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A few weeks ago, I mentioned
that the central banks had put up collectively $3 trillion worth of
stimulus/backing to financial markets. I also noticed that the big bailouts
had about only a one day boost to the financial markets till they did a
thumbs down.
Now, as of Monday Oct 13, the
Europeans came up with a mammoth 1.3 trillion Euro bailout package (close to
$ 2 trillion worth). The markets rallied for ONE day. Then, add another
unlimited Fed dollar swap package to anyone (they trade dollars to central
banks who need them for their currency because those central banks need
dollars for people leaving foreign markets). So using my rough math, since
August 07, the central banks have now put out over an astonishing $5 trillion
plus worth of what is mostly short term liquidity (loans to financial
institutions).
And, with all that money, the
markets are down Wednesday across the world again? Only two days after the
Europeans add almost $2 trillion worth of backing to their financial system? And
the Fed had just added unlimited dollar swaps?
What the heck is going on?
Relentless deleveraging
What is going on is relentless
deleveraging of over $1000 trillion of financial leverage (it’s more
than that but the figure gets the idea across. So, over a period of a year,
the US and ECB /Europe alone have added $5 trillion worth of financial
backing to the world, but that is against $1000 trillion deleveraging –
the bailout efforts are simply miniscule compared to what is driving markets
down – at a ratio of 1000 to 5 so far. The bailouts and liquidity
injections simply cannot work.
And, the markets relentlessly
tail down, even within a day or two of major new bailout announcements. I
think this kind of makes the point. Which is that $5 trillion is not near
enough to stop $1000 trillion from deleveraging worldwide.
Gold, USD, and oil here
And then, we see gold and silver
and precious metals selling off big at times, but gold kind of holds its own.
But basically, gold is being tugged between big selling for money for margin
calls on big investors like hedge funds. Then gold comes back a week later.
Gold is reacting most strongly to the credit crisis worldwide, as big
investors flee into the most secure ‘money’ they can find.
And even though the initial
epicenter of the real estate collapse and the banking crisis is in the US, the USD is strengthening too. One reason is that people are selling emerging/foreign
markets and repatriating that back to the US in dollars. Another is that the
USD is still regarded as a safer haven than most. Just take a look at the
Ruble and Russian markets – way way down, but last year regarded as a
possible resource currency financial haven. Well, that sure proved wrong.
Resource sector
And then, the resource sector is
just getting killed. And so are the resource nations stocks. And, get this, China is slowing markedly. Not to mention the China stock markets are WAY down from their
highs, like 70% or so down from a year or two ago. But, didn’t we hear
that China and the emerging economies would carry the world economy if the
US/West slowed? Well, I think that theory has been definitively debunked.
And, with this slowing in the
West, and now about a year later in developing economies like China and
Russia and South America, the resource sectors are getting creamed. Miners
and also oil/energy stocks are getting creamed. But didn’t we hear that
these sectors were the new future and in the middle of a ten year plus bull
market only a year ago?
I think a lot of this is simpler
than that. Frankly, a year ago, we stated over and over that the imminent
slowing of US and world economies would lead to a China slowdown, and a
resource correction. But it was worse than that even. The collapsing credit
markets (imploding is a better characterization, frankly) have put a choke
hold on every imaginable economic activity.
And guess what, the next shoes
to drop in the US, EU, Asia will be huge layoffs, as the economic stats will
start to show big economic declines in consumer and business activity in
coming months. In fact, those bad data are now showing up now.
Realization
And, when markets finally wake
up to the fact that, despite new gigantic bailouts by governments, it’s
not working, it’s definitely not working, and financial institutions
are still afraid to loan money out. The realization is that it’s
basically over, the cake is baked.
Or, to be more clear, the
markets are not going to recover, and are going down far more.
Now, after the totally
unprecedented actions in the last two weeks, particularly the announcements
Monday by the Europeans and the Fed, with another what $2 to 3 trillion thrown
at the problem, the markets this week are just crashing.
And now we get back to the
original point, that every time a new huge bailout is announced, all that
money appears to be good for a mere one day rally in financial markets.
Of course, to be fair, the Fed
and others say it takes time to get all that money out and working in the
system. But, do we have the time now? And frankly, can the huge bailouts even
work in the end?
It’s already being stated
that, even with the huge infusions to all these world banks and financial
institutions, the financial institutions still won’t lend but are
merely holding on desperately to the money- Lest they be the next Lehman or
whatever.
Central banks cannot replace the
economy
Now, Sarkozy and others in the
EU are talking about a new Bretton Woods agreement. So now they want to
replace /reform the entire world monetary system too? Do you think that will
solve the problem? So, now after committing what is rapidly going to be $10
trillion and counting of public backing, which is not working, they will
think up anything to try to stop what they fear, a total world financial
collapse.
But, no matter what they try, no
matter how big, nothing works. The reason is that the Central Banks cannot
replace the economy. They can try to stimulate it, but they cannot even come
close to replacing millions of people working, borrowing and lending.
And the way things are going,
with every bigger bailouts (that European $2 trillion move Monday was
amazing) it would seem they are going to bankrupt their own government
finances along with their collapsing economic sectors. They will stop at
nothing to avoid what they fear, a total economic collapse. And after that,
comes the currency collapses? With the way they are handling this, that appears
to be in the cards.
It’s already being stated
that the US fiscal situation has been severely degraded by all these
bailouts. The USD is still holding, but till when?
Effects on the Euro
Then, consider the effect of all
this on the Euro. First, when it became clear that there would be no EU wide
consensus on a fix, the Euro fell. Then some of the big nations did come up
with a $2 trillion backing Monday. But, the fact is, there is no real
coordinated EU wide policy on this situation. Even if the Fed is acting
wildly, it at least has a unified policy for the USD. But the EU is not so.
And this definitely calls the
Euro in question. So then, we get calls for a new Bretton Woods agreement. (The
Bretton Woods agreement was where the USD was used to back the collapsing
European currencies during WW2. It stayed in effect after WW2 till the US went off the gold standard in 1971).
New world currency?
But, this time, the USD is not
really able to back the world’s currencies. Some new form will be
invented. The trouble is, what currency is able to step into that gap? None
that I can see.
So, will this relentless bailout
mentality lead us all ultimately to a new world currency? A single new world
currency, or one that the major economies subscribe to?
That may sound preposterous but
I don’t think it’s quite that unlikely.
What really concerns me
What really concerns me is
another Great Depression. And, we are actually closely following the script
of that time. First, economic and financial crashes. Then big public bailouts.
Then economic activity collapses. Then we have a grinding depression.
And, in a depression, we get
huge unemployment, and even food shortages. In fact, I wonder if we will see
something like what happened in Iceland this week, where the stores are
running out of food and everything because there is no foreign exchange. They
won’t accept the Iceland Krona. So, Iceland can’t import food.
Lest you think that problem is
isolated to that island nation, in the Great Depression millions starved in
the US and Europe and elsewhere, even in big food producing countries. One
reason is that big food producers sell their food for foreign currency
– ie export it. The natives be damned. That’s what happened in Argentina in the early 2000’s.
And, god forbid, there can be a
big war after the depression. This is exactly what happened in the
1930’s/40’s.
So, batten down the hatches, and
be super cautious. Don’t believe the financial TV that seems to be
always saying the bottom is here. I don’t believe that for a minute.
The credit crisis is just grinding away at the world economies like a big
wood chipper. The next quarter or two, we will see big declines in economic
activity, and also big layoffs all over the world.
The Prudent Squirrel newsletter
is our financial and gold commentary. Subscribers get 44 newsletters a year
on Sundays, and also mid week email alerts as needed. We alerted our
subscribers April 20 that the USD was bottoming. We have been warning of a
big commodity and resource correction for months. We even warned for several
years that gold and silver bullion would become unavailable in the inevitable
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I had one potential subscriber
ask me if the newsletter has much more content than these public articles,
ie, if it was worth subscribing. The answer is that the public articles have
less than 10% of our research and conclusions that subscribers see, not to
mention the subscriber email alerts of important breaking financial news. We
have anticipated many significant market moves in the last year, such as
imminent drops in world stock markets within days of them happening, and big
swings in the gold markets within days of them occurring. We have also made a
number of good calls on big currency swings, such as with the USD, the Euro
and the Yen.
We invite you to stop by our
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Chris
Laird
Prudent
Squirrel
Chris Laird has been an Oracle
systems engineer, database administrator, and math teacher. He has a BS in
mathematics from UCLA and is a certified Oracle database administrator. He
has been an avid follower of financial news since childhood. His father is
Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He
has grown up immersed in financial news. His Grandmother was Alice Widener,
publisher of USA magazine in the 60?s to 80?s, a newsletter that covered many
of the topics you find today at the preeminent gold sites. Chris is the
publisher of the Prudent
Squirrel
newsletter, an economic and
gold commentary.
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