World Crisis Not Dissimilar to 1929-1932

The $USD continues to sink and commodity prices are on the rise again Thursday. For those of you who are long gold because of the destruction you see happening to the USD, I worry that you have made a grave timing mistake if you have any margin against your positions. At some point, your margin will be called.

I have repeatedly opined here that the economic and financial problems of the world are not contained to America. Inflation in countries like China and Russia, among so many others, is very high. The US data is alarming.

The fact is that, without higher employment, income or savings levels, consumers can no longer pay these high prices. Corporations no longer have pricing power and are facing lower orders as well as higher costs, leading to more lay-offs. The rate of unemployment is growing in almost every country.

As economies slow and shrink, taxation falls and yet expenditures are not falling, and so deficits are rising. Social programs are failing. Food riots have broken out in many countries.

The next shoe to drop, in my view, will come when British, European and Japanese banks admit to the same $1 trillion in write-downs that American banks will make before this crisis is ended.

In fact the very word ‘write-down’ is an insult to our intelligence.

Without a write-off, these terminally ill assets are staying on the books so that Liar Bankers can have Mom & Pop believe there is a hope of recovery. When people and companies disappear, and no one wants to or is able to buy foreclosed assets, those assets should be written off, not down. However, a write-off would sink the capital of many banks under the reserve requirements, making it insolvent. Governments will then be required to bail out those banks because no other banker has sufficient financial strength to take on the liabilities of banks the size of Northern Rock, Bear Stearns, Lehman Brothers, Merrill Lynch, Citigroup, Wachovia…

Here is the problem in a nutshell. It’s called the deposit multiplier in reverse. For every trillion dollars in write-offs, many trillions of ‘money’ is destroyed. Bankers, then, cannot meet their obligations to depositors who demand the return of their money. This discussion at Wiki, particularly the tables, may help you understand the problem.

Taking in the big picture, I think the world has reached a crisis not dissimilar to 1929-1932. The G-7 central bankers and finance ministers know it and are keeping the reality from causing a run on banks.

When the banks in the UK, Europe and Japan start to sink, and they will because the problems at Britain’s insolvent (and now nationalized) Northern Rock mortgage bank (NHRKF.PK) were not isolated, the Pound, Euro and Yen currencies will sink against the USD, crushing commodity prices, bringing them into line with the ability of Mom & Pop to pay.

At the end of the day, I believe there will never be a case of global stagflation that doesn’t result in a massive destruction of debt and equity capital prices. This time (2007-2009 or longer) is no exception.

Here is the bottom line: Those of you who have broker margin and banker demand loans and short-term loans under, say, 5 years, are at great risk to losing the associated assets unless you quickly pay off those loans or switch them to long-term loans. Long-term loans at low rates are fine to those who, under any possible scenario, will be able to meet the debt service.

If you are a trader, you must be a day trader. Else move your money to a safe place, with a balance of various international currencies and gold.

I recognize that only day-traders, and not all of those even, welcome these words. Most of you will not pay heed to them.

In Wednesday’s Daily Report, I wrote:

Yesterday I commented that not everything is going well, and that is true, but will be resolved shortly. As someone has written, earning a good reputation is hard work and then you have a helluva burden keeping it. I just have to remove a few unnecessary weights, that’s all.

In addition to having an office/residence in Nassau, I am working on having one in Freeport Bahamas as well. Freeport, in fact, is likely to become my headquarters.

Have a great day. I’m here in Toronto where the weather’s almost as nice as Bahamas. I’ll return to Nassau in two weeks, after I complete some business.

Writing today’s report is removing one of those burdens.

Onwards and upwards.

Comments

[adan]

hi, re: "...move your money to a safe place..." can you say which are some of the places you'd consider safe?

thanks,

adan

2008 Apr 17 09:53 AM

[proseadvocate]

I agree that we are heading for very bad times but, it is elementary that when assets simply evaporate (are written down or "off") that deflates the money supply and hence deflation. Even helicopter Ben may not be able to counter such, if, as you rightly suggest, the rest of the World is so highly intertwined. Hence, although all money is relatively worthless, as financial assets decline, so will the price of gold. Sadly, there are no good long term bonds [which during the last great D where the best way to sit it out]. Ergo, today, I like good farmland somewhere safe, with a year round growing season. Buy land from me in Texas.

2008 Apr 17 02:54 PM

[ericinNE]

Can't follow your reasoning on gold, Prose. I am unaware of any time in history when fiat money devalued, for any reason, that gold did not increase above the rate of devaluation, except for the short time (relatively speaking) after the US went off the gold standard for our currency. Even if the expressed-in-dollars price of gold were to come down, what it could actually buy would be worth disproportionaly more than what the paper dollars would be able to buy. Of course, this assumes one is holding actual gold, not GLD and the like. I have been seriously thinking about moving a chunk of $ into gold and silver coins. Less as a speculative investment, more as an insurance policy for economic upheaval. Readily tradeable assets will be necessary for getting those things you need, don't have, and can't grow/make/take. Gold has been a recognized curreny for over 5000 years, and I can't see that changing, even under the most dire scenerios.

2008 Apr 18 02:27 AM

[David Roskoph]

You are spot on. The market is reflexively responding to the desperate actions of the government but it can't balance the massive deflation. The disconnect exists between reality and the markets due to the virtually unregulated fudal lords that giant hedge funds have become. That "sinking feeling" will show up as a surprise to the Feds even though they are acting as if it had already begun.

2008 Apr 18 09:06 AM

[Malkiel]

I'm no economist, correct me if I have it wrong, but my understanding is that the Depression was brought on when universal trade barriers and protectionism among the advanced industrial nations exacerbated the monetary problems caused by the market crashes; economies couldn't recover quickly because of trade barriers. Since todays' world economy is virtually the opposite of that, with no trade barriers to speak of, it might be more accurate to say "World Crisis NOT similar to 1929-1932"...

2008 Apr 18 11:24 AM

[sorgmot]

One could say that it is not now 1929-1932 but rather 1938. The stock market crash of late 1929 to 1932 was repeated in late 1999 to 2003.

As of now or 1938, the crashes are in USA mortgages and USA bonds which are in the process of defaulting and USA stocks which see lowered price to earnings ratios. The USA dollar is rising against USA bonds, USA real estate, USA stocks yet falling against commodities and foreign currencies.

The USA dollar in 2008 is like the British Pound in 1938, falling from $5 to $2 USA dollars per pound. Foreign holders of USA dollars are cashing out into other currencies and non perishable commodities which since 2001 have bin raising against all currencies.

2008 Apr 18 01:24 PM

[sorgmot]

The click above did not work

please try

financialtrax.googlepa...

2008 Apr 18 01:39 PM

[robert seibert]

One never knows? this guy ALWAYS writes doom and gloom articles.. I've been trading stocks for over 15 years and one thing I do know is that before every bull run the extreme negative or positive comments run rampant?

2008 Apr 27 12:32 PM