Well, you can’t complain that it is boring. Not any more. Things are getting interesting…very interesting…
Wednesday, the Dow took another 360-point hit. Gold soared another US$10 to US$833. And oil stayed at US$96.
Yes, gold is finally in the news. People are catching on. Our Dear Readers have been buying gold since it was at US$300. But now, everyone is getting in. Is it time to get out? More below…
Meanwhile, Xu Jian, vice director of the central bank, told the world that China was going to dump the dollar. “The dollar is losing its status as the world currency,” he said. Whoa…China has US$1.4 trillion in reserves…most of it in dollars. You don’t want to be holding dollars when the Middle Kingdom bails out, dear reader.
General Motors (NYSE:GM) announced a US$39 billion loss in the last quarter. In other words, in a single quarter the automaker lost an amount equal to twice its entire market value. You can’t do that very often.
How come the big loss? “Tax charges” was the official explanation. As near as we can tell from the news reports, what really happened is that the company’s erstwhile very profitable finance arm – GMAC – didn’t make as much as it had planned. Then, GM’s attempts to cook the books blew up in the kitchen.
As you will recall, the US economy made a huge shift over the last 50 years – from savings to debt, from manufacturing to finance, from making things to buying them. The rusty motto over gritty Trenton, NJ, still says “Trenton Makes, The World Takes”. But for the last few decades, the residents of New Jersey…and all the other 49 states…do more taking than making.
Likewise, on the shores of Lake Michigan, General Motors still makes cars. But in recent years, GM has made money by financing cars and housing. It became a finance company. Why? Because that’s where the money was.
Back in the ’70s, financial firms were only about 5% of total capitalisation of the S&P. As the United States shifted from making things at a profit to buying them on credit, the percentage of the S&P represented by the financial firms rose to over 21% in 2007.
But now, finance seems to have peaked out. At least, financing housing purchases is not the velvet business it was two years ago. And people aren’t buying cars – especially not GM’s cars – the way they did back in the ’60s, either.
GM has had its day. And look at what is happening to the other finance companies. Merrill (NYSE:MER), Morgan Stanley, Citigroup (NYSE:C), Goldman (NYSE:GS) – the masters of the universe are getting beaten up! Not only are the stocks going down…the companies are taking write-downs almost as big as GM’s.
So far, about US$40 billion worth of subprime related losses have been announced by the financial industry. A strategist from the Royal Bank of Scotland says he thinks the eventual total will run somewhere between US$250 billion and US$500 billion.
There’s a little more than a trillion dollars worth of subprime mortgages outstanding. We’ve heard that as many as one out of six of them is in trouble. And after you put these mortgages in CDOs…and embed some options in the derivative contracts…and get mathematicians to gin up models so you can leverage them to high heaven – there’s no telling how large the losses might get.
One news item from yesterday tells us that the money shufflers will be forced to write down as much as US$100 billion from their ‘level 3’ assets. You might not know what ‘level 3’ assets are, dear reader. We don’t either. But we’ll pass along what we know about it from reading the paper.
Level 1 is stuff you can readily sell on the open market – stocks, bonds, and so forth. Level 2 is made up of stuff you can’t sell quite so fast, but you still have models in place to tell you what it is worth. And level 3 is the stuff whose worth you don’t actually know; the press tells us it is valued according to “unobservable” inputs.
Whatever is in the ‘level 3’ category, Goldman has a lot of it – an amount thought to be equal to 185% of its assets. Wait a minute… You mean Goldman has almost twice as much in dodgy assets as in marketable ones? Yes, that is what we mean.
Do you mean that if the value of this stuff is cut in half…Goldman could be nearly wiped out? Yes, that is what it looks like.
But what do we know? We never believed these firms were as successful as everyone said they were. Now, we don’t believe they’re as desperate as the press makes out. The Goldman boys still have a few shekels in their pockets. And they know what to do with them. While they’ve been putting their clients into subprime derivatives, they’ve probably been buying gold for their own accounts.
Markets and Money