US Economy – CDO trouble

Well, it’s good to be back in the USA after spending a week in Guatemala picking up our adopted son. We are happy to be back and are looking forward to seeing what God does with our little guy.

While I was gone, the markets certainly kept up their action. The most important event to occur in the financial markets in the last several years happened last week with the trouble in the Bear Stearns “High-Grade Structured Credit Strategies Fund”.

Now first of all, catch the name of the fund. It is called “High Grade”. This fund was supposed to invest in only high grade securities. The problem is, there were many sub-prime mortgages wrapped up with other securities into what are called CDO’s (Collateralized Debt Obligations). Get used to hearing about these as you will be hearing more in the future. These CDO’s were rated AAA by Moody’s despite containing sub-prime mortgages. How can this happen? Good question – one that will be asked many times over the next few weeks and months as many more of these CDO’s are examined and possibly re-rated.

And that is the rub. This particular hedge fund collapse is so significant because there are hundreds of billions of dollars in CDO’s that have sub-prime mortgages embedded within them floating all around our financial markets. And if they are all re-rated to a lower rating, many institutions who must only invest in investment grade AAA bonds will have to sell. This would start a vicious cycle of selling that could bring about the worst of all worlds – a complete financial meltdown.

I don’t think it will happen though. The Fed and all of the New York financial power brokers are in on the bail out of this fund. The reason they do not want the assets to be sold it that it would cause their true market value to be revealed. And all other holders would have to “mark to market” their holdings.

Here is a good article summarizing the situation. Mortgage Meltdown

This is a blood bath of extreme proportions either in the making or the saving. We won’t know for certain if they are able to save the financial markets for awhile yet. Confidence is high that the Fed and the PTB can do it. If that confidence fades, look for all kinds of turmoil in the markets with nearly every asset class – including precious metals – to be sold and sold hard.

If this occurs, it will be the beginning of something quite large and would be a great opportunity to get safe with God’s money. For now, we’ll wait and see. Gold and silver sold off hard today. It could get a lot worse before it gets better. But for long term holders, fear not. This is another in what will be a long line of bumps in the road of investing in God’s money.

The fundamental reasons for holding gold and silver have not changed. But when fiat money investments start to go sour, if it happens in a panic, people will run to cash first, selling everything and asking questions later.

Watch for the DOW to break sharply below 13,300. If that happens, the run might well be on. In Christ,
Doug

Category: US Economy