Update Aug 2010: Forecasting the Repossession Rate

The US economy is not only declining but is getting worse: in Q2, GDP was estimated to be 2.4% and is now being revised lower to 1.6%. In Q1 it was a healthy 3.6% which itself came down from 5% in Q4 of 2009. It's coming down in leaps and bounds.

It seems that there's a 6 month lag between the US and Europe: In Q4 of 2009 in the UK, GDP was 0.4% and 0.3% in Q1 of 2010; but was 1.1% in Q2 which was revised to 1.2%. Germany grew by a massive 2.2% and France by 0.6%. This reflects the good time the US was having 6 months earlier. This implies that Europe will experience a massive downturn by Christmas - if our economies are coupled. However, France has downgraded their forecast for 2011 - they will soon be followed by other countries including Asian ones.

This will skew the results and our forecast for the repossession rate will be less than accurate. This is forcing the WPM to take evasive action in order to prevent this downturn becoming a recession - the dreaded double dip. The WPM already advised using war-time economics where all contributors to the economy band together and make sacrifices but was ignored in favour of a monetary solution.

The WPM is still recommending war-time economics but it looks like they'll be ignored again and the governments will incur further debt to prevent a double dip recession. But the market will see through this and the 2nd dip will eventually take place. This gives us a clue as to what is needed.

Only value creation will do. This means evaluating what went wrong and changing the processes that led to it. Then finding out what goods need to be manufactured and services provided; skills needed to achieve them; skills providers to plug any gaps; and the demand for those goods and services. The governments will still pay for this project with the employers paying for the actual production/provision. But this is better than paying for other people's mistakes/crimes.

Many of the big banks that caused this problem were involved in derivative trading which magnifies losses as well as gains. The bankers kept the gains but the tax payers are paying for the losses.

Furthermore, derivative gains are NOT taxable and yet it's the tax payers that pay the losses. As part of the bail out, the government should have separated legitimate trades (taxable) from non-taxable ones. They would bail out the taxable ones and ask the people involved in non-taxable trades to sort it themselves.

For example, if a punter has a winning derivative against a bank who can't pay it, then the bank would go bankrupt. This is like when Nick Leeson made a lot of futures contracts on behalf of Barings bank, it was made bankrupt as the losses were greater than the assets of the bank.

These futures were not commodities but an index that has no legitimate value. These trades should be made illegal as they're gambling with other people's money without their knowledge. Hedge Fund operators should be forewarned that these are illegitimate ways of protecting assets because, if anything goes wrong, then the assets are not protected - unless they are bailed out.

While we have derivative trading, fiascos of this scale and greater, will become common place. I heard that Goldman Sachs made a huge profit last year. I bet they made it via derivative trading i.e. they didn't create any real value in the economy. If they're so successful, why is the US economy going down the pan?

They've siphoned a lot of money from the economy making it difficult to create real value. This is because that, in derivatives trading, to win somebody has to lose and it's you and me that are losing.

While this cheating, in the form of derivatives, is taking place, it'll make it difficult to get people to band together as the derivative traders will siphon most of the value without doing any work for it. War time economics can only work in the absence of illegitimate trading - how dare they call it trading.

Until next time, have a nice day.