They’re Back – Credit Default Swaps for the Next Generation
Just when you thought the bankers learned their lesson, sorry, They’re Back! Here we go again with bankers creating the next generation of credit-default-swaps. Bankers should just be bankers. Creating products destined to blow up when they are the market-makers is just nuts. Now JPMorgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index. This is designed to make it easier for investors to wager on the debt. The problem is, the lack of an arm’s-length transaction and the people who create the product keep track of positions and then find it just impossible not to trade against their clients. This is just a new version of the same story over and over again.
Goldman Sachs Group Inc. is also in the game planning as much as 10 billion euros ($13.4 billion) of structured investments that bundle debt into “top-rated” securities. Isn’t this the same thing as taking low-grade mortgages and bundling them together so they somehow are not worth more in a bundle?
ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt. At least exchange traded is a little more transparent. Dealing with a banker who creates the product and provides the market for it has been done so many times and it always ends in a scandal.
Well - They’re Back. And this time, right on cue for big-bang.
Mainstream Press Always Wrong?
QUESTION: Martin you continue to provide us with economics based on cycles and human nature far different than my economics degree taught me.
Thank you.
The recent mainstream press seems decidedly bearish on US Equities. Does this provide impetus for movement toward the phase transition and resulting bubble? Is the mainstream press generally on the wrong side of the curve?
ANSWER: Actually yes. The mainstream press try to pretend to be analysts but are far from it. Throughout the bull market going into 1929, they turned bullish only during the last 6 months. They called the high so many times it was pathetic. The Wall Street Journal went as far as to accuse Jesse Livermore of being bullish only to influence the Presidential elections. When they were proved wrong, they refused to ever quote him again.
So as long as the mainstream press is bearish, that is a good sign that the broader uptrend is still intact. They will mislead most people and the new comers have to pay their dues to join the club (lose money listening to mainstream nonsense). On the way down from 1929 high, they did not believe it would continue. It was always an interesting examination of the press v the market.
Are Meteors Included in the ECM?
QUESTION: Dear Martin,
Just to probe your theory further,
If a meteor were to hit New York and wipe out Wall Street would your predictions on ECM still be intact? Don’t tell me even meteors also are part of cycle to choose when to hit the earth 
Best wishes,
S
ANSWER: Honestly, the answer to be accurate is absolutely yes! Why? How? It is already in the data. We need not plot them or include them – they are already there like everything else. It is like war. You cannot extract it from the data smoothing everything out. This would be like pretending World War I did not happen or that it was even unpredictable. General Patton warned about the rise of Russia and Winston Churchill warned about the rise of Hitler. Society ignored both until they were proven correct.
So have meteors changed the economy and have they thereby altered economic trends? The answer is yes. A rather major one hit in 1908 and helped to fuel the communist revolution in Russia. Fortunately, they are not as common as volcanoes and earthquakes.
Meteors travel cyclically and most likely they would take place only when the timing is correct for the historical record also includes such events both local and major. So I would not worry about that until 2032. Nature has played a MAJOR role in the rise and fall or the economy. It was the Black Death that initiated the age of Capitalism. It was the collapse of Rome during the 3rd century that caused Christianity to spread. The eruption of Vesuvius that buried Pompeii came in 79AD and was economically quite shocking in Rome. There was the major 1906 Earthquake in San Francisco that resulted in the creation of the Federal Reserve.
There was the 1923 earthquake in Tokyo that wiped out the city. Then there was the eruption of Tambora in 1815 that created the year without a summer as snow fell in New York City during July 1816. This is just to mention a few that have impacted the economy. And let us not forget the eruption of Thera around 1650BC that wiped out the Minoans and shifted the power to Greece.
Tunguska Event in Russia 1908
As far as meteors, yes there was the Tunguska event which was a large explosion in Russia on June 30 [O.S. June 17], 1908. The explosion occurred at an altitude of 5–10 kilometres (3–6 mi) at 60.886°N, 101.894°E. It is classified as an impact even though the asteroid or comet is believed to have burst in the air rather than hitting the surface. The Russian Revolution started in January 1905 as a strike began at the Putilov Works in St. Petersburg. The Tunguska event came right at the perfect time to inspire greater numbers for the Revolution. Within just 13 years, July 17, 1918 the czar and his family were executed. So the meteor event did impact economics and that in turn aided the revolution.
You cannot extract anything. Absolutely everything is included from weather, earthquakes, volcanoes, and meteors to plagues and disease. There are cycles in everything. The interesting aspect is how they come together like the synchronization of waves in the ocean that produce the giant wave that appears as a harmonic of many. the key is to remain unbiased and just let the data show you the truth. Worry able the explanation later.