The Bubble that will
Burst Higher than all Previous Bubbles: Depression Looms as the Dollar Crashes.
Previously published 11.02.2009. Most Townhall links are broken
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demand that cannot readily be repealed by governments and that law controls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 GDP ratio is
currently 218% and will rise and our US
"The debt situation is irrecoverable,"
said Carl Weinberg from High Frequency Economics. "I don't see any orderly
way out of this. They [Japan Japan America Japan 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
[2] Krugman of the NYT
Has Divined the Future for US: Obama Will Heal with More Government and Higher
Taxes!http://rycksrationalizations.blogtownhall.com/2008/12/22/krugman_of_the_nyt_has_divined_the_future_for_us_obama_will_heal_with_more_government_and_higher_taxes!.thtml
[3] Mother of all carry trades faces an
inevitable bust By Nouriel Roubini Published: November 1 2009 18:44 | Last updated: November 1 2009 18:44 http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html
[4] In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also
frequently called fundamental value. It is ordinarily calculated by summing the future income
generated by the asset, and discounting it to the present value. http://en.wikipedia.org/wiki/Intrinsic_value_(finance)
[5] An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, or a speculative mania) is “trade in high volumes
at prices that are considerably at variance with intrinsic values”.[1][2] (Another way to describe it is: trade in products or assets
with inflated values.) http://en.wikipedia.org/wiki/Economic_bubble
[6] An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, or a speculative mania) is “trade in high volumes
at prices that are considerably at variance with intrinsic values”.[1][2] (Another way to describe it is: trade in products or assets
with inflated values.) http://en.wikipedia.org/wiki/Economic_bubble
[7] The carry of an asset is the return obtained from holding it (if positive), or the cost of holding it (if negative) (see also Cost of carry) http://en.wikipedia.org/wiki/Carry_trade#Currency
[9] There are 32,150 troy ounces in
a metric 1 metric ton
[10] It is Japan America
[11] The Cubans Teach Us about Economics and Arithmetic.
I hope Paul Krugman reads their Works. He needs some Elementary Instruction.
"We have the
deepest and most liquid markets for risk-free assets in the world. We're committed to
bring our fiscal deficits down over time to a sustainable
level.
"We
believe in a strong dollar ... and we're going to make sure that we repair and
reform the financial system so that we sustain confidence," he said.”[12]--
Geithner tells China Monday
June 1, 2009 , By Glenn Somerville
The
Dollar Sags in Full View of the World This Invites a Run on the Dollar.
Inflation Threatens US.
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