discounts the value which a weaker buck in reasonable volatility could afford a productive economy like the US.
.

It is my opinion that the dollar will remain the reserve currency for a very long time, if for no other reason that there is no alternative. I can give you many other much more viable reasons, but frankly, there really is no alternative.

Having said that, per the above post regarding probabilities, I think the probability of the dollar collapsing is much higher than it was a decade ago, and much higher than the general population believes. Now, what is that probability, 20%, 10%, 5%? I don't know. But whatever it is, I think it is higher than common perception.

There is no doubt that the policy of the United States, both the federal government and the Federal Reserve, has been to devalue the dollar. It has been for eight or nine years. The US government has embarked on a variety of policies that are bad for the dollar. We are highly reliant on the kindness of strangers, given that one half of all our marketable debt is held by foreigners. A better question that one should be asking is why shouldn't foreigners sell our debt? Again, I can give you a number of reasons why they should, but I can also give you reasons why they will eventually say no mas.

If you have time, and if you haven't seen Niall Ferguson, I would highly suggest you watch this clip. It is over an hour long, but he argues that empires often end by the accumulation of excess debt, and it tends to happen quicker than most people think.

FORA.tv - Niall Ferguson: Empires on the Edge of Chaos

Thank you sincerely for the defense but I found that I have been overoptimistic about the chances of mitigation. I knew about the GMAC/Ally foreclosure crisis days ago but it was only today on another board where I do volunteer work that I ran across a story that claimed it was not computer glitches and bureaucratic bungling but industry wide criminal fraud that was the problem. "The Market Ticker" Karl Denninger writer is the only source I have seen so far but if true, my estimates of probabilities for a bond bust and timeline were wildly overoptimistic in favor of stability.

In my own defense while I have admitted on this board to buying index options more than a year out that include puts I felt constrained to be ultra-conservative in my comments with the SEC perhaps on the warpath. (I own very minor positions in LEAPs barely enough for a fancy meal in a few restaurants but capable of gains that might possibly cause SEC interest to be piqued.) I am also doing a piece on option hedging for an industrial education start up which is probably not relevant but since I have found out more data about the junk bond rally and I want to get everything out on the record. I was not intending to work anybody up so that they would take the other side of any trade I am on I know next to nothing about any of the posters on this board. Enough said.

 

[loosecannon]

well are you gonna post that one link about GMAC/Ally?

and how does this play into the Team Obama restructuring of GM?

 

[loosecannon]

(Reuters) - GMAC Mortgage, a unit of Ally Financial Inc, asked some outside vendors to suspend some evictions after consumer attorneys and state officials started questioning the documents used in foreclosures, according to lawyers and court documents.

GMAC suspended evictions in 23 states last week after discovering that employees submitted affidavits containing information they did not personally verify, and that in some cases were not signed in the presence of a notary, a company spokeswoman said on Tuesday. Those states, including New York, Ohio and Florida, require foreclosures to be approved in court.

"We are reviewing every affidavit in the states in question," Ally spokeswoman Gina Proia said on Tuesday.

"The substantive content of the affidavits are factually accurate," she said, calling the problem in a follow-up email "an important, but technical, defect."

A GMAC employee signed off on tens of thousands of affidavits containing information he did not personally verify, according to a deposition taken in December 2009 by the homeowners' law firm Ice Legal PA.

"Foreclosure defense attorneys have been raising (the problem with affidavits) for a while," said Christopher Immel, the Ice Legal attorney who took the deposition.

But generally when homeowners' lawyers challenge the affidavits in court, "the banks aren't really withdrawing the foreclosure case, they're withdrawing the affidavit and replacing it with a new one," Immel said.

So what is the deal, William?

This sounds like a very borderline variety of fraud at most. Industry wide or not. Is there something about this that reeks of serious criminal conduct?

 

[william the wie]

More like serious losses in the trillions. The tranches were mostly sold overseas in the EU and Far East so lawsuits for treble damages rather than the Justice department starting the ball rolling is much more likely. If any of those mortgages ended up in a CDO cubed treble damages translates into 9 times the provable damages.

Assuming an average damage settlement of 4 times damages and 5% equity financing on the deals then 80 to 1 reverse leverage will be brought against the offending banks here plus sanctions in other jurisdictions. I do not follow banks well enough to guess at the size and scope of this disaster without a lot more information.

GM and GMAC are no longer part of the same company or so I have seen reported.

 

[KissMy]

(Reuters) - GMAC Mortgage, a unit of Ally Financial Inc, asked some outside vendors to suspend some evictions after consumer attorneys and state officials started questioning the documents used in foreclosures, according to lawyers and court documents.

GMAC suspended evictions in 23 states last week after discovering that employees submitted affidavits containing information they did not personally verify, and that in some cases were not signed in the presence of a notary, a company spokeswoman said on Tuesday. Those states, including New York, Ohio and Florida, require foreclosures to be approved in court.

"We are reviewing every affidavit in the states in question," Ally spokeswoman Gina Proia said on Tuesday.

"The substantive content of the affidavits are factually accurate," she said, calling the problem in a follow-up email "an important, but technical, defect."

A GMAC employee signed off on tens of thousands of affidavits containing information he did not personally verify, according to a deposition taken in December 2009 by the homeowners' law firm Ice Legal PA.

"Foreclosure defense attorneys have been raising (the problem with affidavits) for a while," said Christopher Immel, the Ice Legal attorney who took the deposition.

But generally when homeowners' lawyers challenge the affidavits in court, "the banks aren't really withdrawing the foreclosure case, they're withdrawing the affidavit and replacing it with a new one," Immel said.

So what is the deal, William?

This sounds like a very borderline variety of fraud at most. Industry wide or not. Is there something about this that reeks of serious criminal conduct?

Government is pushing them to slow down foreclosures. Government is chalked full of criminals.

 

[loosecannon]

what is the total exposure of GMAC/Ally in terms of mortgage bundles(?) or other debt securities? And who securitized them?

I bet it wasn't GMAC.

But if this is real it will reflect incredibly poorly on team Obama's restructuring of GM.