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Massive World Speculation Dominos

 

By Chris Laird             Printer Friendly Version

March 20, 2006

www.prudentsquirrel.com

Last year, many Asian and other foreign stock markets went up as much as 50%. There  is a synchronized world housing bubble that is a very analogous follow on bubble from the Japan collapses in the early 90’s, and the Fed loosening following 911.

We had the tech bubble crash in 2000/1, and a have now a general US stock bubble that is yet to really pop. Right now, we are about at the same DOW level before the market collapses in 2001/2.

There is a massive US and Japanese bond bubble because interest rates are so low, and have been for over ten years, at least from Japan’s perspective. Japan has acted as a virtual central banker for the world, with their zero interest rates. That has caused both a multi trillion dollar value Yen carry trade (borrowing cheap yen then lending the money in the US for example for a net gain of about 3%). The massive Yen carry trade has also financed much of the world stock bubbles as of this point. Also, that money has found its way into the world real estate market bubbles through various forms of mortgage backed securities. This list is endless for the Yen carry trade.

For bonds, in general there is a huge increase in risk taking because interest rates world wide are so low. Fixed income investors like insurance companies, mutual funds and individual savers have no choice but to send their hard earned money into the under priced bond markets. There is no other place to get ‘safe’ returns.

The ultra low US interest rates of late have created the huge US and world real estate bubbles, and these are all synchronized and are going to crash together within 6 months of a public/investor consensus that a pop in the real estate bubble has occurred. This public and investor consensus has not completely formed yet, but is now forming. Housing data is now coming out every week with very significant statistics that prove the housing bubble is cooling. With over 30% of homes in the last few years being purchased as second homes or investment/speculation properties, the now 6 months backlog of houses on the market is going to cause a rush to the exits for speculators. That will ultimately bring down the housing market all by itself, even if many people did wish to keep their overpriced homes for a few years.

There is an unprecedented derivatives atom bomb waiting to collapse. The derivatives outstanding according to the Bank of International Settlements (BIS) has grown from roughly $20 trillion of value in the early 1990’s to about $300 trillion now. The Fed and US banking authorities have had two meetings in the last year to address the fact that there is a very large percentage of these derivatives agreements that are not closing their paperwork within even a month of their creation! The Fed and other regulatory agencies are very concerned that the Banking industry cannot handle the volume.

Warren Buffet has stated that derivatives are weapons of financial mass destruction, due to their incredible leverage. Every year now, we hear of old time banks and new ones going broke in a day or two when a derivatives trade goes south for them. The recent victims are the Chinese petroleum procuring company that lost about $700 million in some air fuel hedges gone wrong. The trader responsible has been arrested, as I recall, and probably going to rot in a Chinese work prison.

I could talk about the Barings collapse, the LTCM collapse, and others.

What would happen if there was a real interlinked derivatives domino collapse and not just one affecting two or three banks only? A financial catastrophe of unimaginable scope.

Now I am going to stop here listing the dominoes that are all synchronized world wide, because my fingers are getting tired, and I don’t plan on typing all day and night to even to begin to list all of these. I just wanted to list enough to give you a good idea because:

All of these dominoes are going to crash together in a period of less than a year of each other and perhaps even within 3 months of each other! I’ll tell you why in a moment.

Also, at this juncture, I wish to say again that there is a big ETF mania going on in all financial and commodity realms. The hot ticket is supposedly hard asset ETFs, to include gold. Many investors are turning to ETFs because they are a hot new idea. Hedge funds and other speculators are pouring money into ETFs, and increasing volatility in the metals markets.

My point is that ETFs are a hot investing vehicle, but are not suitable to people who want to own metals for monetary and wealth safety reasons. For speculators, I suppose ETFs are fine. In fact, most of the activity in ETFs now are speculators anyway and they are not in them for the monetary reasons, but to obtain speculative gains. I go into this in more detail in a special ETF report out this week at the PrudentSquirrel newsletter.

To get back to the issue of synchronized global bubbles…

The issue at hand about the world stock, bond, and real estate bubbles is that they are all peaking together. They are all at historic highs. And they are all peaking at the same time in every nation on earth. Developed nation or not, many world stock markets had incredible gains in excess of 50% just last year!

That, combined with maturing real estate bubbles world wide, and the fact that bonds are at a high peak because interest rates have been so low mean that, when any one of these lets go, it will cascade into the other like markets around the world. That cascade in the like markets will lead to stampedes out of the other bubble markets as well.

Then we will see a massive financial collapse with all the synchronized bubbles world wide, real estate, bonds, stocks collapsing in one fell swoop.

This will not be just a national or regional collapse, it will be a total world economic collapse because all these bubbles are now synchronized.

Kondratieff studied bubbles of all kinds, from population growth to economic. He found that bubbles invariably rise until a catastrophic collapse. It is my view that we are in the last stages of a world synchronized Kondratieff bubble that has subsumed all of the world stock, bond, and real estate markets. The inception of the final stage of this bubble occurred in the 1990’s when Japan opened a decade long policy of zero interest rates. That money ultimately acted like a global central bank liquidity wave that has found its way into all world markets, and has synchronized them in conjunction with the tech revolution and the emergence of globalization. The US participation since 1998 and after 911 only heightened the process and magnitude.

There is a special report about gold ETFs in the latest PrudentSquirrel newsletter. In it, James Turk, founder of GoldMoney, replies to my 6 concerns about gold ETFs.

In my newsletter, I track these macro economic trends, and the gold and silver markets. I try to get a big picture analysis that is ahead of the usual financial and even gold bug commentary. Often, I have succeeded. PrudentSquirrel readers are re-subscribing at a rate of over 90%. The newsletter also looks at practical survival and personal safety in case there is a big war or depression. We consider personal survival as important as financial safety. Stop by and have a look.

Christopher Laird
Editor-in-Chief
www.PrudentSquirrel.com

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The Prudent Squirrel newsletter is a gold and economic commentary. It is a big picture analysis of markets and gold that looks for new strategic trends. It is more sector analysis than stock specific. It is a commentary and is not investment advice specifically.