The bad 2%

I said most of this last week, but Paul Farrell probably says it better in this articleposted on MarketWatch tonight. 

I also talked about Warren Buffett a bit last week when he posted his annual letter to shareholders, but Mr. Farrell quotes both Buffett and PIMCO bond guru Bill Gross when he says “Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen“.

There are a lot of people saying that this is all overblown, that the Fed will handle it, that all we need is trust, etc.  But the more I learn about what’s going on, the more I’m convinced we’re in for a big crash.  Bigger than 2000, worse than Carter’s bungling in the late 70’s, worse than Johnson’s Great Society that wasted trillions of dollars.

Please read the article.  Earlier tonight I said that we’d be facing huge losses if just 10% of the mortgages defaulted.  According to this, I was way too optimistic.  Farrell says “There’s nothing intrinsically scary about derivatives, except when the bad 2% blow up.” Unfortunately, that “bad 2%” did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was “contained.”

Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a “bad 2% deal” to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It’s only a matter of time. “

AP is reporting that  “The Mortgage Bankers Association said Thursday the proportion of all mortgages that slipped into foreclosure set a record, 0.83 percent, from October through December. The previous high, 0.78 percent, came in the July-through-September period.”

We’re almost at 1%.  Watch what the foreclosure rate goes to over the next few months as all the ARM’s given out in 2005 start to reset.   Buffett’s view that “…derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”  will probably be proven right. 


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