Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17
Q4 Pivot View for Stocks and Gold - 14th Oct 17
Gold Mining Stocks Q3’17 Preview - 14th Oct 17
U.S. Mint Gold Coin Sales and VIX Point To Increased Market Volatility and Higher Gold - 14th Oct 17
Yuan and Gold - 14th Oct 17
Tips for Avoiding a Debt Meltdown - 14th Oct 17
Bitcoin Hits New All-Time High Above $5,000 As Lagarde Concedes Defeat and Jamie Demon Shuts Up - 13th Oct 17
Golden Age for GOLD, Dark Age for the Stock Market - 13th Oct 17
The Struggle for Bolivia Is About to Begin - 13th Oct 17
3 Reasons to Take Your Invoicing Process Mobile - 13th Oct 17
What Happens When Amey Fells All of a Streets Trees (Sheffield Tree Fellings) - Video - 13th Oct 17
Stock Market Charts Show Smart Money And Dumb Money Are Moving In Opposite Directions—Here’s Why - 12th Oct 17
Your Pension Is a Lie: There’s $210 Trillion of Liabilities Our Government Can’t Fulfill - 12th Oct 17
Two Highly Recommended Books from Bob Prechter - 12th Oct 17
Turning Point Nations On The Stage - 11th Oct 17
The Profoundly Personal Impact Of The National Debt On Our Retirements - 11th Oct 17
Gold and Silver Report – Several Interesting Charts - 10th Oct 17
London House Prices Are Falling – Time to Buckle Up - 10th Oct 17
The S&P Is A Bloated Corpse - 10th Oct 17
Are Gold and the US Dollar Rallying Together? - 10th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

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

© 2005-2017 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

Catching a Falling Financial Knife