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 Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 24-Jan-08
Large US banks are pressured to bail out bond insurers

Web Log - January, 2008

Large US banks are pressured to bail out bond insurers

The news drives an explosive 600 point (5%) spike in the Dow Industrials, from the intraday low of 11675 to close at 12270, almost 300 points or 2% above the open.


DJIA, January 23, 2008 <font face=Arial size=-2>(Source: Yahoo)</font>
DJIA, January 23, 2008 (Source: Yahoo)

The surge came when Financial Times reported that the largest US banks are under pressure from New York State insurance regulators to provide as much as $15 billion to bail out bond insurers, the largest of which are MBIA Inc and Ambac Financial Group.

Please read the new article I just posted: "A primer on financial engineering and structured finance."

This article provides numerical examples and diagrams to explain the various techniques used by financial engineers to create CDOs and other structured finance investments. It shows how a BB rated security can be transformed into an AAA rated security by various magical techniques, including the use of bond insurers.

The effect on investors was electric.

The markets had opened sharply lower, falling as much as 300 points (Dow Industrials) when the news was announced. Markets spiked immediately, continuing to a 600 point surge, to close 300 points above the open, for close to a 3% gain.

Ebullient pundits predicted that the market had "found a bottom."

However, the highly emotional swings, during a general down trend, is part of the 1929 pattern that led to a crash. If you look at my Dow Jones historical page, and check out what happened on Monday, October 7, 1929 (1929-10-07) -- notice that the market went up 6.32% on that one day alone. You can just imagine the euphoria and laughter of investors on that day. And the stock market continued to gain throughout that entire week, but crashed two weeks later.

From the point of view of Generational Dynamics, generational stock market panic and crash is overdue, and must happen, since the stock market is overpriced by a factor of almost 250% (like 1929). It might happen next week, next month or next year, but the patterns that have occurred since January 1 indicate that it might be close. (24-Jan-08) Permanent Link
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