Original Post:
Two news items in particular are catching my eye this morning. First, consumer spending continues to outpace personal income by a wide margin. In February, spending grew .8% while personal income was up only .2% (an inflation-adjusted -0.1%, I might add.) Because spending should track income over the medium/long term, this divergence is unsustainable.
Second, the NY Times ran an article regarding Moody's downgrades at BAC, C and MS. They touch on the impact this will have on derivatives in particular -- the one colossal danger hardly anyone is discussing. As bad as the Euro-Mess and China's hard landing might be, I think the unraveling of trillions in derivatives stands to be the story of the year.
Zerohedge has done a great job of discussing the issue. Here's the latest. The average ratio of derivatives to total assets is over 30, with some banks such as C (47) and GS (54) coming in much higher. Morgan Stanley is particularly susceptible to foreign exchange (98% of total), while virtually all the banks' derivatives are OTC.
In other words, who knows what they're worth or how well they'll hold up in the event that one of more counter-parties, however many degrees removed from the originals, goes belly up.
And, lest we forget, derivatives/assets is meaningful, but derivatives/capital is the ratio that we should really worry about.
Charts coming.
Two news items in particular are catching my eye this morning. First, consumer spending continues to outpace personal income by a wide margin. In February, spending grew .8% while personal income was up only .2% (an inflation-adjusted -0.1%, I might add.) Because spending should track income over the medium/long term, this divergence is unsustainable.
Second, the NY Times ran an article regarding Moody's downgrades at BAC, C and MS. They touch on the impact this will have on derivatives in particular -- the one colossal danger hardly anyone is discussing. As bad as the Euro-Mess and China's hard landing might be, I think the unraveling of trillions in derivatives stands to be the story of the year.
Zerohedge has done a great job of discussing the issue. Here's the latest. The average ratio of derivatives to total assets is over 30, with some banks such as C (47) and GS (54) coming in much higher. Morgan Stanley is particularly susceptible to foreign exchange (98% of total), while virtually all the banks' derivatives are OTC.
In other words, who knows what they're worth or how well they'll hold up in the event that one of more counter-parties, however many degrees removed from the originals, goes belly up.
And, lest we forget, derivatives/assets is meaningful, but derivatives/capital is the ratio that we should really worry about.
Charts coming.
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