It's very important to remember that all debt gets paid. It is paid either by the borrower or by the lender but it must in the end be paid. Right now there is about $460 trillion dollars in derivatives outstanding. Most of these are interest rate sensitive.
The $460 trillion dollars is notional value but included in the figure is trillions of dollars worth of fraud. That's far more money than even the most optimistic central bank or any group of central banks or all central banks together can possibly paper over. Someone must feel the pain for as we remember, all debt must be paid, even fictional debt.
What the Powers That Be refer to as Sub-Prime debt was better known in the industry as liar's loans. Or better and more accurately, Ninja Loans as they were termed by one inventive lender. No Income, No Job, or Assets. Ninja. Cute, very cute. I'm sure it convinced a lot of people to opt for the Ninja loans rather than the more tacky Liar's Loans.
The $460 trillion dollars in derivatives represents a giant crap game or casino some 40 times larger than the entire US economy yearly. Filled with liar's loans and Ninja loans all looking for a safe home. I've said for years that it's like a massive game of Musical Chairs where everyone in the financial world actually believed that when the music stopped, they would safely grab a chair.
What no one understood is that there are no chairs and the music just stopped. Little derivatives land mines are exploding all over the world. In the next month or so, the world's financial system is probably going to grind to a halt. Because all loans get paid. Either by the borrower or the lender.
Greenspan's opening of the monetary spigots in 2001 to remove the pain from the Dot.Com bubble has engendered a far more dangerous real estate and financial bubble all over the world. Fed by artificially low interests rates and by the Yen carry trade, derivatives exploded from just under $100 trillion dollars in 2001 to over $460 trillion dollars today.
Those are almost meaningless numbers but let me try to put it into perspective.
The annual GDP for the world is only $61 trillion. That of the United States a mere $12.2 trillion. So we have derivatives on derivatives on derivatives. The key to understanding why I am convinced we are headed directly over a cliff at once is based on the fact that in theory these trades were a zero-sum game. There was one winner and one loser for each trade and the loss was equal to the gain. But in fact, both sides were using mark-to-model and unrealistic valuations about both value and liquidity.
We just figured out how realistic the mark-to-model figures were. Hedge funds are blowing up all over the world. How bad is it going to get? There are about 8,000 [corrected] hedge funds in the world. All of them are at risk. As are most commercial paper and half of the top ten banks in the world.
It's going to get far worse than anyone wants to admit. Even respected newsletter writers hesitate to suggest the truth.
It's the end of the financial system, as we know it. Central Banks might be able to paper over a few trillion dollars but the fraud is ten times what they can paper over.
Here's how absurd things are going to get. Bill Gross, aka "King of the American Bond Market" wants Bush to bail out the poor homemakers who can't afford to pay their mortgages. Let me make sure you understand this. The biggest and most powerful bond dealer in the world wants our beloved President to bail out those nice people who took out the Ninja loans. (No Income, No Job or Assets) Yea, right. And how did Bill actually pass Economics 101? Do you think maybe he is really asking Bush to bail out Bill Gross?
Get liquid. Stay liquid. Do not use margin unless you fully understand there is a great risk of losing your entire investment and more. It's time to hunker down. Everyone is going to lie to you, they all have a vested interest. I don't. I might be wrong but I'm not lying. It's going to be far worse than you can imagine.
Look for another market peak to open September and then a 6 week crash. It's going to get bloody. In the end, there will be a lot fewer hedge funds and major banks will close. It could mean the end of the dollar when the Chinese get tired of getting whacked by their trillion dollars worth of toilet paper.
At the end of the day, the only solution is a gold standard; all currencies are going to be worthless. It's going to be a real good time to own gold.