Replaying 1929: Business, Financial, and earth change news

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The Great De-Levering, Redux

As I explained on Tuesday, my friend who has written a book has explained in great detail how something called "The Great De-Levering" is taking hold in the world, so as you look at the price of gold which has crashed well under $800 an ounce this morning, it's neither a time for fear, or a time for panic.  What's missed by the conspiracy minded is that there has been a tremendous build-up of excess financial leverage in the global economic system and it's in the process of all coming unraveled.

 

In the detailed explanation this week, the plot line simplifies to this:

• There are 9,000 hedge funds. Virtually all of them are over-leveraged to one extent, or another.  They control something on the order of $500-trillion in synthetics, but some of that is double and quadruple-counted, so let's say only $250-tillion.

• So all it takes is one hugely run up asset class to suffer a short-term decline and two things happen:

  • Those with over levered positions are forced out immediately.

  • Those who try and hang onto positions find their balance sheets have been devalued.  What might have been a $50 million position with gold at $1,000 an ounce today is down to a shade over $39-million.

• When the decline is asset values hits the top line of a hedge fund, their can quickly go from hugely profitable to horrible losses.

• These loses then trigger additional selling of assets in an attempt to stem the bleeding on the P&L

• Which then drives down other asset classes....and so forth.

 

As a result, with The Great De-Levering underway, if my serious money-managing friend is right, we should see the propagation of losses across almost all asset classes.  Let's check the headlines and see how things are going as the week winds up, shall we?

• Gold falls more than 3 percent overnight.  No surprise there.

• Silver, part of the same asset class dropped even more, down to $12.95 an ounce (update quotes at top of page).

• Oil is another asset class that could be expected to drop.  Sure enough, we now read that "Oil seen dropping under $90 by Year End" in a headline.  The headline in this morning's WSJ online report "Oil Falls on Economic Worries" while accurate, doesn't mention that the real driver is the Texas Hold-em Poker game being played as the 9,000 hedge funds play masters of the universe and try to hang on to be one of what my friend thinks will be only 3,000, or so, left by the end of the game. 

• Headlineslike "Oil falls below $114 on slowing economies" only gets to part of the answer.  Yes, a global recession/depression is bad, but remember energy is an asset class that's de-leveraging, too.

• Homes?  Because of the mess in home financing, the sales of homes has fallen to a 10-year low.  Well, oh duh.  What were you expecting?  This is a global (as in circularly referenced) economy.  A sneeze here is a sinus headache there, and first thing you know, heart attacks are propagating.  So much so that Mr., Bulbblator, former Fed Deity Alan Greenspan is saying now maybe the housing market won't bottom until next year.  Now who woulda thought?

 

To be sure, there are a few asset classes which have done better than others.  Wheat's outlook is mixed, so it has been in a rally for a few days, but it's not so much that wheat demand is up (it is) or that the world is running out of food (it is)( or that topsoil is disappearing (it is) and that Prince Charles is right about genetically modified foods posing a planetary health risk (they are).

 

Nope, the reason that grain has been in a short counter-trend rally here is what?  The ultra-lemming behavior of the fund managers who play the game of financial pile-on even more tightly regimented that mindless 401(k) retail "investors".

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In a few minutes (after our regular 8:00 AM Central positing time, the Industrial production figures will come out.  I expect them to be flat to down.  Why?  Simple enough:  Banks are trying to keep lots of cash around to shore up their balance sheets because their holdings of Liar's Paper are looking a little dicey.  The Consumer, having burned through the federal tax 'rebate check' likely in a single bank card payment, has been pretty well tapped out.

 

Those in Washington, who are trying to privatize profits and socialize losses, including almost all members of the Republicorps a Democorps (the two brands of corporatized American corporate governance) are worried as hell about how to stem the free-fall now that it has 'gone circular".  They may be too late, but we keep hearing rumbles of another stimulus package in the works.  Sure, like money-for-nothing will help.  The policy-makers aren't getting it.

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And it's not like the circularly referenced Great De-Levering is confined inside the US borders.  We read today how Spain boosts stimulus package as growth falters.  Spain seems, to the credit of its government, to be one of the first countries to "get it" about the new economic reality.  "Spain removes wealth tax to spur growth" makes headlines while they work on smaller cars and more solar installations.  Local agriculture is improving says one of our readers there, who's raising bees and putting in a vineyard.  Who would have thought Spain would be at the front edge of a paradigm shift?  They haven't done that since the 1500's...

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A colleague of mine called from Chicago yesterday to ask a simple enough question:

"George, we see the worst inflation numbers in 17-years, food is running on empty, there's a threat of global war which could go global, and all these other pressures -- so why isn't the price of gold going through the roof and making us rich?"

I then patiently explained that we live in a country which has been hijacked by a bad craps game involving hedge funds.  Just for example, the big money boyz want Hillary so badly that she's now weaseled a her way into a nomination slot.  Big money is throwing all kinds of dough her way because she'll socialize more losses and privatize more gains.  What part of the picture is not clear?  America has been hijacked by high rollers.  How many times did Americans have to say "No Hillary!" and still we're being over-ruled by the hand-outs from the Fat Cats.  What isn't clear?

 

The Fat Cats are also angling to get another War going as soon as they can because that will help their version of "the economy" by boosting defense spending.  Which is why Condi Rice and a large naval armada are talking peace but really angling for regional conquest along Russia's southern border.  Meantime, the Polish  "defense shield" deal  has been signed.

 

This puts a US/Western missile program about 300-miles from the Russian border and right next door to Belarus.  How would you feel if the Russians angled to put a missile project in Edmonton, Alberta?  That's how close we're talking.  So no wonder Russia is pissed.

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In this morning's email I received this:

"I’m a journalist for a Belgian business magazine. I read your comments on your discussion with your friend in the hedge fund business who is about to write a book

At one moment you say ‘Before Thanksgiving I might take a position long gold/commodities in the light of the discussion… because some serious money could enter this trade’ or something like that.

Before that the whole discussion was about the deleveraging of the hedge fund business acting in lock step (black boxes).

My question is, why wouldn’t the opposite happen ? May be they have too much leveraged positions in gold/commodities.

Can I quote you on the answer ?"

'K, point by point:  My friends book is done - ready for print - he's just looking for an agent because he's too busy managing a fund with more zeros than I can count to mess with publishing it himself.

 

I guess my 'quotable answer" would be this:  "Markets always go to extremes.  At some point, the price of gold and silver will likely be oversold.  The world is also a very dangerous place and we have the potential in Ossetia, Kashmir, and Bushir for direct conflict involving nuclear weapons.  I expect one of these two thresholds will be passed before year's end, perhaps before November 1st.  A flight to safety from war, or just the mechanics of being oversold might be playable, so I may try.

 

Once there, because hedge funds are so lemming-like, I a major short-term move up in the metals and that's when I might be in one last leveraged move which would precede a move to government bonds held directly because the middlemen (banks) have become shaky and  untrustworthy as I read it.  Having a 'split portfolio' of part gold/silver balanced against cash/government bonds held directly, seems to me a reasonable way for a small investor to cover both the possibility of hyperinflation on the one hand and massive deflation on the other.

 

The game is not about making a killing.  It's about not getting killed.

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Peoplenomics subscribers may wish to play the gaming scenario I posted back in 2004 again in Peoplenomics Issue #148 "The UrbanSurvival Oil War College" from August of 2004.  Today, we seem to be on a mix of policy choices 2 and 3...

You will accept lower growth rates from oil price gouging.

Unfortunately, accepting lower growth rates is a loser's game. That's because the economy will not be stable.  As Commander in Chief, what do you think will occur first and force you to act:

Click here if you think you can "muddle through."

Click here if you see a deflationary depression arriving.

Click here to print money like crazy and inflate your way through the crisis.

Click here if you see shortages developing and then leading to starvation as your country  is strangled.

I won't tell you where this goes, but one of these weeks I will have to block some more time and build another interactive future simulation like this one. The model (decision tree) exercise is interesting because it's exactly the kind of problems face by the political leadership.  You have a set of problem, you implement a policy or make a strategic move, and that then projects out to future consequences. 

 

All of which can be gamed, and off of which have economic consequences that range from assassination of leaders that go down the wrong money policy path (say, this wouldn't refer to Executive Order 11101, would it?), to global thermonuclear war, to a mass die-off from starvation - the whole range of model outputs.

 

While there is a certain school of thought that goes to good news when Kurzweil's Singularity arrives, all forward progress accelerates to change at blinding speed, the flip side - which doesn't get voiced - is that all possible bad decision and incorrect courses of action will also be taken. 

 

In the end, we're left with either a) a Melt up to a new wonderful world or b) a Meltdown to a destroyed biosphere and mass die-off of humans.  Its against this background that we have entrusted our faith to a hijacked political system which is about to run What's-her-name despite the voters will.  Some game, huh?

 

Dying Oceans Meme

'We've written before, based on the predictive linguistics, about how the oceans are 'sick' and in the process of 'dying'.  Every so often, as the runoff of fertilizer and chemicals goes to extremes the story pops up in the MSM.  Take this morning's headline "Ocean 'dead zones" becoming global problem."

 

News You Can't Use

I had this conversation this week with a friend wherein we were discussing a product roll-out.  After having the looong conversation about which markets to test in, sample sizes, and so forth, we got back to the classic b-school question:  "What will we do with all this data once we get it?  Will it change any of our behaviors or forward actions?"  Nope.  OK, that simplified things.  Round file all the studies then.

 

I mention this because the ratings pandering MainStreamMedia (MSM) fills your head up on a daily basis with news that is absolutely useless because in hard b-school terms, it's not actionable.  Whenever I go through the headlines, I ask myself  "Is there a chance that there's anything contained in the story under this headline, or that, which could possibly be useful to the Life of George or Life of Elaine?"  Some examples:

• "Ellen DeGenerest and Fiancee Portia de Rossi to Wed this Weekend." 

• "NBC's Olympics coverage tops but drops"

• "Cat killer gets two years in prison"

• "Military donations favor Obama over McCain"

• "Edwards' ally explains $14,000 payment to mistress"

 

Not much actionable there...On the other hand, there are some stories that are genuinely useful.

• "Highway crashes kill more than 41,000 in 2007"  Action: Keep nagging on Elaine to wear her seat belt in the car - don't want to lose her. 

• "Motorcyclists deaths' rise by more than 6 percent"  Action:  Take the shaft-drive Yamaha Virago 650 off my eBay watch list.

• "Banks borrow more from Fed's emergency loan window"  Action:  Park money somewhere other than bank - like TreasuryDirect.

• "Germans try to slow glacier melt with giant screen"  Action:  Send them an offer to sell them sun block, too.  I'm a self-employed entrepreneur, after all.

• "Bush signs consumer bill to cut lead in toys"  Action:  Email White House to put that story out in Mandarin or it's meaningless.

• "Coffee heads for second weekly drop on Brazilian crop, dollar".  Action:  Stock up.

 

See?  Useful news and useless news.  What a fine world we live in.

 

Reader Note

This weekend, Peoplenomics deals with rationing.  No free report Saturday - next update here will be Monday, assuming Pakistan doesn't revolt until late this weekend.

 

"Impeaching President Musharraf - Destined to Push Pakistan into Crisis and Put the World at Risk"  Yeah, we already knew that, and the crisis point around August 17th is something we've been mentioning since when?

 

Go look at the Google cache of this site for May 24th of this year.  Read the part from May that goes:

"I will try not to mention the specifics of the coming unraveling this fall with such precision, and in keeping with this new circumspect attitude, I'll layoff the predictive linguistic specifics and turning my back on the virtual time machine, I'll try not to mention the radical uprising in Pakistan in mid August again (13-17th), either. There. Feel any better being 'blindsided' by the future?"

Life is soooo much easier when you've got even a rickety home-built time machine to guide...skeptics aside.  Now, if I could just keep Cliff from getting bummed out by what's coming - and keep Igor from fleeing for a small town, life would be grand.  Except for the rationing part, which is why we're going into that in this weekend's report.

 

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Coping: Hard to Argue Video

Getting almost a quarter of a million plays in 2-weeks, the "Second American Revolution" video on YouTube.

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You may have noticed something here:  A couple of years back, the linguistics team started seeing "revolution" in America coming on the linguistic horizon.  Shortly after that it was the Ron Paul Revolution" and now that he's gone from the fray, video's like this one - and lots of others with the "R" word in their titles - are appearing on YouTube.

 

Now, go wage something productive....

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By the way, Ron Paul's wife is recovering from a third surgery - which apparently has gone better than the first two. A mention in your daily prayers/mediations would be nice.

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Send snip and save ideas to george@ure.net

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