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Ardent Listener
Administrator
USA
4841 Posts |
 Posted - 12/10/2009 : 19:15:30
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The Dubai Financial Nuke
By Clive Maund
06 December 2009 @ 04:48 pm AEST
We got the heavy reaction in gold that we had been expecting for some days on Friday. The problem is that we also got a big important breakout in the dollar, which we had acknowledged as a significant possibility for some time. This is not good news for commodities and not good news for the stockmarket either as it signifies the onset of a flight to cash such as we witnessed last year.
What was really odd about yesterday was that we saw a big dollar breakout, but Treasuries fell heavily. We are now believed to be on the verge of another massive deflationary downwave, similar to last year, but worse. However, this time it is very possible that while we will see a flight to cash, we will not witness a stampede into Treasuries, or at least not on anywhere near the same scale. So what is going on here? - what are the principal underlying dynamics? Anyone who has had the misfortune to watch a nuke exploding, misfortune because you get irradiated, knows that first you see a very bright flash, then there is a period of tranquillity as the flash dies down and the mushroom cloud starts to rise, before the shockwave hits, when things get pretty rough to say the least.
You’ve seen the flash - now get ready for the shockwave...
What happened in Dubai just over a week ago was the bright flash, and the media have used the intervening period before the shockwave hits to reassure everyone that everything is going to be just fine - "You just relax, nothing will come of it, it's only $60 billion down the drain or whatever - have a cup of tea". The trouble is that it's not $60 billion at all - the reality is that this is a default on a massively larger scale. Dubai was a vast sinkhole into which western banks and governments unquestioningly poured not just billions but trillions of dollars which was then leveraged enormously by means of derivatives enabling Dubai to build itself up into a latter day Rome, with a level of opulence and extravagance that would have made Caesar green with envy.
When people think of Dubai the things that come to mind are the massively extravagant 7-star hotels, the towering record breaking skyscraper, palm-shaped island resort complexes etc and forests of new office buildings and apartments etc. What the vast majority don't realize is that the stupendous leverage afforded by derivatives has in addition enabled Dubai to create an immense global empire of businesses, most of the elements of which are broke, having racked up staggering levels of debt. Dubai is the nexus of the derivatives pyramid and it is flat, stony broke. Where did all the money come from to pay for all these things? - why from taxpayers and pension fund contributors the world over of course, but especially in the US, with Wall St acting as a giant conduit sluicing a torrent of cash into Dubai. The interesting thing is that there was never any accountability - countries and companies vied with each other for the privelege of pumping money into the exalted kingdom, seduced by its supposedly limitless oil wealth, and requesting or requiring guarantees was regarded as impolite. Now that Dubai is broke, the Dubai government has suddenly distanced itself from Dubai World, and the attitude towards the Western banks and governments who have poured trillions into Dubai is "Tough luck - you lose, suckers". What this means is that trillions of dollars which are now counted as assets on the balance sheets of banks worldwide and especially in the US are actually liabilities. So what do you think is going to happen to the stock prices of these banks - and stockmarkets generally, when the world wakes up and acknowledges this reality - when the shockwave hits?? Small wonder that the charts for Goldman Sachs and J P Morgan look very like the market charts before the '87 crash, but that was "small potatoes" compared to what is coming down the pipe this time.
If money panics out of commodities and stocks it has to go somewhere. Last year, as we know, it took refuge in US Treasuries, especially short-term Treasuries and it drove the dollar up as massive across the board liquidation went first into cash which was then used to buy Treasuries. While we can expect a similar dynamic to be in play this time round, largely because most investors simply don't have the imagination to think of an alternative to US Treasuries, there is a complicating factor, as highlighted repeatedly by Karl Denninger in his recent highly pertinent articles, which is that the US has been making a mockery of foreign Treasury buyers on an ever increasing scale with its endless monetization and ramping of the money supply - in effect treating them as morons by paying them zilch interest rates and undermining the dollar at the same time. They are right - they are morons, who are one way or another are going to get what's coming to them - after all, who but an imbecile buys the debt of a bankrupt country? However, there is a saying that "you can't fool all of the people all of the time" and foreign Treasury buyers and holders are getting increasingly fed up with their cavalier treatment at the hands of the US, and, in the absence of another deflationary implosion causing a renewed flight into the dollar and Treasuries, they look set to start dumping them, which as Denninger points out would set in train a "death spiral" of rising interest rates one consequence of which would obviously be a crashing stockmarket. So whether we see a rising dollar or a falling dollar it`s "Zugzwang" for the US stockmarket and economy - any move made loses, as does no move.
The rate of advance of the broad stockmarket has been slowing for months. On the 6-month chart for the S&P500 index we can see that it appears to have arrived at the top point of a large "Distribution Dome". If this Dome is valid - and it appears to be so - then we can expect the market to turn seriously lower soon, and we should remain aware that markets generally drop twice as fast as they go up, so it will not have to contact the Dome boundary on the way down - on the contrary, given the parlous fundamentals outlined above it will probably drop like a rock.
Bank stocks look set to be particularly hard hit in the event of a second downwave. This is apparent from their deteriorating relative strength in recent months - they are already very close to crashing key support as is clear on the charts for Mordorwebsite#65533;- Goldman Sachs and J P Morgan. These 2 elite companies have had the richest of pickings during the financial crisis - being at the front of the line for everything, which is why their stock prices recovered so well - and because of this they are widely assumed to be invulnerable. They are not expected to be spared during the second downwave however, and their current lofty valuations make them a good candidate for shorting or Put options.
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 12/11/2009 : 05:44:20
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| while this result is possible, i don't see it yet. bank stocks have been rallying. there is no proof that dubai will be as serious as the author suggested. now, i'm no optimist. i think the second wave of mortgage resets is going to be worse than the first. it will result in even more foreclosures, realestate inventory, decline in real estate prices, etc. we are only half way through at best. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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copper cane
Penny Sorter Member
USA
62 Posts |
Posted - 12/11/2009 : 09:28:31
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Ardent Listener-great information but some of us (ok, just me) needs a bit of translation, clarification, or if I was humble I'd just blurt out "help"! Would you give me a ballpark % of:
a. cash in mattress
b. silver
c. gold--although for me I've been priced out of that pretty much.
I've done the food supply, gun/ammo supply/copper penny supply although that's a never ending hobby. I don't understand the "cash" part. You have to have it for daily use. That's with the assumption our present dollar will always exist, worth less, but at least not a "turn in piece of paper 3/1 ratio for a new, yet unknown form of currency" or is that a wrong assumption? I worry most about the paper money tucked away for safety becoming totally unspendable in its present form. Is it all the bad news or just plain old age that makes me worry?
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Ardent Listener
Administrator
USA
4841 Posts |
Posted - 12/15/2009 : 20:00:29
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quote:
Originally posted by copper cane
Ardent Listener-great information but some of us (ok, just me) needs a bit of translation, clarification, or if I was humble I'd just blurt out "help"! Would you give me a ballpark % of:
a. cash in mattress
b. silver
c. gold--although for me I've been priced out of that pretty much.
I've done the food supply, gun/ammo supply/copper penny supply although that's a never ending hobby. I don't understand the "cash" part. You have to have it for daily use. That's with the assumption our present dollar will always exist, worth less, but at least not a "turn in piece of paper 3/1 ratio for a new, yet unknown form of currency" or is that a wrong assumption? I worry most about the paper money tucked away for safety becoming totally unspendable in its present form. Is it all the bad news or just plain old age that makes me worry?
Percentages depend on you and you ought to judge the time and situation that you are currently living in. Things change and don't always count 100% on things changing as we often assume or predict around here. Try to judge what may happen in the future but know where you stand now.
People of great wealth should have a lot more % of their wealth in gold or if they got the room, silver. IMO, Average Joe should be holding some too, but first he should have enough "cash" to pull him though tuff times if he should join the growing ranks of the unemployed.
With all the talk of gold and silver recently I still feel that those of limited means should be holding on to a good amount of their assets in copper pennies and even more so, U.S. nickels. A base metal coin hoard is a long term protection against inflation, but it is also "cash" if or when it becomes needed now. Base metal coins aren't as exciting to hold during an up precious metals market but they sure seem sweet when the PM markets tank like they did in 08.
I'm holding paper cash too, but it isn't something I would want to bury in the ground and dig up in 20 years.
You appear to be on the right track IMO. I suggest no one put all their eggs in any one basket. |
Realcent.forumco.com disclosure. Please read.
All posts either by the members, moderators, and the administration of http://realcent.forumco.com are for your edification and amusement only. It is not the intent of realcent.forumco.com or its host to provide investment, medical, matrimonial, legal, security or tax advice and nothing posted here should be considered to be so. All rights reserved.
Think positive. |
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Dubai Financial Nuke
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