Best of the Week
Most Popular
1.Gold Price Target of USD 2,300 - GoldCore
2.Greece Banking System Collapse Monday as ECB Pulls the Plug, Capital Controls Ahead of GrExit - Nadeem_Walayat
3.Why British Muslims Are Leaving Elysium Paradise for Syrian Hell - Nadeem_Walayat
4.Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - Nadeem_Walayat
5.Extreme Gold/Silver Shorting - Zeal_LLC
6.European Empire Strikes Back Against Greek Debt Fantasy, Counting Down to GREXIT - Nadeem_Walayat
7.Gold And Silver – Three Choices: Sell, Hold, Hold and Add. A Trading Treatise - Michael_Noonan
8.Gold and Silver Price Headed for Breakdown - Jordan_Roy_Byrne
9.Greece Crisis OXI - Raul_I_Meijer
10.Flatline Investing and Dead End Debt Schemes - Doug_Wakefield
Last 5 days
Forget Drachmas Greece Syriza Government Could Instruct Central Bank to Print Euros! - 2nd July 15
Greece Debt Crisis Trigger for Stock Market Crash or Bull Rally? Video - 1st July 15
Gold Stocks Break Below 2008 Low - 1st July 15
SPX Stock Market Retracement May be Over - 1st July 15
Silver Tunnel Vision 'Experts' - 1st July 15
Gold And Silver - Monthly, Quarterly Ending Analysis - 1st July 15
Europe’s Controlled Demolition - 1st July 15
The End of Dow 18,000; Bailouts No Longer Extended  - 1st July 15
Athens Mayor: Greek Government Should Resign - 1st July 15
China Stocks - This Is What a Bubble Looks Like - 30th June 15
Stocks Plunge on Greece Euro-Zone Financial Armageddon Blackmail - 30th June 15
Greece Crisis Shows Importance of Gold as Europeans Buy Coins and Bars - 30th June 15
Stock Investors Express Route to Profits in the Healthcare Sector - 30th June 15
Beyond the Greek Impasse - 30th June 15
Gold GDXJ : Impulse Move Pending - 30th June 15
Fed Interest Rate Increase Could Be Best Thing to Happen to Gold - 30th June 15
Marc Faber - Greece is Basically Bankrupt - 30th June 15
Greece - Shoot the Dog and Sell the Farm - 29th June 15
Grexit?, BIS Warning, Chinese Market Crash & Systemic Risk Shake the Global Economy - 29th June 15
The New "Sharing Economy" May Not Be the Profit Bonanza Everyone's Expecting - 29th June 15
Gold and Silver Greece and Short Positions - 29th June 15
Volatility and Sleep-Walking Markets - 29th June 15
Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - 29th June 15
Stock Market More Decline Ahead? - 29th June 15
China Stock Market Crackup - The Final Trap Looms... - 29th June 15
Greece Banking System Collapse Monday as ECB Pulls the Plug, Capital Controls Ahead of GrExit - 28th June 15
Investor Stock Play for Two Growing Missile Threats - 28th June 15
Stock Market Uptrend/downtrend Inflection Point - 27th June 15
Greece Crisis OXI - 27th June 15
Gold And Silver – Three Choices: Sell, Hold, Hold and Add. A Trading Treatise - 27th June 15
It’s Time to Change the Way You Look at Disney Forever - 27th June 15
Flatline Investing and Dead End Debt Schemes - 27th June 15
Stock Market Investors Avoid the "Herd" Like the Plague - 26th June 15
Extreme Gold/Silver Shorting - 26th June 15
USD Daily, Weekly, Monthly & Conclusions - 26th June 15
Gold Price Target of USD 2,300 - 26th June 15
Gold and Silver - Another Successful Option Expiration For the Insiders - 26th June 15
Why Buffett Bet A Billion On Solar Energy - 26th June 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

China Stocks - Where are they going?

What Would Happen in a Stock Market Crash?

Stock-Markets / Financial Crash Nov 16, 2012 - 07:13 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleShah Gilani writes: Hang onto your hats. It's getting windy out there. Stuff is blowing all over the place.

Oh, that's not wind! That's a giant fan. Well then, that must be why this "stuff" stinks so bad.


What stuff?

How about the Dow Jones Industrial Average falling more than 1,000 points from multi-year highs reached only a few weeks ago?

Or that the Dow has nosedived 5%, ever since the fateful morning last week when we found out that polls don't mean anything, that Republicans don't have memories like elephants, and that Obamarama is still the game we're playing?

Or that the Nasdaq - you know, that tech bellwether index that a lot of analysts believe is our economic canary in the coalmine - is down 10.6% (technically in "correction" territory) since reaching its highs back in late September? Or that it's down 5.5% since the elation, I mean election?

That's not only stinky stuff; it is scary stuff.

Supposedly the reason the market is going down is that we're nearing the fiscal cliff and may be heading over it. But that outcome doesn't worry me.

My colleague Martin Hutchinson - a brilliant banker - isn't worried about it either.

He just came out yesterday morning with the following reality check: "Contrary to all of the media caterwauling, [the fiscal cliff is] not a dreadful fate. In fact, it is exactly what we ought to be doing, since it solves 77% of the deficit problem in one fell swoop."

You can follow Martin's argument for facing the fiscal cliff right here.

Even Warren Buffett said yesterday that going over the fiscal cliff wouldn't be as bad as everyone is making it out to be, and that if we go over it we'll bounce back like we're attached to a giant bungee cord. That's comforting - to Warren, that is. That's because he likes to buy when things hit bottom. He's a clever one, that Warren.

What Would Happen in a Stock Market Crash?
Here's a heads-up for you: The biggest "cliff" we have to worry about is the market falling.

After all, the market has been the primary instrument of interest and intention, as far as the Federal Reserve's articulated policy of pumping it up with cheap money (that's also known as leverage, people), so we all feel good about our pensions and 401(k)s and all our investments.

Then, when we're brimming with confidence, we will all go out and consume again, and again, and again, and borrow to do it - kind of exactly like what our government does.

And then there's the Fed's other policy prescription: massive giveaways to banks to buy the government's debts. (Hey, isn't that what they're doing over in Europe?)

Banks then "repo" that debt (that's short for "repurchase agreement," which is when you lend your treasury bills and bonds and get cash, and agree to repurchase your collateral later to close the loan) to get more money to buy more treasuries, and so on and so on.

Oh, and sometimes they lend out some of their money. After all, they are banks, not hedge funds, you silly people.

So what happens if the market does fall off a cliff?

What's the Fed going to do then to build up our confidence? Are they going to pay off the margin calls we get when our brokers call us for more dope because we were on dope when we believed the Fed could engineer a rising market with leverage but no downside?

The Fed is out of bullets. If the market crashes, we are in deep doo-doo.

Big Trouble at the FHA
You know what else stinks? This $100 billion shortfall at the FHA.

The Federal Housing Administration (FHA) - speaking of a canary in a coalmine - is in dire straits. That spells another round of trouble for real estate. No, we're not out of those woods yet.

When the mortgage crisis hit and Fannie Mae and Freddie Mac had to be bailed out, the whole game of the government backstopping, aiding, and abetting mortgage origination and dissemination came to a grinding halt.

Things were so bad that the government decided to do something about it. So they punted all the problems Fannie and Freddie created, but couldn't stomach, over to the FHA.

The FHA doesn't lend money. It insures lenders against borrowers defaulting on the mortgages they get. Since lenders weren't able to originate mortgages and sell them off to Fannie and Freddie, everyone was afraid there would be no mortgage money and, therefore, no homebuyers. So the FHA was told to take in the poor, tired, and broke potential homebuyers by insuring lenders who gave them money to buy homes.

What's interesting about the FHA is that they are there to insure mortgages for people who have a hard time getting mortgages. Which happens to be pretty cool now that everyone has a hard time getting a mortgage.

You only have to put down 3.5% when you get an FHA-insured mortgage. And you don't have to have a good credit score, either. It used to be you could get away with a 550 FICO score. (It's a little higher now.) That's what I call a score!

But, best of all, new legislation allowed the FHA to raise the amount of a loan they can insure from the previous level of $362,790 to a new total of $729,750.

I want my MTV and my McMansion!

Anyway, the FHA has been insuring lenders right and left. They have insured something like $1.1 trillion worth of mortgages. But, alas, now it seems that close to 10% of the mortgages that the FHA insures are seriously (90 days and more) delinquent.

Let's see, 10% of $1.1 trillion is a little more than $100 billion, right? So the FHA could potentially have to back lenders to the tune of how much, $100 billion? And how much do they have in their reserve tank? Oh, that would be about zero. They're supposed to have at least 2% in reserves, but they haven't had that in more than four years now.

Don't worry, the FHA can borrow as much as they want from the Treasury, so they're cool. Don't you feel better already?

But what is happening with delinquencies on new mortgages is not cool.

The FHA hitting the spotlight, in a dark way, brings into question once again what the heck the government is doing in the mortgage business in such a big way when they have no idea how to fix, sell, or dismantle Fannie and Freddie. And it could put another dagger into the back of housing... just as it tries to climb out of the hole it's been in.

This all stinks. And there's more. But this column is getting long, and you're getting scared.

You should be.

P.S. I promised I'd follow up with you soon on prepaid cards and the like... and I will. I haven't forgotten. It's just that this other stuff hitting the fan is more important right now.

Source :http://moneymorning.com/2012/11/16/with-the-fed-out-of-bullets-a-stock-market-crash-will-really-hurt/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History