Saturday, December 22, 2007

Breakdown of our modern day banking system

The news of the coming torrent of housing foreclosures has been all over the newspapers for weeks if not months. I have to believe that the stock market has taken it all in -- and that this "coming disaster" has been fully discounted.

But there other and even bigger problems, and Bill Gross, he of the giant PIMCO funds, is warning about it. "What we are witnessing is essentially the breakdown of our modern day banking system, a complex of leveraged lending so hard to understand the Fed Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." Later Gross adds, "As the commercial paper market shrinks by hundreds of billions a month, central bankers worldwide are facing a giant stress test of the modern-day shadow banking system. The publicized and photographed overnight 'runs' on Contrywide and the UK's Northern Rock in mid-august were nothing compared with what's taking place in the shadows of the real banking system. Credit contraction, with its inevitable companion of asset destruction, is spreading with the speed of an infectious bacterial disease. "How does one protect 'deposits' during a run that no one can see? To be blunt, what does this mean to your pocketbook? ... Home prices have been the obvious first hit, down 5% nationwide already, with perhaps another 10% to go over the next several years. Following in lock-step have been financial stocks followed in short order by consumer-based equities as jobs and disposable income falter."

Is that scary enough for you? Let me put it this way. Bill Gross is one of the smartest men in the business, he manages billions in assets and has access to the best information on the face of this green earth.. Gross is worried, not just about the subprime situation, more importantly he's worried about the whole US and world banking system!

But you know what -- I'm going on the premise that the stock market knows everything that Bill Gross is warning about. If the problems ahead are ominous and fated to tear the international banking system apart, the stock market must be aware of it.

A critical test -- So far I must report that the stock market doesn't give a damn about the coming disaster. Because if Bill Gross is right, then the stock market should be falling apart and plunging wildly below its November lows. THAT ISN'T HAPPENING!

From: DowTheory


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