Monday, May 30, 2011

The 'Decade of Debt' Story continues

Faithful readers know that this blog is fond of saying that the 2008 Financial Crisis was a profound financial earthquake, the depth and breadth of which we still do no fully understand nor appreciate.

And that viewpoint was reinforced a couple of times this past few days.

Dr. Joseph Mark Mobius, a leading global investor and emerging markets fund manager, warned yesterday that "another financial crisis is inevitable because the causes of the previous one haven’t been resolved" .

Speaking to the Foreign Correspondents’ Club of Japan in Tokyo, Mobius said that this was because the massive 'Over-the-Counter' (OTC) derivatives problem has not been dealt with yet.

“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes."

Many believe that  the $600 trillion or so in OTC derivatives will be the next source of systemic jeopardy.

Said Mobius:
  • "The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10. With that volume of bets in different directions, volatility and equity market crises will occur."
The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in write downs and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008. The MSCI AC World Index of developed and emerging market stocks tumbled 46% between Lehman’s downfall and the market bottom on March 9, 2009.

Mobius's warnings come the day after similar warnings from hedge fund titan Carl Icahn, who not only warns that the current levels of leverage are as bad as they ever have been and that the entire "system is not working properly." 
  • "I do think that there could be another major problem... I don't think that the system is working properly. I really find it amazing that we're almost back to where it was, where there's so much leverage going on in the investment banks today. There's just way too much leverage and way too much risk-taking, with other people's money... I think we're going back in the same trap, and i will tell you that very few people understood how toxic and how risky those derivatives were."
In the last post we mentioned famed commodities investor Jim Sinclair.  Sinclair has long identified the OTC derivatives problem as the primary reason we will have QE to infinity and soaring Gold/Silver prices.  Last week Sinclair sent out the following message:

  • Long speculated upon in our community, the rock and the hard place has finally become a reality. An economy not accelerating at an accelerating rate is declining at an accelerating rate. The mirage of a recovery is getting harder and harder to MOPE about. It simply is not there. We are entering a declining phase that will not end in any kind of a soft landing.
  • Stimulation monetarily, QE, and fiscal are like controlled substances in that the real high is on the first injection. After that, each additional stimulation of an economy must be multiples of the first stimulation in ever increasing size just in order to hold the line. QE3 is guaranteed unless the powers that be want to see a depression that will make the Great Depression look like kindergarten in the pain department.
  • This week we saw a European Bank forced to sell their US mortgage derivatives and the loss was a shocker. These pieces of crap are not worth the digital bits they are written on. Smart money has not let this event pass their view, and know now how broke the US financial system really is. This event broke the camouflage of FASB’s selling their souls out to politics by allowing the banks to value their mortgage derivatives at any price the bank wanted on the bank’s cartoon balance sheets. The western balance sheets of their financial institutions are raging misstatements. The system is broke. This is why there is no recovery of merit but rather a statistical aberration, which was until recently only holding the line.
  • Here we are at that place we have anticipated for the past 45 years knowing that all the games being played had to play out at that point where super stimulation had no effect and it became totally appreciated that even many trillions of printed money will only impact the currency and not business.
  • The rock and the hard place is a time when the Western World is simply screwed.
  • The risk of not stimulating is stagflation at a spiritual level. The risk of stimulating is stagflation at a spiritual level. The risk of doing nothing is both an economic and currency collapse of biblical proportions.
  • Should the Fed lose control of this, which is predictable, then currency induced cost push inflation would take gold to Martin Armstrong’s $12,500.
  • The odds are 70/30 right now that hyperinflation occurs. That takes gold over $1650. If the odds shift then gold starts a run to balance the International Balance Sheet of the USA and will secure Martin Armstrong’s target of $12,500.

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  1. Interest rates are at the lowest level in history for a reason. They are effectively putting lipstick on a Pig. The Pig being the world economy. It's amazing how fast the status quo can change. In one article Jim Sinclair explained how the OTC Derivative market is actually over 1 quadrillion, however a simple accounting gimmick allows total derivatives outstanding to be reported as $600B. Its the same with statistics such as GDP, unemployment and inflation, the numbers reported in the mainstream are nonsense. It's like if you repeat a lie often enough people start believing that inflation is 3.5% when it is actually about 10% if measured as it was in the early 1990s. We live in a time where nearly all information is managed to keep us fully invested, whether its in assets or supporting the war machine(time for another terror alert). Sinclair calls it Management of Perception Economics (MOPE). Protect yourself, through study and gaining the ability to separate the buckwheat from the bullshit, or wake up one day on the bad side of the biggest wealth transfer in history.

  2. Over a period of just less than 8 hours - the same pattern is occurring. Silver climbs for eight hours - then drops precipitously back to $38... It would be comical but we're losing our investments to thieves.

  3. same 38 dollar pattern a day later...