Foreword
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The Crack-up Boom Series Part VIII - Final
In This Issue
HERE Come The BUYERS!
The Crack Up Boom series is exploring the unfolding "Indirect Exchange" (as detailed by Ludvig Von Mises), that dollar holders will be using to exit their holdings now and eventually will be followed by all holders of fiat currency holdings no matter which country is perpetrating the "fraud" of confiscation of wealth through the printing and credit creation process that all such monetary schemes evolve into. The "Crack Up Boom" will drive an inflationary global expansion to inconceivable heights over the coming years. Asset prices will skyrocket as people do what they always do when threatened. They will modify their behavior and do the things necessary for "SELF PRESERVATION" of their families, countries, economies and their wealth. Let's take a look at Von Mises' description of the CRACK UP BOOM once again:
This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last. Thank you, Ludwig.
Unfortunately, for us all this is now NOT an isolated currency policy as detailed in the last paragraph, as globally virtually "ALL" governments are pursuing this policy at this point. So first we will see the biggest offenders suffer from their hubris AKA the "UNITED STATES" then it will rotate to all countries who follow such monetary policies. Public Servants always and every time have become Public Serpents robbing their constituents to further their personal ambitions and collection of power and wealth.
Here come the Buyers
This week markets crumbled as RISK in the corporate bond and private equity arenas was viciously REPRICED, as it should have been as those cov lite loans were no better than sub prime trash they were replacing in the CDO (collateralized debt obligations) and the CLO (collateralized loan obligations) markets. The demand from the banks and prime brokers for financing and origination fees had overwhelmed their good sense. Their greed for outsized renumeration they were getting from these deals was propelling them unbelievable heights of irresponsible lending requirements and product issuance. Those deals were going to be ultimately as toxic as the sub prime debacles we see daily in the headlines. Now the marketplace is forcing higher lending standards and returns to investors for getting these done. The repricing of risk from absurd levels to more realistic ones is only a return to rationality, it had to occur. Borrowings are now priced more rationally: AS IT SHOULD BE. Markets revert to the mean and then some.
Everyone talks about the widening spreads between treasuries and corporate bonds, but they have only widened to levels we saw at the beginning of the year. Whereas last weeks global sell off was breathtaking in its speed, in terms of percentage loss after the previous run up it was a real YAWNER. Stock prices in general have only retreated to the highs set in late February. As everybody who is reading this newsletter knows a big pullback was expected and only a cause to reign in IRRATIONAL exuberance. This unfolding pullback will only set the stage for the next reflation effort, after the worse excesses of irresponsible money and credit creation are curtailed!
Its true that the Banks and prime brokers are STUCK out on a limb in their bridge financing deals for private equity, stock buybacks and M & A, but those deals WILL get done, albeit at a higher price to the borrowers and a better prospect of payment for the lenders who finance the deals. As to the issue of the balance sheets of the banks and brokers? Many are too big to fail. They will be quietly BAILED out by the financial authorities. 300 billion dollars of money printing is PEANUTS to the fraudsters in Washington DC. 600 billion you say? They will print the money! How about a Trillion dollars? They will print the money! NOTHING WILL GET IN THEIR WAY. These paltry sums would never be allowed to jeopardize the financial system or the REELECTION plans of PUBLIC SERVANTS. You can count on this, it is an opportunity. The unfolding VOLATILITY is only an opportunity LONG and SHORT: learn how to capture it at www.TraderView.com.
As for the millions of SUB PRIME borrowers also out on a limb, the bailout won't extend that far, they are TOAST. Caught in the web of the "NEW" bankruptcy laws, which place them outside the reach of "true bankruptcy", chaining them forever to the lenders which funded these frisky hugely leveraged loans which will continue to plague them for years. Their holdings will be RESOLD at pennies on the dollars to the strong hands holding trillions of dollars. The Federal Reserve and central banks worldwide continue to create huge gobs of money DAILY, therefore it has to be deployed as to sit in the bank melting is NOT an option. So liquidity will return when prices retreat enough.
We all live in an Asset dependent world where economies depend on the value of their financial and real assets to underpin the financial systems in which they reside. Those assets are set to soar as dollar holder's worldwide attempt to exit. This is in addition to the purchasing power of the emerging economies as their citizens incomes have leapt higher. There are now over 750,000,000 Chinese who make more than 5000 dollars a year. Doesn't sound like much but you can live like a king for $50,000 dollars a year in China. I know this as my wife is mainland Chinese (her brothers and fathers incomes are up over 100% in the last three years, she was making over 10,000 dollars a year in Shenzhen before she left).
Their incomes have quadrupled in 15 years. Russian, Indian and other emerging economies citizens are all doing the same to different degrees. Billions of people emerging from poverty, how wonderful, and they want cars, homes, dishwashers, roads, sewers, better education, more meat and poultry and all the things they see on TV and the internet in the developed world. Why you think raw materials prices are near highs, even Dr. Copper is signaling global economic strength. Buyers of things by the little guy (meat, poultry, grain, cars, homes, which they see on TV and the web and which we take for granted) and buildings, businesses and raw materials by their governments. Inflation written globally.
They are thirsty and they want to drink the fruits of their labors. They earned it. But they are now beginning to realize they were deflating currency (the dollar) for their products and labor. It is like an ice cube in your hand, melting fast.
So they and the sovereign wealth funds run by their governments are about to embark on a buying spree of epic proportions, to buy something from some other poor sucker before the ice cube melts even more. Get a hold of the asset and let the next guy worry about collecting the dough from the government and the citizens of the United States. And it is a theme written worldwide. They will attempt to identify undervalued assets and buy them.
You can expect them to be arriving soon in a town near you and buy the homes and condos that are about to be spit out from the housing and mortgage bubbles. 800,000 defaults are expected in towns across the country, including such place as Torrey pines in San Diego and other upscale areas in bubble communities near you. At what else? Fire sale prices. If you are going to buy something, better when it is low priced than when it is on its highs.
Who will the government look to take these assets? Their campaign contributors on Wall Street and the financial industry or the foreign holders of dollars, my bet is on the former. Let those foreigners twist in the wind, as "THEY DON"T VOTE". LOL. This will be quite a bomb on those foreign holders of dollars when it happens, and of course it will for the constituents of these short sighted politicians as interest rates skyrocket and their dollars buy less and less from their foreign suppliers. Inflation writ large as the manufacturing industry is all off shore. It will hit the pocketbooks of everyone who shops anywhere, especially those who frequent Walmart. And of course who elected these guys? The people who shop at Walmart. You have to wonder what these public servants were thinking? And the answer is they were thinking of only the next election cycle, career PUBLIC SERVANTS whose blind ambitions for power and reelection hopes trump ANY other consideration of the future of their constituents.
Look to Japan as one of the primary destinations of these dollar holders as they take advantage of the low value of the yen to go on a buying spree of Japanese assets, Japanese assets that have gone through a 15 year deflation. They are CHEAP in dollar terms. The Yen carry trade is convulsing as we write this as the sellers of the yen over the last 6 months have sold the currency at the lows, and bought the worst paper imaginable in these cov lite and private equity deals were priced for more than perfection. Late arrivals to the party that is the yen carry trade and very weak hands. About to be spit out as everyone is who buys tops or sells into bottoms.
As this trade continues to do its occasional unwinding, it creates buying opportunities in markets that were previously purchased by these late entrants. It also created an opportunity for dollar holders to buy JAPAN cheap. Just think about what this bombshell will do to other assets as it comes off the books. WOW. Opportunities will abound for the astute investor when these speculators have to liquidate the high yield side of the equation. In fact these dollar holders may be forcing the issue in a slow motion way with money at the ready to buy the high yield side as it moves lower in crash like fashion.
Wherever assets are cheap in dollar terms you can expect dollar holders to show up soon. Small armies of investment professionals will soon be employed to identify and seek out these opportunities in the global market place. When the financial assets crash from getting ahead of themselves dollar holders will be there to cushion the blows as they take the assets from the weak hands. Global plunge protection teams courtesy of the Chinese, Russians, Indians, and other foreign governments. What delicious irony.
The bankers and brokers will be back in a couple of years to repackage and sell again these assets, charging fees over and over again for the problem they themselves created. Just like in the early eighties with the real estate, oil and gas partnerships.
As Warren Buffet once said we were building a share cropper society with the deficits we were running; now we will see the meaning of his words as foreign dollar holders buy the means of production and tangible assets with their mountains of money. To put this in perspective I will use the bidding battle between the Chicago mercantile exchange and the ICE (International commodity exchange) for the CBOT (Chicago Board of Trade) they are bidding respectively 8.3 and 9.7 billion dollars respectively. Chump change for this jewel of the commodities and derivative industry. Chump change when you have 1.3 trillion dollars in the bank and are building your reserves at a 23 billion dollar MONTHLY rate. Or the forty some billion recently paid for Sam Zell's equity office REIT (real estate investment trust). This is the largest commercial real estate holding firm in the United States; once again chump change in context to their enormous dollar holdings.
Now let's think of the enormous reserves India, Russia, Japan, and the Middle East have accumulated, and who increasingly will soon join the bidding. And they want to spend them soon to preserve the value of those reserves, as the dollars demise is now on the near horizon as we look at the train wreck of liabilities slated for the next ten years in the United States. Obligations which can only be met through the printing press. They are going to move out of dollars and move into non paper tangible holdings with far greater income and capital preservation potential then the dollars they now possess.
Creating Berkshire Hathaway type holding companies to purchase and harness the productive capacities of their; previous customers, current borrowers, and future employees. The bidding wars for these "productive" assets will become fierce, driving those assets far higher in dollar terms. Notice how G7 politicians are beginning to express their CONCERNS with sovereign wealth funds, already angling towards the door of reneging on the impossible obligations they have created for their constituencies.
Look at how China has purchased 10% of Blackstone and has now combined with Tomasek holdings (Government of Singapore) to join Barclays bank in bidding for ABN AMRO bank, of course these purchases were in DOLLARS which they are choking on, it is only the beginning. 13 billion dollars is just a week and a half's inflow of dollars. Just as a saver puts part of his income into the bank every month, these countries will be embarking on a buying programs in much the same vein. Putting aside part of their current incomes into regular buying programs creating a brighter future for their constituents and countries futures. Doing exactly the OPPOSITE of the G7 central banks as they continue to bury the future prospects of their economies with runaway "WELFARE STATE" and socialist spending plans, paid for with the printing press and bond issuance. So emerging market financial systems will continue to get stronger while the G7 continues to get weaker. Constantly, on the bidding side for things and productive assets everywhere. They have a lot of left buying to do....
In conclusion, The "CRACK UP BOOM" is just getting started, it will create a lot more VOLATILITY, long and short, but those are only opportunities for properly prepared investors. Learn to recognize what's going on and find the appropriate investment vehicles and professionals to assist you in to tackling the opportunities as they unfold (www.TraderView.com). There's one thing you can count on no matter what happens: "THEY WILL PRINT THE MONEY". If they have to buy US government bonds to hold them up and keep the "over the counter" derivative bubble contained, "THEY WILL DO SO". If foreign central banks have to print domestic currencies to hold up the dollar, "THEY WILL DO SO". The byproduct will be a "WORLDWIDE" inflationary BOOM going forward, with "fingers of instability" (see Tedbits archives at www.TraderView.com) such as we are seeing now along the way. It's been a great mental exercise looking at this unfolding "CRACK UP BOOM" I hope you have enjoyed the series.
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