Posted by
rycK on Monday, November 02, 2009 10:15:10 AM
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, 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 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 , 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
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
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demand that cannot readily be repealed by governments and that law controls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 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,
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 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 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."-- 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 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