Ouch!

The subprimes were hit again today. Here's Bloomberg's report on the downgrades of BBB- bonds from Moody's. The simplicity of the math is frightening. Subprime mortgage bonds have yields of up to 9.25% If you bought the bonds a month and a half ago, you got 9.25% (max) and could insure against default for 3.89% for a net of 5.36% (max). That's a bit better than Treasuries. Now, however, insurance costs 11.2%.

Game over.

On paper at least, all future subprime mortgages are uninsurable. If they're uninsurable, they're unsellable. If they're unsellable, all the subprime lenders will go bankrupt.

Our economy has over $2,000,000,000,000 trillion worth of subprime mortgages. This drop is exactly what George Soros talks about in "The Alchemy of Finance." I feel pretty silly to have missed it completely. However, I still think this is in the baby stage.

When the loans go bad, the lending stops. Why don't the banks bail them out you say? It won't help, because it's cheaper for the bigger banks to cut their losses and run.

It's a slippery slope, it's very, very steep, and it's getting steeper. In the practice account, I'm going to position everything around this as aggressively as I possibly can.