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what a wonderful wonderful mess they’ve made.

the sub-prime credit crunch crisis is hitting everyone around the world, in one form or another.

but what the hell happened?

its quite simple really.

you see, wall street is full of children. not the chubby cute ones that say hilarious things,…

no.

the children of wall street are like teenagers in high school. all of them.

brokers and investment bankers are the jocks and the popular kids, you know,.. the ones that will do anything to maintain their position at any cost.

and their customers are the kids that aren’t quite geeks, the ones who are cool enough to hang out on the corner, but arent quite cool enough to chill with the jocks and the cheerleaders.

now when someone gets a new ( insert anything from hairstyle to hot new ipod) then everyone else wants one too, or to atleast hang with the person and therefore be cool by association.

and thats what happened on wall street.

where did it all start?

surprisingly, it goes waaaay back to the dot.com bubble.

you see, all the cool kids got into the dot.com thing, then the others started slowly joining in. and more and more and more people came,…. not all cool, mostly rather uncool accountants, lawyers and doctors who thought they were smart enough to make it on the markets since they “made it” in the real-but-not-so-important-world outside wall street.

you see, wall street is the only place where adults with phd’s and mba’s start dreaming like little kids again.

well as with all things fashionable, once the dot.com bubble got as fat as a fat man on faturady, the cool kids thought they had had enough,…. the dot.coms were no longer considered cool. but of course, no one tells you that the once cool ipod that you saved up for is now no longer “in”. now with ipods, its not such a big deal,…. but with hard earned pensions and life savings it certainly is.

nevertheless, the cool kids had to make some money to get the new cool thing, so they had to sell the old cool thing to people who still (mistakenly) think its cool. and thats what they did.

until the market blew up.

but little did the cool kids know just how many of the uncool had joined their ranks. cool kids got a slap in the face big time once they realised that they are only cool cos others think they are,… not cos they inherently are cool.

in other words, wall street underestimated just how much “small money” was in the market. and just how panicky that small money is.

so when everyone started to panic, a stampede was on. which even started affecting the wallets of the cool kids.

how very uncool of the uncool. ( gotta love the irony 😛 )

anyway, as markets tummbled in the early late 90’s, a little saudi boy wondered,…. now what could i do that would make the rest of the world think arabs all around the world are blood thirsty warmonger terrorists?

and so 9/11 happened.

9/11 took the markets down with the twin towers. the market dropped so far that the federal reserve, america’s central bank, had to keep cutting interest rates until people calmed down a bit. it took a while and a whole lot of interest rate cuts,…. but eventually people calmed down.

but,….

with interest rates now sooooo low,….. some people figured that it would actually be cheaper to buy a house and pay a mortgage, instead of rent. it got to the point where it would cost you almost nothing to borrow money for your house. so thats what alot of people did. they bought house after house and actually managed to keep the US economy out of recession, cos along with a house comes all the other stuff you need to buy to put in the house,…. eg 2 cars for your two car garage.

now heres the problem…..

a bunch of people outside the regular banks started lending to people who had bad credit. when you have bad credit, the big nice banks will politely tell you to get lost if you went looking for a loan.

the smaller banks and lending companies however, welcome you with open arms,…. provided youre happy to pay them a bit more in interest of course. and with interest rates being so low, alot of people thought they could manage it.

they could have, if nothing happened to their jobs, if the interest rate didnt go up, if the world didnt decide to go nuts.

but it did.

9/11 led to the war in afghanistan.

9/11 also led to the war in iraq.

both wars made traders nervous,… they figured that there might, in the not too distant future, be a problem with the oil supply, if a big ass war was going on in a big ass oil field. they also figured that the chinese and indians were going to need more and more and more oil if they were going to continue expanding as they did.

so what do you do when you think there isnt going to be enough of something?

you buy as much of it as you can.

so they bought more and more oil contracts, pushing crude oil, which once traded at less than US$10 a barrel, all the way to todays price of over US$100 a barrel.

now remember what we all use crude oil for?

yup, gasoline. and what do we use gasoline for? yup, transport, both ourselves, and our food, commodities, luxury items .

and when we transport all that stuff, what does it come in?

plastic containers of some sort right?

and what is plastic made of?

ok now youre getting the idea.

so back to the whole financial mess……

since there were a bunch of people paying really high interest on their mortgages, some banks on wall street looked at them and said hey! why cant we get in on that action?!

its real estate based and therefore pretty safe right?

so some of the lenders said well why bloody not?! ( altho not as english sounding)

so they got a bunch of mortgages together, packed them into a nice little package and sold them to the bigger banks.

one year goes by and everythings cool.

another, and another, and another,…….

and more and more people shout holy crap! you finance people are geniusseseseses! i want in! sell me the mortages that you bought from someone else!

so they did.

now remember during this time, oil has gone from $15 to $20 to $30 to$50 etc, etc,….

the economy starts getting better and better, so the federal reserve raises the interest rate slowly. a bit more, a bit more, a bit more…….

peoples wages arent going up, but gas is getting more expensive by the day, and theyre having to pay more on their house since the rates keep going up.

obviously some people start failing to pay their mortgage since the sub prime lonas they took out are now at a stupid interest rate of 10% or more. so as gas prices go up, more and more people start losing their houses.

more people defaulting on their mortgages starts to worry the bankers who bought the mortgage packages, which worries the mortgage package makers. some decide to bail, then more decide to bail, then more and more,… and you get a nice little stream that turns into a flood.

when bankers panic they turn into hysterical little teenage girls.

and the world descends into the chaos on the markets that you have seen.

all of this pushed the US markets down, people started bailing out of the US markets cos they were also afraid of the dollar dropping as the economy gets worse. instead they put money into gold and oil, pushing their prices up even higher.

now what does this have to do with the price of chicken at the co-op?

well to have a dead chicken on your plate requires an awful lot of energy. it got to your plate from the co-op by car, it got to the co-op by truck, it got to the truck by boat, it got to the boat by another truck elsewhere. before getting to the truck the dead chicken was alive, it had to be killed, and someone has to be paid to kill it. but before its killed, its alive and needs to be fed, its fed on grain that comes from fields on trucks. now alot of those grains are in high demand,.. not just for chicken feed but for conversion into biodiesel. biodiesel is in demand because the price of oil makes making biodiesel cheap compared to buying a gallon of gasoline.

on the one hand its nice to see how interconnected we really are. but on the other hand, its not hard to see what we’ll be fighting over in the not too distant future.

if you managed to get this far,…. well done haha!

this mess is obviously important to you on some level, and is probably mostly old news if youve been following the subprime thing.

but looking into my crystal ball:

its only just been 12 months since this sub prime thing started getting media coverage. its been going on for years and years so i really doubt that we’re anywhere near the end of the bloodshed. i recall enron, and how after enron there was worldcom, then xerox, then more and more,….

also the subprime thing is similar to what the japanese economy suffered from. and japan has been in a recession for the past 15 years. granted the us are moving faster than the japanese did, but still,… thats only gonna shave off a few years in my opinion.

and the really scary thing that makes me grab my wig and run,…..

the price of oil on the market today doesnt filter down to the consumer until 18-24 months later, once its been made into gasoline and plasitc, and only when the stocks of the cheaper gasoline and plastic have all been sold.

which means today’s prices are 2 years old ie $50-$60ish a barrel.

today oil is over $100, and will probably stay around this level for a while. it may not jump up too much in the near future as traders are worried that a real recession would mean less demand for oil. but that might not bring it too far back down as the global economy is still oil hungry and very healthyly expanding.

if that doesnt encourage you to start saving then nothing will.

i’ve stayed out of the US markets for the past 5 years cos the picture of high oil and a strong economy never made sense to me. it doesnt even work here in oil rich kuwait where people are starting to feel the cost of importing everything, so theres no reason why it would work elsewhere without as much oil per capita.

but i do see opportunity, as usual people panic and mr market gets depressed and slightly suicidal,…. which as benjamin graham has always said is the best time to buy something.

but not right now.

mr market might be depressed and suicidal, but he hasnt tried prozac yet, and he hasnt realised prozac wont help, and mr market is not quite so fed up that he’ll give it up for nothing.

if nothing else, this whole mess in the “safe” developed markets should teach investors everywhere a lesson,….. know your story.

mine is simple.

the world runs on oil.

the world’s oil comes from here.

therefore the world’s money comes here.

before, it would then go out again back into the “safer” world markets.

not this time i dont think, especially since the soverign wealth funds have taken such big hits in the past 6 months alone.

this time theyre going to be staying here.

and the world will be on its way here in greater and greater numbers, which will push the markets here up to truelly stupid levels.

the only reason its not happening right now is that the government is trying to tighten things as best as they can to cut inflation. so theyre cutting lending aggresively.

but there is something wrong here as well.

on the one hand theres soooo much money here, on the other hand no one is getting credit from the bank,… not even the big boys on the market, so theres actually not enough money here.

doesnt add up does it?

sub prime lending here is rampant and on steroids so hopefully the central banks here are being proactive rather than reactive. hopefully theyre not trying to cover something up,…. but it is possible that even if they are covering something up,…. the sheer amount of money in this region will help cushion any major crisis.

skunks bottom line?

pick a market you understand, not one you think you understand,….

but if youre intent on staying in the western markets, heres one golden stock tip,……

buy the stock of publishers of any investment book with the following words in their title:

fundamental, value, analysis, benjamin graham or warren buffett

$100’s says that the bookshops around the world will be flooded by graham and buffett books.

that tip should make you enough money to be able to afford the price of chicken tomorrow.

😛

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3 Comments

  1. Give me my big piece of chicken 🙂

  2. Skunk I understand things so much better – thanx – and yeah, right now in the area i live in all of a sudden so many signs are coming up on houses and apartment buildings that say for rent, and for sale – frightening –

    but you know whats truly scary, the fact that the prices of oil are a few years old and that the impact of current prices is yet to come ;/

    I cant save! ;/

    “when bankers panic they turn into hysterical little teenage girls.” wahahahhahah :)~

  3. lol touche.

    cp: youre welcome, yeah it must take on a whole new dimension when the news is talking about stuff in your own area.

    and learn to save!

    😛


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