Wednesday, November 16, 2011

Keeping the balls in the air

The email inbox overflows from yesterday's posting on the political attack video about Vancouver's Mayor Moonbeam, clearly striking a nerve on various sides of the civic political spectrum.

Today, however, we switch gears and go back to world's debt problems.

As we have commented before, debt will be the issue of this coming decade... specifically Sovereign Debt. 

The ticking time bomb in this mess is the financial product known as 'derivatives', vehicles which Warren Buffet labeled as "financial weapons of mass destruction".

I am fond of saying that what we experienced in 2008 was a deep, financial earthquake - the repercussions of which we do not fully appreciate nor understand.

I maintain that viewpoint even today.

The chain of events set into motion in 2008 still has a long way to play out. A massive amount of private and public debt  has accumulated and the system needs to allow this debt to unwind, no matter how painful this process will be (and it will be painful).

We cannot have meaningful recovery until this happens.

But Western governments have not allowed this to happen. They have intervened to prevent the pain.

The slate needs to be wiped clean but the problem is eliminating all these debts, deficits and unfunded social entitilements will trigger the gorilla in the room: the $600 trillion of derivatives created by the banks.

This is why the Euro zone and the PIIGS is such an important topic.

Bloomberg hilighted this today by reporting that JP Morgan and Goldman Sachs have disclosed to shareholders those two banks alone have have sold protection on more than $5 trillion of debt globally (much of it dependant on the debt of Greece, Italy and Spain).

Bloomberg notes, "as concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether."

The banking system has enabled the creation of an unsustainable mountain of debt.

What we have watched since 2008 has been nothing more than a complex juggling act that has - so far - failed to deal with the root of the problem: eliminating the debt.

The crisis that looms on the horizion will be the biggest event in our lives and understanding/preparing for it will be the most important step you will ever take.

Future generations will look back upon the 25-year period after 2008 in a way that dwarfs the 25-year period that followed 1929.


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  1. Whisperer, you might be interested to read the new GEAB newsletter... (I've already posted the link on other blogs)

    In their previous newsletter, they forecasted the failure of major financial institutions… And what happened since then? (cf MF Global)

    Below is an abstract (the link to the full article is after).

    “Speaking of public debt, it is time to turn to the United States. The coming weeks figure to remind the world that it is this country, not Greece, that is at the epicenter of the global systemic crisis. In one week’s time, on November 23, the Congressional “Supercommittee” in charge of reducing the US federal deficit will admit its failure to find 1,500 billion US dollars in savings over ten years. Each side is already crafting arguments that will blame the other side. As for Barack Obama, apart from his televised simpering with Nicolas Sarkozy, he now contemplates the situation passively, while noting that Congress has torn into pieces his grand jobs project introduced only 2 months ago. And it is not the utterly unrealistic announcement of a new Pacific Customs Union (excluding China) on the eve of an APEC summit where Chinese and Americans are expected to confront one another harshly, which will enhance his stature as head of state, let alone his chances for reelection.

    The predictable failure of the “Supercommittee”, which reflects the overall paralysis of the US federal political system, will have an immediate and drastic consequence: a new series of credit ratings deteriorations. The Chinese agency Dagon has opened fire, confirming that it would once again lower the rating upon the failure of the “Supercommittee”. S&P will probably lower one more time the US rating, and Moody’s and Fitch will have then no other choice but to get on board, having given the US a reprieve until the end of the year under condition of effective results in terms of public deficit reduction. Incidentally, in order to dilute the flow of negative information in this regard, it is likely that there will be an attempt to reinforce the public debt crisis in Europe by lowering France’s rating in order to weaken the European Financial Stability Fund.
    All of this makes for an eventful season for the financial and monetary markets, casting severe blows on Western banking systems and, beyond that, on all US T-Bond holders. But beyond the failure of the “Supercommittee” to reduce the federal deficit, the entire US pyramid of debt will be thoroughly examined, in a context of global – and of course US – recession : falling tax revenues, unemployment increases, increases in the number of unemployed no longer receiving benefits, further drops in home values, etc.”


    “In terms of the amounts at stake, a quick calculation by a USreader of GEAB gives some sense of how much the “efforts” undertaken to reduce the budget deficit are ridiculous in relation to the needs : Treating the US federal budget as that of a household, things become abundantly clear. Simply remove 8 zeros for budget that comes to mean something for the average citizen:

    Annual household income (income tax): + 21,700
    Family expenses (federal budget): + 38,200
    New credit card debt (new debt): + 16,500
    Past credit card debt (federal debt): + 142,710
    Budget cuts already made: – 385
    Budget reduction targets of the Supercommittee (for one year): – 1,500

    As can easily be seen, the Supercommitte (like Congress last August) cannot even agree to a 10% reduction … of the annual increase in federal debt.”

    Things are just starting to get worse.

  2. Whisperer... I have been thinking about a means to gather like minded (and properly PM hedged) people to act as a buyers group once these issues play out. I believe I have a "play" that could work well. Any thoughts on how to find people like this in Vancouver? Just regular people who don't own gold mines ... sort of thing.

  3. I am reading about preparing for the coming disaster but I'm completely at a loss to k now how to do that. A bunker with guns and ammo and tinned food? Gold buried under the floor boards? Berkshire stock? Foreign currency? Real estate (not in Van of course...) Any advice on this Whisperer? While I'm trying to educate myself, financial literacy nor fortune-telling are among my talents...