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derfrewop -> RE: The Markets Bounce Back Big, Good News for McCain or Obama? (10/13/2008 6:48:16 PM)
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I predicted this rally on Friday about 20 minutes after market open. Remember that the Lehman bonds settlement was expected to move $300B cash on Friday morning. The numbers I heard were that 350 of the largest financial institutions in the world were holding the bag and that between 50 and 200 of them could go bankrupt. The entire week leading into Friday morning could easily have been due entirely to these institutions selling to raise cash. Remember that Credit Suisse damn near crashed the market by trying to unwind only 7 Billion from that rogue trader earlier this year.
When there were no announcements of bank failures Friday morning and a vast amount of money came roaring back in, it was clear that all that cash piled up for Lehman debt was back in play.
That money is still re-entering the market but has been augmented by the worldwide promise that no bank will fail, the fed will loan to any business so that no major company will fail. In plain english, as of this morning, there is no possibility of any bankruptcy for any major company. In effect, all of the governments around the world have just said that there is no possibility of any stock losing money.
Todays situation is this: the only way any stock could go to zero is if the US Treasury defaults. Naturally, stocks have gone through the roof. Nobody turns down a guaranteed no risk investment.
The big question is this - is the available credit of the US Government sufficient to cover all of the money promised this weekend? If it is not, it really is the end of the world as we know it.
The US GDP is about 15 Trillion. The debt before the crisis was 9T. Depending on what we have been told, between the bailout, the loan guarantees, the money loaned to companies, liquidity injections to the money markets and the money needed to prevent any banks from failing, it all adds up to between 2.5T and 5T. If you add that to the previous debt, the US debt is between $11.5 and 14Trillion. This leaves about 1 to 3.5 trillion in available credit to the US.
If the actual costs are significantly higher or if the GDP has shrunk by more than about 5%, then the US is bankrupt, owing more than they are worth. All of that of course also depends on the US balancing the budget this year. Yearly deficits of 0.8 trillion means that even in the best case scenario, bankruptcy comes in 4 years. Worst case scenario is that its already bankrupt.
Todays rally is because Bush and company have bet everything. If they have bankrupted the US, then quite literally everything ends. If they are wrong, money, bonds, stocks, and anything that isn't food and ammo become worthless. Even if they are right, it is hard to see how a market without downside will operate, especially if the major player is the government. Guess we will all find out soon enough.
Happy Thanksgiving from Canada!
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