The world financial system is leveraged beyond comprehension. It's estimated that $500-700 TRILLION of derivatives are outstanding. Compare this with total economic activity (GDP) of the world, which is around $50 Trillion, and you can see that even a 5% drop in value of the derivatives is beyond the rescue capability of the world's central banks. --- Bert Dohmen (of Wellington Letter, and author of Prelude to Meltdown)
Two very interesting discussions are featured in this week's audio reports, one from Don Coxe , the other Don McAlvany. Incidentally, Coxe's site now carries the following warning: Links to Don Coxe's conference call webcasts are for the exclusive use of BMO Financial Group clients and are not to be distributed or posted for public access. What it means, I don't know. However, this is the last time I will publicly link to his site.
Coxe's discussion isn't very long. Aside from some his usual interesting tidbits, it was the Q&A that mostly caught my attention. First time I had ever heard mention of "synthetic money". This was Coxe's term to address that all money metrics, M1, 2,3, etc, not very helpful in determining what's going on today. Instead, Coxe thinks real interest rates are the key factors to look at.
Clearly, on the basis of this discussion, and the McAlvany interview with Bert Dohmen, the question about the current environment being deflationary becomes absurd. In fact, Dohmen's argument is so convincing that, well, you'll just have to hear it for yourself.
The key, of course is that the Fed, et al are waging an all out fight aimed at countering the collapse, which is so devastating that, well, again, you just have to hear it for yourself. The current recession is SO DEEP, SO PERVASIVE, that the world is on the verge of going down. No place to hide, 'cept maybe in "real money", meaning metal. Such is what the market is saying.
Highlights from both discussions: (sorry, not in any particular order)
Synthetic, or Neomoney: Negative real rates are being sustained, which leads to inflation. Printing or not printing" money, based on the Ms, is not the real focus, though argued back and forth practically everywhere. What should be matter of interest is that, so long as negative real rates prevail, bad lending will continue to be stimulated and savers will keep losing money as bad allocations of capital continue to be subsidized at savers expense. So long as savers continue to lose money central bank policy should be understood as supporting mal-investment. Implications should be obvious. Inflationary pressures remain in short term. As for the Dollar, trend will remain downward until BKX has risen 80%.
Dohmen sees a 30-yr inflationary cycle (which began in early 2000) underway. What it means is that we're now in secular bear market. Way too early to go bargain hunting. Government fudging numbers, big time. GDP is negative, at least to the tune of 4-5%, which means we're in midst of sharp contraction. Japan, Europe, US - all in recession, and bound to go much deeper. All currencies of the world are destined to decline relative to gold. Be clear, this is the strongest bear market since the 1930s. And it's at the end of a recession when you get deflation. All this is totally contrary to what you hear from the media, especially CNBC, specialists in bringing on analysts who chatter about US not being in bear market. It is a gross deception.
The kitty is empty, banks have run out of capital. Banking system is in dire straits. Key focus, going forward, is liquidity and credit. When credit contracts the market must go down. Rates will have to move in direction of zero. Tens of trillions of dollars are just going up in smoke and CBs can't accommodate enough. The problem is not that Fed is creating too much money.
We've not yet arrived at the recognition stage. Unemployment hasn't surged yet, primarily because so much labor had been outsourced. Emerging economies, therefore, will get hit. No place to hide. The world is in the process of going down. Civil unrest will become the biggest problem in emerging economies, and this is one of China's biggest fears. There could be 200 million unemployed Chinese, having moved from countryside into cities and fully out of work. China is NOT BLOOMING. Their market is already down 58%, which means they're signaling awareness of the problem.
Best investment over next several years will be shorting the emerging markets. It's a worldwide recession that we're in, emphasis being placed on global downturn. Three hundred point rallies never occur in bull markets, check history an you won't find it. Such rallies are the hallmark of a recession.
Are we safe, knowing at the helm of our federal reserve is an academic specialist on depressions? Consider the case of Robert Mugabe. Mugabe, according to Dohmen and McAlvany, has 3 PhDs and other multiple degrees, some coming from Oxford no less. I checked around the Net and did find records showing a master's degree in economics, a bachelor's degree in administration, and two law degrees — to go with the three bachelor's degrees he already possessed, in economics, education, and history and literature. Guess certificates don't necessarily mean dip. Fade 'em.
Dohmen Capital Research - excellent bookmark candidate.
Excerpt from the WELLINGTON LETTER, August 5, 2008
.....................Bridgewater Associates' recent estimate of losses from mortgage-related securities in the financial institutions is $1.6 trillion. If you look at the leverage ratios of these firms, they seem to average around 25 to 1. That means each dollar of capital supports $25 of assets. If $1.6 trillion has gone up in smoke, than we multiply that times 25, and get a reduction in lending capacity of $40 trillion.
The world's economic product (similar to a country's GDP) is around $55 trillion. So we can see that the reduction in lending capacity is 80% of what the world produces each year. However, we also have to consider how many institutions, banks or financial firms, have severely cut their lending voluntarily just to be more cautious.
And then we have Wall Street's incredible money machine, which pooled loans of all types and resold them via certificates, coming to a screeching halt. In fact, that was one of the largest contributors to worldwide liquidity creation. European banks also participated in such techniques. This involved trillions of dollars.
The result is that money will be very tough to borrow over the next many years. The bad stuff has to be liquidated first before new credit can be created. And when money creation flips from creating tens of trillions of dollars to liquidating similar amounts, you have a drastic change in liquidity. And that can only result in a serious, long-term recession, globally.
People ask me, why haven't we seen the U.S. economy plunge into a deep recession? There are several reasons...
Excerpt from the WELLINGTON LETTER, July 16, 2008.
Banks and finance firms worldwide have so far reported losses of about $410 billion in writedowns and losses. There is much more to come, but they can't do it all at once, as they have to raise new capital every time they take more writedowns. Ray Dalio, founder of the huge hedge fund, Bridgewater, estimates losses of $1.6 TRILLION. My estimate for the next 10 years is much higher.
Think of the implications: Where will these financial firms find the capital to compensate for these losses? Are there any investment firms or Sovereign Wealth funds willing to provide such capital, especially those who were too early at the end of last year, and now are sitting on multi-billion dollar losses on these investments? Bankruptcies, or "shotgun weddings," are inevitable. In fact, last year I predicted that some of the major U.S. financial institutions would eventually be controlled by foreign entities. Guess what: now legislation is being considered which would give a blessing to foreign firms wanting to own more than 25% of such institutions. The groundwork for the inevitable is being laid.
from Prelude to Meltdown (excerpt)
"While everyone on Wall Street talked about the huge amount of "liquidity," Bert pointed out that genuine liquidity is cash, and that Wall Street confused liquidity with "credit" which could disappear overnight. And that's exactly what has happened.
It's estimated that $500-700 TRILLION of derivatives are outstanding. Compare this with total economic activity (GDP) of the world, which is around $50 Trillion, and you can see that even a 5% drop in value of the derivatives is beyond the rescue capability of the world's central banks."
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