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NOTABLE! The Coming Recession (2019-2020?)

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JScott

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@JScott have your opinions changed at all since the fed has announced that buying equities is on the table?

Changes my opinion only in the sense that I'm a lot more terrified that this little experiment known as U.S. capitalism may be approaching it's conclusion. :(
 

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Silverfox148

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If you are holding cash waiting for a deflationary environment , you may be waiting for awhile. The government is going/has gone all in in keeping the economy/asset prices propped up, if anything you can expect more inflation at some point in the medium term future.

It's better to be in hard assets or cash flow producing assets as has been pointed out. This scenario is very different than the 2008 crash, there the government was still worried about "moral hazard" and still holding to a version of capitalism and letting some entities fail.

Not this time around, they are all in on keeping the economy propped up, if anything now might be the time to be buying cash flow producing hard assets such as real estate.
 

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I’m trying to find the article, but something happened that is going to probably impact the fiat currency in the mid to long term. It was a bloomberg article, but based onwhat they were saying the Treasury and Federal Reserve were significantly combined, giving the president a lot of direct control of monetary policy Directly.

anyone that has more expertise in finance can you weigh in on this?
First mistake is trusting anything from Bloomburg.
 

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In a typical situation, this would be a great plan. But when the government intervenes and stops rents being collected like they are doing in New York right now, cash flowing real estate may no longer cash flow with an increase of unpaid rent. This is the counterparty risk that most people invested heavily in real estate never question and now it is happening.

As I said above, I'm not too concerned about inflation in the short-term, simply because there is going to be little consumer demand, which is generally needed as a driver of inflationary pressure. If nobody is buying stuff, businesses need to lower prices, not raise them.

But, it's certainly a longer-term risk, and you like pointed out, stagflation is also a risk. This is what happened with Japan back in the late 90s when they overextended their central bank and wasn't able to control the expanded money supply.

Now, if you think inflation is a risk, the easiest takeaway is that cash is the wrong place to be. The most basic fact about inflation is that it makes your $$$ worth less.

What assets do you want to hold in an inflationary environment?

Leveraged real estate (or leveraged anything) is the best asset. That's because when you get a loan against something, you lock in a payoff at the value of the currency the day you get the loan. But, if that currency is worth less tomorrow, you're now paying off the loan with fewer dollars.

I always find using extremes to be the best way to clarify these types of concepts...

Imagine you get a $500,000 loan against a piece of real estate today. And let's say we have hyper-inflation next month, and the value of the dollar falls off a cliff. Suddenly, a gallon of milk costs $10, gas is $20/gallon, etc. Everything costs 10x as much as it did today.

If this happens, wages have to keep pace. So, instead of you making $50,000 per year, you're now making $500,000 per year (10x as much, for the sake of this example). But, you've locked in that loan at $500,000 -- that used to be 10 years of salary for you...now it's just one year of salary! It's a lot easier to pay off that loan in inflated dollars.

Not to mention, your income from that property has increased based on inflation as well. If you were getting $1000/month in rent, you now may be getting $10,000 (again, based on our 10x hyper-inflation example). So your money isn't going as far, but your asset is generating more of it.

Which leads me to the second best type of asset -- anything that cash flows. As inflation increases, so does your cash flow from any cash flowing assets. Hopefully this increase is one-for-one, but even if it's not, it's still better than cash, which is dropping precipitously.

Finally, precious metals or anything with perceived intrinsic value is a reasonable offset of inflation. Gold, silver, guns, ammo, etc.

Worst asset classes? Paper. Anything tied to the dollar. Stock market. Etc...

All that said, please don't interpret this post to mean I think we're going to have hyper-inflation. That was just an example to make my point. I don't think that *today* this is a big risk.
 

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In a typical situation, this would be a great plan. But when the government intervenes and stops rents being collected like they are doing in New York right now, cash flowing real estate may no longer cash flow with an increase of unpaid rent. This is the counterparty risk that most people invested heavily in real estate never question and now it is happening.
I cant believe people are asking to freeze rent while at the same time congress just passed 100% unemployment PLUS $600 a week extra. Rents should be increasing!
 
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JScott

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In a typical situation, this would be a great plan. But when the government intervenes and stops rents being collected like they are doing in New York right now, cash flowing real estate may no longer cash flow with an increase of unpaid rent. This is the counterparty risk that most people invested heavily in real estate never question and now it is happening.
Completely agree, but I'm hopeful that this is a very temporary situation with tenants not paying rent.

Also, I haven't been popular among landlords recently by saying this, but part of being an investor, business owner or entrepreneur is risk. The reason we have the opportunity to make big bucks is because we're willing to accept risk that others won't -- if there were no risk, everyone would be doing it!

While I absolutely, positively don't agree with the government being able to tell tenants they don't have to pay rent, this is a risk that we take. And we (usually) get paid very well for that risk. But, nothing in investing is guaranteed, and this is a perfect reminder.

This is the real estate investor's "black swan" event.

Because of that, I always tell landlords that they should have 6 months cash reserves. There are lots of more common things that can kill cash flow than a pandemic, and we all need to be prepared. This situation sucks, the government is overstepping their bounds (in my opinion), but if you're a landlord without a couple months of cash reserves to pay your bills, you have to take some responsibility as well.
 

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I cant believe people are asking to freeze rent while at the same time congress just passed 100% unemployment PLUS $600 a week extra. Rents should be increasing!
It’s not full salary plus $600 a week.

Full pay means full UNEMPLOYMENT pay, not salary. Most unemployment checks are 40%-60% of base salary, the extra $600 a week tries to bring that up to their regular salary.
 
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JScott

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The difference? People have been talking about a global recession for 2020 for 3 years. Something is due, which has no basis in any reality unless you have some hard data which a lot of you do have, however no one pointed to a virus or a health concern.
Plenty of people have pointed to virus/health concern as a possible trigger for economic downturn (or even collapse) over the past few years...

Here was Bill Gates predicting it back in 2015:


Obama's team predicted it, and even did a transfer of knowledge prior to this administration taking office in 2017:


Robert Webster predicted it a few months ago:


Jeremy Konyndyk predicted it almost perfectly back in 2017 (questioning whether Trump was prepared to handle it):


Lots of people predicted this. Did they know exactly when? Of course not. But, it's been part of the economic calculus for several years now.

Anyone who is surprised wasn't paying attention.


Like my previous posts, those who measure the thing and also affect the measurement are the most dangerous folks in the room. We also have non-stop 24/7 news and social media sharing. We have neighbor, nextdoor, facebook, tik tok, instagram, snapchat, periscope, signal, etc etc. We also have the 2016 election fake news manipulation scandal and Cambridge Analytica. We are addicted to drama, we crave this stuff. We have seem to bring this upon ourselves with two reasons:
Cool, but at the end of the day, the takeaway is:

The people who predicted recession were correct. The people who didn't were incorrect.

We could argue all day over who was technically right or wrong. But, most of us playing this game keep score with $$$, not accolades.

And those that predicted the downturn (and continued downturn) made $$$.

Those who didn't...well...didn't.

Bank accounts will ultimately be the arbiter of this debate.

In fact, you seemed to agree with that about a month ago, after one good day in the market:



It's not all doom and gloom.
Especially not for those who are prepared...

Things are likely to get very ugly pretty soon...the economic opportunity for those that are prepared may outweigh anything we've seen in 100 years in this country.
 
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csalvato

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A hyperbolic society: totally drama, reality-tv addicted society pleasured from hyperbole, extremism, and hysterics (I was still working at my gov't job while all the toilet paper, paper towels, and all cleaning supplies in America were bought) [right now the top streaming anything are movies of pandemics, viruses, infections, zombies, and end of the world movies]
Are you serious?

Hyperbolic? Drama?

the healthcare system is so overwhelmed, NY is allowing the graduating class of med students to practice early, are putting out emergency alerts on all cell phones for healthcare workers and stuffing the dead in freezers outside hospitals like Elmhurst because there isn’t enough room for them.

What’s hyperbolic, exactly? Do you really think these things are normal and would have happened anyway?

I’d find it challenging to hyperbolically describe the ignorance of your post.

I guess you can keep pulling up google trends instead of actually talking to people in the hot zones, because that will feed your unshakable belief that this is an overreaction.
 

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Andy Black

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Things are likely to get very ugly pretty soon...the economic opportunity for those that are prepared may outweigh anything we've seen in 100 years in this country.
^^^

We’re going through a massive worldwide upheaval. Lots of people hurting means lots of people we can help.
 

traction2

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Things are likely to get very ugly pretty soon...the economic opportunity for those that are prepared may outweigh anything we've seen in 100 years in this country.
Do you see the mortgage side and property repos start to kick in like 2008?
WFC was strong last time but I see they are more exposed to residential loans now.
 
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JScott

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They were exercising an act of precision versus being accurate. If you go back in history it is easy to see that recessive events occur less than every 10 years. Even doing that math is not correct (as you can see a terrible analysis of it from the Government of New Zealand saying recessions happen on "average" every 4.5 years). This is flawed as it doesn't take in the duration of the recessive period (just like the distance of each planet from the Sun was wrong and great physicists ignored the T axis of this calculation). So to take the latter part of the normal time period and predict an over due recession across the span of 3 years is hardly a feat. It is the similar to after waiting a month for it to rain, you predict within the next 2 weeks rain will occur, in an area where rain typically falls three times a month. To predict across a 33% likely spread has little "utility." This is where we go next. The utility of anyone's analysis. Bill Gate's "prediction" was also unhelpful. For someone to be truly predictive and thus CORRECT about recession, you'd need to be completely accurate. I would bow to the man who said, "hey these viruses that have come out of China will scare the hell out of the world and our elected officials will voluntarily initiate recessive measures. Thus putting us into a recession in the early parts of 2020 because these viruses are typically better transmitted during the winter months when people socialize indoors and after the holiday seasons when people are done visiting family. In particular the Chinese New Year will begin the global infection process when residents return from China after having contracted it by the folks there who exhibit little to no symptoms." This is about as accurate as it gets. I will tell you there have been some seriously close speculations as to the time-period, origin, and duration. But I have not yet seen in my limited searches anyone saying the recession would be self-induced by local and state officials barring commerce. That is out of left field for me.

Being accurate is different from being precise and being correct has a lot to do with both. Also there is inaccurate and imprecise positive matches and accurate and/or precise negative matches. What we saw with the 3 year spread "prediction" of a recession is inaccurate and imprecise positive match. They were not correct, they were lucky.
I think we can probably find some common ground here... These are my thoughts...

For the past six years or so, these philosophical discussions about an impending downturn were interesting. They've helped us all form our opinions that we could then use to "make our bets" on when and how that might occur. We've been having these discussions here for many, many years now, and while we haven't all agreed, we've learned from each other.

But, like in a casino when the craps dealer yells, "No more bets!" we've gotten to the point where pontification on the subject when a downturn might occur is no longer useful.

Our bets were locked in, and through now, we've either made $$$ or lost $$$.

While there will be a time for post-mortem about the end of the last expansion (and I will likely spend a LOT of time on that post-mortem), that time isn't now (at least not for me). The event has occurred, and we were all either ready for it or we weren't.

But, it's now time for the next roll of the dice! We can make new predictions and make new bets.

A discussion about where we've been is not very useful right now, but a discussion about where the economy (and various markets) are, that's a valuable discussion! It's now time to start making bets on the future.

So, before the dealer yells, "Lock in your bets!" on this next phase, THIS is where our focus and our discussion should be...

What's weird is this doesn't really match the definition of a recession. Information on Recessions and Recoveries, the NBER Business Cycle Dating Committee, and related topics. There is no lack of demand, the demand to travel, shop, buy houses, patronize businesses is there, but the capacity is not. Now though since companies have been shuttered we see a drop of demand from people not pulling in paychecks. @JScott, do you think we may come up with some different term? I know we seem to be adversaries but you are my teacher right now as you're growing and stretching my abilities.
A lot of people are tracking current economic data to try to assess the trajectory and impact of this event on the future of our economy. Personally, I think that's a bad way of looking at things. What is likely to happen between last month and the day this lock-down ends should be considered as a binary event.

It doesn't matter if the lock-down lasts a month or two years, the economic impact from the day before until the day after should be considered binary. I don't care where unemployment numbers came in last week, or next week or next month. All I care about is where they are when we return to steady state in a few weeks/months/years.

When all this is done, will unemployment settled at 4%? 6%? 10%? 12%? THAT'S the important question -- not whether they hit 20% or 30% in the meantime. That's all artificial. Where are we when the dust settles and we start to get back to "normal."

Likewise with GDP. Likewise with wages. Likewise with CPI. Likewise with PPI. Likewise with interest rates. Likewise with M1/M2. Likewise with every piece of economic data out there.

If you think that three months post lock-down unemployment is back at 4% and GDP is at 3%, you're going to make very different bets than if you think unemployment will be at 10% and GDP will be -1%.

Likewise if you think CPI will be at 0% or 5%. Likewise if you think M2 will be at $16T or $25T. Etc..

These are the things we should be discussing/debating, so that once the dealer yells "Lock in your bets!" on this next betting round, we're prepared to make our bets...
 
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JScott

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Do you see the mortgage side and property repos start to kick in like 2008?
WFC was strong last time but I see they are more exposed to residential loans now.
The mortgage industry is in a tremendous state of flux right now. With a lot of structural issues and risks that we're seeing for the first time. And much of this is being caused by stimulus and QE decisions that are *supposed* to be making things better. (The law of unintended consequences.)

For example, when large lenders lock in rates for borrowers days or weeks before closing, those lenders have to mitigate the risk of rates rising in the meantime. They don't want to promise a borrower a 3.75% rate, and then when the closing comes and rates are up to 4.0% -- the lender has to eat that difference.

So, what do lenders do? They hedge their bets in the bond market by betting in favor of rates rising -- if rates rise, they lose money on the locked borrower rates, but make money on the hedge.

But, over the past few weeks, mortgage rates and bond rates have been uncorrelated to a degree, and rates are all over the place. In many cases, mortgage rates are rising and bond rates are falling. So, lenders are losing money on their locks and losing money on their hedge. And lenders are starting to get margin calls on their hedges!

They are bleeding.

Another example is mortgage servicers. These are the folks that collect mortgage payments on behalf of lenders, keep track of the loans and then send the payments to the lender (keeping a small percentage as their profit).

Servicers are required to send mortgage payments to lenders whether they collect those payments or not. The servicers take the risk of not collecting, and that's part of their business model.

Well, with the lenders now saying they are willing to do forbearance on mortgages for the next several months, this means that a LOT of borrowers aren't paying their mortgages this month, next month or the following. But, servicers are still required to pay the lenders all the monthly payments that are *supposed* to be coming in.

If just 25% of borrowers decide to stop paying, that's about $50-75B worth of payments that the servicers owe the lenders, but that the servicers aren't collecting! Servicers are hoping that the government will bail them out, but so far, that hasn't been happening.

My guess is that we'll see some consolidation and turmoil in the servicing industry over the next few months/years, and it won't be pretty.

Lots of other stuff going on as well as a result of the stimulus/QE that the Fed has injected, but that hasn't been well thought out. I have a feeling that the biggest risks to the economy over the next year will be the unintended consequences of these drastic actions the Fed/Treasury are taking.
 
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The mortgage industry is in a tremendous state of flux right now. With a lot of structural issues and risks that we're seeing for the first time. And much of this is being caused by stimulus and QE decisions that are *supposed* to be making things better. (The law of unintended consequences.)

For example, when large lenders lock in rates for borrowers days or weeks before closing, those lenders have to mitigate the risk of rates rising in the meantime. They don't want to promise a borrower a 3.75% rate, and then when the closing comes and rates are up to 4.0% -- the lender has to eat that difference.

So, what do lenders do? They hedge their bets in the bond market by betting in favor of rates rising -- if rates rise, they lose money on the locked borrower rates, but make money on the hedge.

But, over the past few weeks, mortgage rates and bond rates have been uncorrelated to a degree, and rates are all over the place. In many cases, mortgage rates are rising and bond rates are falling. So, lenders are losing money on their locks and losing money on their hedge. And lenders are starting to get margin calls on their hedges!

They are bleeding.

Another example is mortgage servicers. These are the folks that collect mortgage payments on behalf of lenders, keep track of the loans and then send the payments to the lender (keeping a small percentage as their profit).

Servicers are required to send mortgage payments to lenders whether they collect those payments or not. The servicers take the risk of not collecting, and that's part of their business model.

Well, with the lenders now saying they are willing to do forbearance on mortgages for the next several months, this means that a LOT of borrowers aren't paying their mortgages this month, next month or the following. But, servicers are still required to pay the lenders all the monthly payments that are *supposed* to be coming in.

If just 25% of borrowers decide to stop paying, that's about $50-75B worth of payments that the servicers owe the lenders, but that the servicers aren't collecting! Servicers are hoping that the government will bail them out, but so far, that hasn't been happening.

My guess is that we'll see some consolidation and turmoil in the servicing industry over the next few months/years, and it won't be pretty.

Lots of other stuff going on as well as a result of the stimulus/QE that the Fed has injected, but that hasn't been well thought out. I have a feeling that the biggest risks to the economy over the next year will be the unintended consequences of these drastic actions the Fed/Treasury are taking.
Related to my post above from yesterday... Things just got a lot worse:


To explain what this means...

PennyMac is the largest mortgage aggregator in the country, which means they buy up loans from originators (the banks that make the loan) and package those loans up into mortgage backed securities (MBS).

Basically, when the bank you get your from is done making the loan, they will typically turn around and sell that loan to an institution like PennyMac. Banks can't afford to hold all the loans they make, and they rely on these big aggregators (and other purchasers/insurers like Fannie Mae) to buy the loans within a few months after they are made.

Now PennyMac is saying that they won't buy any loans that are in forbearance. Which means that if someone got a loan last week from, for example, Wells Fargo, and then this week that borrower decided to use the forbearance option to avoid payments for a few months, PennyMac won't buy that loan from Wells. If Wells can't find another institution to buy the loan, they're stuck with it.

Further, PennyMac is saying that they may require banks to buy back any loans if the borrower goes into forbearance shortly after the loan is sold to PennyMac.

Here's the problem: Banks like Wells Fargo don't have the reserves to hold all their loans! And if they're concerned that they won't be able to sell these loans after they're made, they're going to STOP LENDING.

Long story short, if banks start to get worried that others will follow PennyMac's lead, we could see the residential retail mortgage market completely dry up.
 

traction2

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Here's the problem: Banks like Wells Fargo don't have the reserves to hold all their loans! And if they're concerned that they won't be able to sell these loans after they're made, they're going to STOP LENDING.

Long story short, if banks start to get worried that others will follow PennyMac's lead, we could see the residential retail mortgage market completely dry up.
If the cap is lifted from Wells Fargo would that help as they could expand their balance sheet?
Do you see the Fed stepping in and buying the MBS?
 
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If the cap is lifted from Wells Fargo would that help as they could expand their balance sheet?
Do you see the Fed stepping in and buying the MBS?
Banks are notorious for wanting to keep as little capital reserves as legally required (which makes sense, as they don't make much money on reserves), and they also don't want to keep residential mortgages because that would use up their reserves. They'd rather originate a new loan (and make a fee) than hold a mortgage long-term, and make the interest.

As for the Fed buying MBS, they've been doing that for a couple weeks. The problem isn't with MBS -- it's with the servicers, and the question is whether the Fed will bail out the servicers. If so, the aggregators will probably keep buying loans and packaging them.
 

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Banks are notorious for wanting to keep as little capital reserves as legally required (which makes sense, as they don't make much money on reserves), and they also don't want to keep residential mortgages because that would use up their reserves. They'd rather originate a new loan (and make a fee) than hold a mortgage long-term, and make the interest.

As for the Fed buying MBS, they've been doing that for a couple weeks. The problem isn't with MBS -- it's with the servicers, and the question is whether the Fed will bail out the servicers. If so, the aggregators will probably keep buying loans and packaging them.

I believe that I did see recently that the FED lowered the reserve requirements to Zero.


Could this have the effect of banks continuing to lend due to the fact that they don't have to maintain reserves? It will be interesting to find out.

A consequence of this is that - at least for me - it erases any trace of trust I have with any money in a bank.
 
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I believe that I did see recently that the FED lowered the reserve requirements to Zero.


Could this have the effect of banks continuing to lend due to the fact that they don't have to maintain reserves? It will be interesting to find out.

A consequence of this is that - at least for me - it erases any trace of trust I have with any money in a bank.
The Fed hid this "little" change in the $1.5T repo package they announced a couple weeks ago. It amazes me that this didn't get a whole lot more press.

Personally, I think we'll hear a lot more about it at some point soon when banks find themselves with no liquidity and are begging for bailouts...

Horrible horrible requirements change.
 

tpuffer

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The Fed hid this "little" change in the $1.5T repo package they announced a couple weeks ago. It amazes me that this didn't get a whole lot more press.

Personally, I think we'll hear a lot more about it at some point soon when banks find themselves with no liquidity and are begging for bailouts...

Horrible horrible requirements change.
Seems like it was by design that it didn't get more press. It dovetails nicely with a video I saw of I believe it was a rep of the NY Fed saying that people need to keep their money in the banks as that is the safest place for it.

I agree with you regarding bailouts being a possibility. I think there will be some bail-ins as well. Cypress already had a test run with it a few years ago and there's potential it could happen here...
 

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I agree with you regarding bailouts being a possibility. I think there will be some bail-ins as well. Cypress already had a test run with it a few years ago and there's potential it could happen here...
This would be... nasty.

The Cypriot Crisis is what originally got me hooked on bitcoin.
 
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A discussion about where we've been is not very useful right now, but a discussion about where the economy (and various markets) are, that's a valuable discussion! It's now time to start making bets on the future.

So, before the dealer yells, "Lock in your bets!" on this next phase, THIS is where our focus and our discussion should be...
Given what I wrote above, I decided to start a new thread on the topic. For anyone interested:

 

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I have read some of the doomsday books and am so torn by what to take seriously.
Maybe somebody knows more about some those points?:

1. The banks topic really worries me. Many people have said for a while that legislation just makes sure that people can't legally protect their money since they know that only a crisis can solve the debt problem.

2. Besides banks and a digital currency that people can't hide under mattresses, they say it is also insurance. Most of the contracts seem to have clauses (or are there laws?) that say that you might have to pay fees even if the companies can no longer provide anything in return - when things get bad.

3. One author that I respect says that it would have been easy to stabilize the markets (because of the low volume) after the huge FED cut to the interest rates.
Usually they make sure that there is a visible effect to create confidence. The fact that they did not might suggest that a profound reset is something that the powers that be want right now.

4. If those powers also want to get their hands on cheap real estate (residential), then extreme restrictions will have to last quite a few more months longer. So far it is mostly the commercial realm and some luxury real estate that has a hard time.

5. What about special drawing rights (SDRs)? I have heard that the International Monetary Fund will have to step in to provide liquidity and SDRs could become a new kind of currency reserved for the very wealthy - in many areas taking the role that the dollar has played - just reserved for few big players.

Again, I don't know enough about any of those topics to judge the validity.
 

Everyman

Get To The Choppa!
FASTLANE INSIDER
Read Millionaire Fastlane
I've Read UNSCRIPTED
Speedway Pass
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