Heidi-Lore’s Musings

For more than a year, the linguistics work of www.halfpasthuman.com has been pointing with a high degree of specificity to October 7, 2008 at 07:10 UTC as a ‘moment’ on the timeline when the whole world will stop its ‘tension building language around present events and will shift into what we call ‘release language’. To explain a bit further, the events we have seen recently have been predominately the kind that cause us to suck in breath, and hold it, very much like I’m watching the U.S. futures markets which show the SPOO’s down about 3% while things in the UK are right on the verge of collapse. If the language is right, ‘you ain’t seen nothing yet’ and the balance of this week should be the mother of all economic events that will be referred to in future textbooks as the (whatever-they-call-it) of 2008.

Cliff & I will be on the Jeff Rense radio show tonight.

Not that we’re alone, of course. I happened to be talking with Arch Crawford [The Crawford Perspectives, www.astromoney.com whose September newsletter forecast for a 'crash window' of October 10th - plus or minus 3 days - which uncomfortably overlaps with Cliff and Igor's work which recently has been right in the same kind of range - plus or minus two mostly. I really, really don't like it when the nontraditional/unconventional data points start to line up.

While we don't know precisely what to expect, in general terms it should be 40% military, 20 percent natural disaster and 40% economic in nature. A sequence that would fit and be relatively peaceful would be a simple collapse of the financial markets around today's Fannie/Freddie trading deadlines, perhaps coupled with a major global bank collapse, with looting of its data to hide various criminal activities, perhaps up to and including murder, which would lock things up and necessitate an economic emergency being declared.

On the worst-case side, it could be something like a terrorist attack, timed to take advantage of the momentary weakness of the Western/capitalist system. That would explain the model references to 2, 2.2, or 22 million people impacted. Hopefully, the impacts won't be oif the cinder-making kind and will be limited to a cancelled latte run, or something like that. Nevertheless, the showdown date is here and we are 'in the window' for shift to release language this morning.

Cliff and Igor, the mad scientist and his understudy, besides baking pies, have been keeping a sharp eye on the data streams coming in from their spiders which are out and about sampling the various forums/fora around the internet, because having a T-1 open this is a remarkable opportunity for them to see language shift right at the point of commencement. I imagine that for the next month or two, our conversations will be laced with heavy dosed of terms like 'change propagation' and so forth.

My personal pick for "The" event will be some fallout from today's price settling for $500 billion worth of credit derivative swaps in Fannie Mae and Freddie Mac contracts.

As I outlined for Peoplenomics subscribers this weekend, a sequence of events could be something like this: One major player finds that they need to raise more cash than expected in order to avoid default, as in this particular asset class, it's very much like the music stopped or someone sounded the buzzer and now all the players have to find chairs. The chair prices get set today and settlement comes over the next couple of days. Bad as that may seem, trust me: It's way preferable to a potassium iodide kind of event, if you follow my drift here. But, you know that's out there as a possible Black Swan. (If you haven't read Nassim Nicholas Taleb's book on topic yet, it will make fine Greater Depression reading material, since linguistically, that's just ahead a few months as we do our unique Americanize version of the Argentinean collapse of 2000/2002, which your attention was spun away from by the events of 9/11.)

The sequence that could be occur is if a Big Player has to sell off so much other 'stuff' in their portfolio that it begins to crashcade (sic) such that one things leads to another and the financial system locks up. Things go into a momentary meltodwn, but then it recovers briefly, or at least stabilizes, and then most of the know world goes over the financial edge between October 24th or so on into November 14. And then two weeks later we get this double earthquake that's in the work for the December 10-12 part of the timeline. So, it promises to be interesting.

My tax attorney/CPA, who calls himself a simple 'country attorney' sent in a much more learned description of the situation for my review, with permission to share:

Bye Bye Ms. American

Pie Credit Default Swaps, part of that land of legalized Gambling Market for the Big Boyz have in important day of destiny today.

Today, Monday Oct 6, 2008 is the day that those swaps written on Fannie and Freddie bonds are to be marked to a make believe market determining the value of those swaps. After today's value setting some will owe money and some will be owed money, potentially LOTS of money. Final CASH settlement (or delivery of bonds) on all of those positions will be in just over a week.

By the end of today some of the more leveraged players in that end of the Gambling Market for Big Boyz may (will?) have "blown up" and have left craters in the landscape called Derivatives.

Many of those who may (will?) blow up in the initial wave already know they are going to "blow up" today, the reason that for the last several days one allegorical song has been repeatedly been going through my head. ...

"So Bye Bye Ms. American Pie

Drove my chevy to the levy

but the levy was dry

Them good ol boys drinkin whiskey and rye

Singin "This'll be the day that I die" Singin "This'll be the day that I die"....

First how big is the Credit Default Swap market, a market where people gamble on whether bonds will default or not default?

It is a market that has grown very quickly with current Notional Values estimated to be about $54 Trillion.

Of course that is not the amount really at risk, from the outside that is hard to determine, but an estimate of $2 to $5 Trillion may be in the ballpark (25:1 to 10:1 leverage).

One important thing to keep in mind about Credit Default Swaps that few outside Wall Street understand ... no one who bought or sold one ever needed to actually own the bond or want to own the bond that the Swaps were being written against.

Think of it like a side bet by everyday citizens, say Jack and Mark, on a football game. They use the football game as an event to bet against but neither one plays for the teams, owns them etc..

Because these are side bets the value of the Credit Default Swaps in the system can EXCEED the total debt that they are written in reference to!! (although in many cases one of the parties DID own the underlying security and was trying to protect their investment).

In the case of today's price setting of the value of the Fannie and Freddie Swaps how much CASH money is going to be changing hands over the next week or so? From the news reports there are between $400 to $600 Billion (net) of Credit Default Swaps outstanding on these two entities, probably towards the upper end of that range (I am going to use the higher figure as I talk about these below).

If the bonds end up trading overall at 90% of their "bet" value that would mean that $60 Billion in CASH would have to be delivered to the those who bet the value of the bonds would decline ... PRONTO!!

If the amount is less, say 70%, that amount owed would skyrocket to $180 Billion in CASH.

Some of those guys on the "levy ... drinking whiskey and rye" today, actually probably sitting in a private club in London or New York drinking top shelf stuff, KNOW they are about to be "blown up" today which of course is why they are out drinking.

When they do officially blow up at the end of today and can not fulfill their obligations those losses that they can not pay off are then going to flow to someone else who may not know that they have some swaps that are "...8 miles high and falling fast..." and about to fall right into their lap as they explode.

Voila, what an unwelcome surprise from out of the blue!!

If an entity that owes payment on one of these Credit Default Swap contracts "blows up" and can not pay off their obligations then the losses are going to go in one of two directions. (first a little detour: many of those now holding either the obligation to pay or the right to receive payment were not the original swap parties. The current obligor or obligee may have bought that swap contract second hand from someone else. From the limited information available to the public it appears that in fact there has been a very active market in reselling these contracts)

If the an entity that "owes" bought that "Owes" swap from someone and it was "With Recourse" then those losses could flow back through the chain of ownership of previous owners of that "Owing" swap and the last previous entity that previously owned it now owes the amounts that final obligor owed but could not pay. It is my understanding that this may NOT be the case with most swap contracts.

On the other hand if an "Owes" swap contract that was sold by it's previous owner such that there was "No Recourse" then the previous owner is in the clear. Now however the person who expects to be paid is NOT going to get the money that they thought they were going to get!! (same result if the "owing" party was the original party on the "Owe" side of the swap)

One thing that is certain, someone WILL take it on the chin if a Swap Obligor can not pay on their swap obligation once final settlement occurs during the next week or so, possibly creating an unanticipated shortfall for the entity who either has to now pay or the entity who was expecting to be paid.

Hopefully those who can not fulfill their payment obligations will be few and the dollar amounts, if they do occur, will be small.

Also, one can hope that if parties do go broke today as a result of the setting of value of these Fannie/Freddie Swaps and thus send some of their their losses to someone else it doesn't start a cascade of failures through an entire group of undercapitalized players. (It is difficult from the outside to get a handle on who the parties are who trade/own or owe/are owed money in the Swap market. From the little bit of information available it appears that for this particular Swap market about 1/3 of the trades are by Hedge Funds, who as a group may well be the least capitalized players in this particular game).

The risk for the markets is not just that the party who "owes" may not have enough assets to pay off what they owe but also the fact that those needing to pay out CASH money over the next week may need to be selling OTHER assets in order to raise the money needed to fulfill their CASH payout obligations.

One of the big risks for today's Credit Swap Default value setting is that it can lead to a wave of selling all sorts of assets by the Big Boyz so that they can both raise cash to meet their obligations AND to keep their portfolio positions and risks balanced. (A lack of balance in a portfolio raises risks so the Big Boyz players are always buying and selling as things move up and down so that they can remain within their risk parameters. Sometimes trying to maintain steady risk parameter by the big players means that selling begets selling, the most notable example of which was the internal dynamics of the 1987 crash when to control risk the big players had to sell into a declining market which of course pushed the market down even further faster.)

The questions that those of us on the outside can only ask, but probably will not know the answer to until after the fact are: How much risk exists for the insolvency of some of Big Boyz as they have the amounts as to what they owe set to an amount greater than their assets?

How much more asset selling will need to be done to cover the cash requirements for the CASH payments that will need to be made over the next several days once the values are set today? (one must assume that the ones who are going to owe money have been liquidating assets in anticipation of their payment day so this may actually be a relative non-issue)

How much portfolio rebalancing and risk rebalancing is going to be needed to be done by the Big Boyz over he next several days in order to rebalance their positions as these Fannie/Freddie Swaps are taken out of their portfolios and how will that affect the markets?

How much will the banking system itself be affected by the large money transfers that are going to need to be made. Are some banks at risk due to loans to Hedge Funds, or through third parties then to Hedge Funds, that suddenly do a belly flop? (banks that may be affected are not just limited to US banks but may include other banks around the world, particularly European banks). [Linguistically, we'd be watching the World Bank which has been a huge conduit for US Treasury debt paper and the BIS which is a clearinghouse as leading indicators of global systemic stability. - G]

How much were banks themselves playing in these markets? Darnn, I am hearing that song again: …

“So Bye Bye Ms. American Pie

Drove my Chevy to the levy but the levy was dry

Them good ol boys drinkin whiskey and rye

Singin “This’ll be the day that I die”

Singin “This’ll be the day that I die”….

Darnn, Lehman’s value setting is coming up on Oct 10 and Washington Mutual’s on Oct 23.

This all could just be a Yawner … or it could end up being the ride of everyone’s life.

Paulson and Bernanke though sure seemed to be in a major league panic last week wanting to get LOTS of money approved for unstated reasons before even a couple of more days elapsed. Do they know something that those of us out in fly-over country can only speculate about?

http://urbansurvival.com/week.htm