The Bubble that will Burst Higher than all Previous Bubbles: Depression Looms as the Dollar Crashes.

Economics, formerly known as the queen of the social sciences[1], is now so complicated that few can understand the process. But, this cognitive barrier does not prevent political activists from distorting the destined outcome of some financial misadventure as they can readily identify and enlist enough lackeys and stooges to rally and assemble a noxious chorus[2] to sing the praises of such an action. Thus we can assemble a quorum to merrily sing the praises of our destruction. That is happening now as we print money with no end in sight. The ‘rich’ will pay for all this.

The current case of rising asset prices has been analyzed by Nouriel Roubini[3] , as is his custom, and his predictions are usually correct. In his article entitled “Mother of all carry trades faces an inevitable bust” we learn this:

“Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.”-- Mother of all carry trades [Emphasis is mine in all quotes.]

Normally, the value of some asset is calculated from its intrinsic value[4] which involves a time element and some projection of the asset’s return in a given time span. We saw wealth evaporate in the housing bubble[5] recently where the intrinsic value was distorted by demand that was driven by explosive credit and government propaganda about ‘affordable’ housing.  Fortunately, we have the law of supply and demand that cannot readily be repealed by governments and that law controls prices and supply. Our current liquidity circus has stimulated demand for assets way beyond their intrinsic values and this will correct itself in a bubble[6] when demand collapses.

“But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.”-Mother of all carry trades

The carry trade[7], which is a return or a profit from just holding an asset, allows for big profits as the dollar loses value thus the intrinsic value of equities and such are temporarily distorted until a massive correction is forced by supply and demand as the carry trade becomes negative. The bubble then bursts. This is all driven by shorting the dollar and that increases the supply of dollars and accelerates the downward spiral.

“Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.”-- Mother of all carry trades

This is what happens when governments start to just print money. The investment and financial structure of the country is distorted and people find out how to make huge profits off of the money swimming around in every yard and sidewalk.

A reversal in dollar weakness would require that traders then cover their short positions and:

“But one day this bubble will burst, leading to the biggest co-ordinated[sic] asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated[sic] collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.”-- Mother of all carry trades

This one, in my view, is just another of several looming bubbles. The phony mortgage mess we had stimulated a false demand on housing and that collapsed as people could not pay their mortgage payments. The next bubble will be whatever our phony government attempts to pump up and that is now: jobs, green products, subsidized cars and other follies. This all stems from a belligerent attitude on finances by our elected officials. They seem to believe that if wealth is lost by homeowners who should never have been given loans to buy houses then we can just print money and ‘forgive’ these excesses with do damage to the economy and the ‘rich’ will take the haircut. The ‘rich’ don’t have that much wealth.

The total world gold supply is thought to be about 158,000 tonnes[8] we find and could be contained in a cube with dimensions of less than 20 meters to an edge. At 32,000 ounces per ton[9] we get about $5,308,800,000,000 valuation on the world’s supply at the current price of $1050 in US dollars. Thus 5.3 trillion dollars represents only ½ of our national debt of 12 trillion and is very small compared to our imputed debt from Social Security, Medicare and the 8 or so trillion dollars printed up by the Federal Reserve which might hit 100 trillion according to some estimates. Note also, that the world debt is much higher than this so it appears that gold is one of the few assets that can withstand an explosion in the money supply. Now, what does the supply and demand law tell us about the future price of gold in US dollars? Thus, there must soon be a rush to convert worthless dollars to tangible assets like gold or real estate or other physical goods.

But, our bubble may be off in time and the next big bust may be Japan. Their current debt to GDP ratio is currently 218% and will rise and our US debt is about 85% [=12/14] and rapidly rising. :

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They [Japan] will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."[10]-- It is Japan we should be worrying about, not America. Japan is drifting helplessly towards a dramatic fiscal crisis. By Ambrose Evans-Pritchard Published: 5:33PM GMT 01 Nov 2009 

But, the hokum chuckers[11][12] in our government will just raise taxes and ‘soak the rich’ and continue on spending all the merry while. That is what parasites do: they feed off the host until it dies.

When this bubble bursts the debris and residue will litter the moon.  

rycK

Comments to: ryckki@gmail.com

The New Obama Diplomacy: Clinton and Her Nasty Mouth Soars Beyond Dignity, But Does She Have a Point?

Diplomacy is supposed to be the communication device that is conducted with aplomb, dignity and respect although there is no  cited directive in any history books where diplomacy is presumed to effective. We read from Wikipedia that “…diplomacy is the employment of tact to gain strategic advantage or to find mutually acceptable solutions to a common challenge,[1]” and that definition seems to be out of date. We need some diplomacy that works.

We can search for examples of how certain wars were averted, or, on the contrary how diplomacy obviously failed to prevent our Civil War, WW 1, 2 and Korean and Viet Nam and all that. The only conclusion that makes sense is that diplomacy as currently being practiced is nonsense. A careful reading of the 1957 book:  War and Aftermath 1914-1929 by Pierre Renouvin enlightens us on diplomacy. [2] This source gives us an objective view of the workings of ‘diplomacy’ from the early teens to 1929 and the results obtained from the expenditures seems to show that nearly all the talking and mumbling went for naught. All the meetings and subsequent treaties and erratic whooping about preventing Germany from getting her revenge after Versailles and restraining Japan in the Pacific went for nothing.  For the case of the Middle East, we have had decades of such performances leading to exactly nothing of substance. We need some diplomacy that works.

Perhaps Secretary of State Mx. Hillary Clinton has broken new diplomatic barriers and soars enlightened in the very ethers as she seems to have tossed out the older rules and inserted some kind of trendy Arkansas Dialogue. Some think she is abrasive and insulting; I wonder if she is a herald for a new era of communication among states. She may hold the key to effective diplomacy.

But, the definitive proof is contained in the end result, if we fall back on reason, and assess cause and effect mechanics before the fact. Then, we can test out her new methods. Here are some problems to be solved:

Problem: The Pakistanis cannot find Al Qaeda anywhere in Pakistan.

Solution: “I find it hard to believe that nobody in your government knows where they [Al Qaeda] are and couldn’t get them if they really wanted to,” she [Hillary Clinton] added. [Emphasis is mine in all quotes.]

“Maybe that’s the case; maybe they’re not gettable. I don’t know... As far as we know, they are in Pakistan,”[3]-- Al Qaeda leadership in Pakistan: Hillary Clinton

Freshly translated and presented here, but only broaching the delicate fringe of the new frontier of the new method of reading scripts I have selected to use: the ‘Unspoken Words Theorem’--so aptly invented by Maureen Dowd the Old Red Lady [4][5][6]of the Old Gray Lady[7] [e.g. Quoting Dowd: “But, fair or not, what I heard was an unspoken word in the air: You lie, boy!”[8]]—and here it is!

[Fair, or not], we seem to be able to deduce [translations in blue] what Hillary was actually saying:

“Listen you drooling bumpkins, you have terrorists everywhere in your backward country, your military and even your intelligence services so you look like idiots when you say you cannot neutralize them.  Don’t lie to us!”

And more:

Problem: Not enough taxes

“The percentage of taxes on GDP (in Pakistan) is among the lowest in the world... We (the United States) tax everything that moves and doesn’t move, and that’s not what we see in Pakistan,” she said.”

“You are so stupid not to tax your citizens into oblivion as we are going to do. Where have you been? Do you realize how much money you are ignoring? My co-conspirator and I have made more than 100 million dollars from our corruption and bias and you are cutting off some of that future income. ”

Problem: Population

“You do have 180 million people. Your population is projected to be about 300 million. And I don’t know what you’re going to do with that kind of challenge, unless you start planning right now,” she said.

“Do anything, including total or even nuclear war, to reduce your population and think about free condoms for all citizens. You are screwing yourselves into poverty. “

Perhaps she even hints about the zero-growth notion of spreading around AIDs or malaria in Pakistan as this was very successful in Africa. Capital punishments from committing sodomy under the law in your state might help lower the count also.

And, on tax and population concerns merged we might read:

A combined solution to two problems:

“Raise the taxes as high as you can and make food scarce and expensive and then institute 100% inheritance taxes and then, for the grand move, withhold healthcare for the oldies[9] and this will moderate your population increases and put more money into the hands of politicians.  Those are useless mouths anyway.”

I think being ‘frank’ with the tribalistic protosimians in the Middle East might just shake up the jar and reassemble the marbles. The Clintons have shown us hitherto unknown and unexplored nuances in political conduct such as erotic cigar diddlings, syntax conundrums (like calling taxes “investments”) and how criminality can be excused by political acclaim.

But, there are tacky potential backlashes to her new methods such as her relaying the Obama message that:

“On a one-day Middle East visit on Saturday, Secretary of State Hillary Clinton endorsed Israel's view that settlement expansion in the occupied West Bank should not be a bar to resuming negotiations -- contradicting the Palestinian position.”

The reply:

"The negotiations are in a state of paralysis, and the result of Israel's intransigence and America's back-pedaling is that there is no hope of negotiations on the horizon," Abbas spokesman Nabil Abu Rdainah said.--[10] Palestinians accuse U.S. of killing peace prospects

“Go ahead and build new homes in the settlements because the Jewish lobby was very generous to us in the last election so we owe you one.”

There is a bit of perceptible conflict here among the players from Hillary’s message, but we should give these comments some time to soak into the soft and minuscule neuronal sets of our Middle Eastern friends. It may simply be a soggy residual from the older form of ‘diplomacy.’ Who knows?

Only time will tell, but with Hillary on the scene there are bound to be fireworks and other pyrotechnic illuminations. She is not exactly ‘neutral’ on any topic so we expect her to carve out new ruts in the phony nostrum called diplomacy and might even accomplish something even if it is war.

rycK

Comments to: ryckki@gmail.com