Financial Crisis 7 Aug 2011 : Disguised Defaults

Financial Crisis 7 Aug 2011 : Disguised Defaults
Andre Willers
7 Aug 2011

"The Truth is out there" X-files

Synopsis :
Defaults disguised as rollovers , decreased interest rates , Quantitive easing or simply more debt means a smaller series of income streams in future . Stock Markets are designed to pick these up and register the abrupt decrease in the Present Value of these income streams . This translates as a sudden decrease in share prices , ie a crash

Discussion :
This is why the stock markets fell sharply on 3 to 5 Aug 2011 .
The USA default on Aug 2 , 2011 was averted as far as the banking system was concerned , but the stock valuations picked it up . Prices adjusted accordingly .
Panic set in . Etc , etc .

Estimate of size of fall :
The present value of stocks should fall by at least the amount of default .
The markets are interconnected , so must be seen on global scale for a macro-argument like this .
http://en.wikipedia.org/wiki/List_of_stock_exchanges
Capitalizations of world exchanges ~ $ Tr 120
Defaulted debts USA , EU ~ $ Tr 15

Expected stock price fall of 15/120 ~ 12.5 %
Fall already occurred (at Aug 7, 2011) ~ 7 %
Fall expected to occur week 9-12 Aug 2011 ~ 5%

When is it safe to get back into the water ?
Not while the DOW > 11 100 (= 12 700 x (1-0.125)
Wait till it falls below , then come in on the uptick and take your chances .

Stress between banking system and stock exchanges .
As seen above , the shareholders took their lumps . But the banking sector still is overvalued by 12% . They cannot forgive debt (by law) . The only default for the small individual is bankruptcy and homelessness .
In essence , the banking sector continues to collect debts that has already been paid .
This is seen as unfair . All sorts of hardwired mechanisms kick in .

This is a recipe for revolution . (Ask Hosny Mubarak.)

USA is the most vulnerable state (then China) :
Quantitive Easing III without small-debt forgiveness and reform of the banking system will mean the end of the Union that George Washington , Lincoln and FDR (cf New Deal) worked for . (Bad news for the rest of the planet.)

Social media (like Facebook) is the new element that prevents a replay of the end of the Roman Republic .

On a personal note :
I find the succession of talking heads on the media saying that they do not understand the stock market crash sickening .
The stock market system is working exactly as advertised , discounting lies .

The King has no clothes , but for a modest profit they will sell him a fig-leaf .
And singing lessons for the horse .

Andre