MASSIVE WORLD SPECULATION DOMINOS

Financial Sense University ^ | March 20th, 2006 | Christopher Laird

[Travis McGee]

MASSIVE WORLD SPECULATION DOMINOS

by Christopher Laird

PrudentSquirrel.com

http://www.prudentsquirrel.com/

March 20, 2006

Last year, many Asian and other foreign stock markets went up as much as 50%. There is a synchronized world housing bubble that is a very analogous follow on bubble from the Japan collapses in the early 90’s, and the Fed loosening following 9-11.

We had the tech bubble crash in 2000/1, and a have now a general US stock bubble that is yet to really pop. Right now, we are about at the same DOW level before the market collapses in 2001/2.

There is a massive US and Japanese bond bubble because interest rates are so low, and have been for over ten years, at least from Japan’s perspective. Japan has acted as a virtual central banker for the world, with their zero interest rates. That has caused both a multi trillion dollar value Yen carry trade (borrowing cheap yen then lending the money in the US for example for a net gain of about 3%). The massive Yen carry trade has also financed much of the world stock bubbles as of this point. Also, that money has found its way into the world real estate market bubbles through various forms of mortgage backed securities. This list is endless for the Yen carry trade.

For bonds, in general there is a huge increase in risk taking because interest rates world wide are so low. Fixed income investors like insurance companies, mutual funds and individual savers have no choice but to send their hard earned money into the under priced bond markets. There is no other place to get ‘safe’ returns.

The ultra low US interest rates of late have created the huge US and world real estate bubbles, and these are all synchronized and are going to crash together within 6 months of a public/investor consensus that a pop in the real estate bubble has occurred. This public and investor consensus has not completely formed yet, but is now forming. Housing data is now coming out every week with very significant statistics that prove the housing bubble is cooling. With over 30% of homes in the last few years being purchased as second homes or investment/speculation properties, the now 6 months backlog of houses on the market is going to cause a rush to the exits for speculators. That will ultimately bring down the housing market all by itself, even if many people did wish to keep their overpriced homes for a few years.

There is an unprecedented derivatives atom bomb waiting to collapse. The derivatives outstanding according to the Bank of International Settlements (BIS) has grown from roughly $20 trillion of value in the early 1990’s to about $300 trillion now. The Fed and US banking authorities have had two meetings in the last year to address the fact that there is a very large percentage of these derivatives agreements that are not closing their paperwork within even a month of their creation! The Fed and other regulatory agencies are very concerned that the Banking industry cannot handle the volume.

Warren Buffett has stated that derivatives are weapons of financial mass destruction, due to their incredible leverage. Every year now, we hear of old time banks and new ones going broke in a day or two when a derivatives trade goes south for them. The recent victims are the Chinese petroleum procuring company that lost about $700 million in some air fuel hedges gone wrong. The trader responsible has been arrested, as I recall, and probably going to rot in a Chinese work prison.

I could talk about the Barings collapse, the LTCM collapse, and others.

What would happen if there was a real interlinked derivatives domino collapse and not just one affecting two or three banks only? A financial catastrophe of unimaginable scope.

Now I am going to stop here listing the dominoes that are all synchronized world wide, because my fingers are getting tired, and I don’t plan on typing all day and night to even to begin to list all of these. I just wanted to list enough to give you a good idea because:

All of these dominoes are going to crash together in a period of less than a year of each other and perhaps even within 3 months of each other! I’ll tell you why in a moment.

Also, at this juncture, I wish to say again that there is a big ETF mania going on in all financial and commodity realms. The hot ticket is supposedly hard asset ETFs, to include gold. Many investors are turning to ETFs because they are a hot new idea. Hedge funds and other speculators are pouring money into ETFs, and increasing volatility in the metals markets.

My point is that ETFs are a hot investing vehicle, but are not suitable to people who want to own metals for monetary and wealth safety reasons. For speculators, I suppose ETFs are fine. In fact, most of the activity in ETFs now are speculators anyway and they are not in them for the monetary reasons, but to obtain speculative gains. I go into this in more detail in a special ETF report out this week at the PrudentSquirrel newsletter.

To get back to the issue of synchronized global bubbles…

The issue at hand about the world stock, bond, and real estate bubbles is that they are all peaking together. They are all at historic highs. And they are all peaking at the same time in every nation on earth. Developed nation or not, many world stock markets had incredible gains in excess of 50% just last year!

That, combined with maturing real estate bubbles world wide, and the fact that bonds are at a high peak because interest rates have been so low mean that, when any one of these lets go, it will cascade into the other like markets around the world. That cascade in the like markets will lead to stampedes out of the other bubble markets as well.

Then we will see a massive financial collapse with all the synchronized bubbles world wide, real estate, bonds, stocks collapsing in one fell swoop.

This will not be just a national or regional collapse, it will be a total world economic collapse because all these bubbles are now synchronized.

Kondratieff studied bubbles of all kinds, from population growth to economic. He found that bubbles invariably rise until a catastrophic collapse. It is my view that we are in the last stages of a world synchronized Kondratieff bubble that has subsumed all of the world stock, bond, and real estate markets. The inception of the final stage of this bubble occurred in the 1990’s when Japan opened a decade long policy of zero interest rates. That money ultimately acted like a global central bank liquidity wave that has found its way into all world markets, and has synchronized them in conjunction with the tech revolution and the emergence of globalization. The US participation since 1998 and after 911 only heightened the process and magnitude. © 2006 Christopher Laird

[Fury]

FYI...

[Travis McGee]

Yep, he was great. His death was a shock, because he was just in for "routine" bypass surgery with a 90% or better survival rate. Nobody saw it coming, and there was no "last" TM novel.

[Southack]

"Maybe because 3,000 years of recorded human history now points conclusively to the dollar being one more in a long series of currencies going bust?"

You say that like it's a bad thing. If it takes a wheelbarrow full of cash to buy a loaf of bread, then it will take a freight train full of cash to buy your house...the opposite of a housing "real estate crash."

If your currency is near-worthless, then you can't buy a bunch of imported Chinese crap, either. Suddenly the trade deficit goes away.

People start making their own bread (easier than carting around a wheelbarrow full of cash). Factories start producing things *here* rather than in some 3rd world sweatshop.

And everyone with a home mortgage gets to pay it off with worthless money...by the wheelbarrowfull.

Look around, Americans have a lot of debt. Well, if the Dollar crashes so far that it's about worthless, then all of that personal, car, home, and credit card debt gets paid off for just about nothing. You sell one loaf of bread for a wheelbarrow full of money and suddenly you've got enough cash to pay off your home mortgage.

I suspect quite a few people could live with that sort of "catastrophe."

[Travis McGee]

Great Depressions don't happen without a lot of pain. Yes, we will (hopefully) be tougher on the other side, but the risk of complete social collapse leading to anarchy or martial law/dictatorship cannot be ruled out.

[Southack]

One of the major traits of the Great Depression was that people lost their homes.

That does not happen with a currency collapse. Instead, when a currency collapses, people can pay off their old home mortgage notes with wheelbarrows full of worthless Dollars. In this way they keep their homes.

When they keep their homes, a major catastrophe is avoided.

This is not to say that a currency collapse is painless; lots of people would be caught off-guard and lose the bulk of their stored wealth (e.g. in checking/savings accounts)...but, Americans have the *least* of any nation in wealth stored in such accounts...so our pain would be less than anywhere else.

Americans have most of our wealth stored in 401k/pension/IRA/brokerage accounts...and in our homes. Well, stocks can handle currency inflation reasonably well...they just go up in price as the currency falls. And people don't lose their homes in a currency collapse, either...so the bulk of U.S. wealth is essentially shielded from a major currency collapse.

That's not the recipe for a major economic disaster.

This was *not* the case, however, 8 decades ago. Back then, most American wealth was in cash (typically hidden under mattresses or "saved" in banks). Even then, however, it wasn't a currency collapse that brought on the Great Depression. In fact, the Dollar rose in value at several points in that timeframe.

And both the German and U.S. economies recovered...one after a currency collapse, the other after an asset collapse.

[Travis McGee]

Bernanke is on the record as totally opposed to permitting a deflationary spiral to occur. Rather, he would dump cash from helicopters, in his famous turn of phrase.

It's either the USA or Germany, 1930s. Deflation, or hyperinflation. Choose your poison, both are painful, neither is a panacea.

[CodeToad]

The perfect storm is brewing.

[Travis McGee]

Yep. And the rose-colored-glasses pom-pom girls are laughing and singing, paddling down the Niagara River.

[Southack]

"Bernanke is on the record as totally opposed to permitting a deflationary spiral to occur. Rather, he would dump cash from helicopters, in his famous turn of phrase. It's either the USA or Germany, 1930s. Deflation, or hyperinflation. Choose your poison, both are painful, neither is a panacea."

The Fed doesn't think that it's that black or white. If they see deflation, then they airdrop money on the economy. Well, if they drop only enough cash, and not too much, then they stop deflation without causing hyperinflation.

Drop too much cash and they give us hyperinflation. Don't drop any cash and they give us Japan-style deflation. Get it just right and the economy booms in spite of dim-witted politics in Washington (e.g. budgets based upon the prior year plus some increase rather than zero-based and jusitfied each year).

So the Fed is microscopically examining inflation. When they see the slightest uptick in inflation after a cash-dump, they raise interest rates a quarter point. Then they wait. Did the PPI go down too much (deflation)? They adjust.

Then they repeat again. Looking back, they are averaging pretty close to their target rates for inflation and GDP growth.

This is risky. The whole thing has a soft trigger. But it is, in theory, sustainable.

For me, I'd prefer to see slightly higher inflation and GDP growth. Increase the speed of money. Get people hired, keep people hired, give out raises (whether they pace inflation is another thing altogether), and encourage people to spend rather than to hoard.

The Fed is actually *more* conservative than me. They are clearly afraid of the whole thing running hard one way or the other. They've found a window of inflation versus GDP growth that they think that they can sustain and control even with ridiculous foreign trade deficits and federal budget deficits...and so far, the Fed has been right.

If I were put in charge, I'd up the window and risk factor just a bit more (but not much more). I think that the economy can take more stress, so I'd prefer to be a little closer to the overheating side than the ice-cooler side.

[NewRomeTacitus]

Ebay from someone with a near 100 Feedback score via certified check.

[Travis McGee]

Fed monetary policy cannot cure a terminal case.

"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."

---Harvard Economic Society, October 19, 1929

[Tenacious 1]

[Maybe because 3,000 years of recorded human history now points conclusively to the dollar being one more in a long series of currencies going bust? Or perhaps you can point to one case in human history where an unbacked fiat currency has been printed to infinity from thin air, where it did NOT go bust? Let's see...the Roman Denarius? The French Assignat? The Weimar Deutsch Mark? Can you point to one, please?]

If my next comments insult you, then I apologize in advance, I mean no disrespect.

This sounds like something that has been taken out of context and regurgitated from an economics professor. Maybe an article somewhere?

The issue with currency of olden times when cultures foregone switched from trading commodities, goods and services directly to "money", which only represented the commodities, goods and services is that they did not understand what we now consider basic economics. They invented inflation and we only know how and why it exists because of that 3,000 years of history. Civilization has come a long way. A monetary value of currency is based on the availability of it. The harder it is to get, the more it is worth. We only know that because cultures before us just kept printing more to make themselves "wealthy". Before long the proverbial bucket was worth more than all the money you could stuff inside it. Our Guvmnt now keeps a pretty tight reign on how much money is in circulation going as far as to consider and research how much American money is being manufactured outside of the US (counterfeit).

If you think we are done learning about economics check again. Half of this country still does not understand how lowering the tax burden on the American population actually adds tax revenue to the Guvmnt. In fact, I would argue that no one can yet tell how low you have to go in taxes before you reach the "point of diminishing returns" and reverse the historic affect of lowering taxes (economic growth).

[djf]

I think part of the problem most people have is in distinguishing the differnce between gold as a long term investment medium versus a short term element of barter.

If there was some kind of breakdown, and you had something that somebody wanted/needed, what would you be more likely to accept for it?

Cash?
Food?
Stocks and/or other pieces of paper that are easily forged/counterfeited?
Gold/silver?
Guns/ammo?

No doubt, if there is a disruption, you would see alot of gold plated stuff being traded as the real thing. I doubt if very many people at all know how to tell the difference.

Bottom line, get at least a months worth of sustainable goods together. Remember when those Pasta Fettucini thingies were on sale for 3/dollar at the Safeway?

Buy it now and hold it.

I love it when people make all these grandiose plans for the future and retirement! There was a time when it was practical. But it is gradually giving way to pie-in-the-sky status.

[driftdiver]

" But if you believe Captain Smith, and want to remain on the bridge, that's your decision."

Ok that was a good example and I suppose I could could find many good examples for my argument but why waste the time. What will you do if our currency just go bellyup overnight? Will a closet full of gold help? No, the govt will either confiscate it or someone else will steal it. If they don't, what the heck will you use it for? The power vacuum will be filled and I'm sure our new masters will have plenty for us to do.

I think there are better ways to prepare yourself for potential problems of any kind.

[Travis McGee]

No doubt, if there is a disruption, you would see alot of gold plated stuff being traded as the real thing. I doubt if very many people at all know how to tell the difference.

Actually, no. It's easy to tell gold from gold plated lead, because it's almost twice as heavy. So a gold plated fake Krugerrand is the easiest counterfeit in the world to detect. Plus, you would need to invest in an extremely expensive minting machine and dies just to make even look-alike fake gold coins, not just a paper copying machine. If you try to make cast (poured in molds) fake coins, they would be spotted as fakes ten feet away, even BEFORE they were tossed on the gram scale.

[Travis McGee]

Our Guvmnt now keeps a pretty tight reign on how much money is in circulation going as far as to consider and research how much American money is being manufactured outside of the US (counterfeit).

You forgot the sarcasm tags.

[Travis McGee]

If you don't know why it's worth having some gold, then you have not studied any of the copius histories on the collapses of various fiat currencies.

[djf]

Well, you and I know of the specific gravity (19.6) of gold and how dense it is.

Realistically speaking, though, how many folks have ever held five pounds of gold in their hands? or even five ounces?

If there is any kind of breakdown, people would go into survival mode very quickly. And that means desperation. And throwing values and morals to the side.

The amount of swindlers out there depends on one thing - the amount of suckers! And we know there is no shortage of those!!!

[driftdiver]

"If you don't know why it's worth having some gold, then you have not studied any of the copius histories on the collapses of various fiat currencies."

There are also many numerous examples of cultures collasping that used gold, salt, and chocolate as currency. Any currency only has value because people believe it has value.

[Travis McGee]

Show me a few examples of societies suffering an economic collapse that used gold or gold-backed currency.

Should be easy. I'll be here, waiting.