The recent flight from all other markets into US government debt paper is only so far justifiable as the Fed only needs to keep on printing to produce ever more dollars to repay debts, fulfilling the formal demands from rating agencies (now under fire on both sides of the Atlantic.) The Fed can always guarantee cash, but it cannot guarantee its purchasing power.
So why is the investment world holding on to the concept of calling paper obligations the opposite when these investments depend on future cash flows, which in turn depend on a zillion of other factors?
The meltdown in the sub prime sector can logically be nothing else then the prelude to a volcanic eruption in derivatives markets with its fantastomaniac leverage and size. Latest figures say this market weighs in at $460 trillion.
Until now banks are only fighting with the explosion of a couple of grenades in what was thought to be a safe and profitable asset class. Not to hear one word on the exposure in derivatives in times when the VIX goes wild is very suspicious. It can be safely assumed that the unwillingness of banks to lend to each other is the thunder announcing the storm. Follow this link to a Fitch report on derivatives.
The systemic risk of too few hands holding the majority of derivatives is just crying for a meltdown in development. Nobody can tell me the opposite. As Deutsche Bank (NYSE:DB) is a major player in derivatives, sometimes called a hedge fund behind a bank facade, I think rumors focusing on a big European player going under could one day end up there. German banks today had problems getting loans in the interbank market, prompting the ECB to say it would come with more liquidity "help".
So far we have only seen billions vanish; the size of the derivatives market will ensure that soon the first headline with a trillion in it will be published. It is not a question of if, but only of when.
This leads to the question of my headline. It will be imperative to hold assets that are a store of value and not just a risk depending on the fate of the debtor.
There are only two asset classes that can shield against inflation which central banks have now ordered on the backseat in their frantic efforts to delay the necessary shakeout of a market based on illusory yield expectations.
Shares are a way to escape inflation. Even in Zimbabwe the real returns have outpaced inflation rates of 7,634%. A share in a company will always be a share in its assets. But such an investment will still be laden with numerous other risks.
So the search for an asset that is truly a store of value ends again at precious metals. A bullion coin or bar made of gold or silver in your hands is free of any obligations once you have paid for it. Why is this so difficult to understand for the millions of investment experts?