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Why we have not even seen the real problem?

Disclosure:
Long GOLD @ 980, LONG EUR/USD @ 1.401
 
We saw the tech bubble of 2000 and we said "that US will come back". Come back it did and in mighty style. Then we saw the sub prime crisis and many analysts said that this was not a very big problem and it should be good buying opportunity. But then came the credit crisis, the mother of all crashes as the world recoiled in absolute fear. It took a good 6 months for the world to come back. 

It has been a year now from the mighty bankruptcies that had ripped the heart of Wall Street. As we look back, I cannot but feel a sense of disgust how we have still not learnt the lessons to look ahead, rather we continue to look into the past and say "The worst is behind us". I still repeat what I said at Investing Contrarian , we have not seen the worst yet. The worst will be far more gorier and more bloodier than 2008. 
  • The real problem that I see on the horizon are twofold:FDIC bank defaults: FDIC problem in itself looks a rather tame one. FDIC in their last analysis spoke about 552 banks to fail. When I wrote my analysis at Investing Contrarian that we will see 1800 banks to fail, the date was Oct 3rd and number of bad banks was less than 400. Now we are slowly starting to see the rise in bank failures as we reach the figure of 600. You can read my analysis here: 1800 banks to fail This will cost the FDIC close to 2 trillion in deposits which need to financed from the treasury. Assuming under extremely stressed conditions, US is able to raise a further 2 trillion of debt, the 1800 number will set off a chain of irrevocable runs on the other safer banks which can easily cascade to closure. This will lead to the mother of all Bank runs known to man kind.  This in my view is not fantasy but very present reality which will probably shadow even the Saving and Loan crisis in 1982-88.  Is there any way to escape? Yes but you need to be sharp enough to get your assets out of the US. Open a bank account in Europe and make yourself operational in case of an emergency. 

  • Currency imbalances will crush the concept of welfare benefits in the developed markets: This is a problem am sure some of you already have a clear understanding of. US consumers while Chinese sell and put the proceeds back into the US bonds. The problem is that the "G2" is overly reliant on each and relationship is based on trust. When the trust is broken (as it seems to have), very little can be done to reverse the fall. The ultimate result will that the whole world will be plunged into a non stop fall of both financial markets as well as economic conditions.
My understanding of the situation tells me that United States FED will not be able to get out this problem and it will need to seek external help (possible arrangement from ECB). 


Am a new author at Seekin alpha but am someone who mostly looks at the worst case even in the midst of rip roaring bull run.  So am not the one who can give you the candy bar, feel good, sugar coated analysis. For that you can rely on the government.


Fresbee
Fund Manager (GA Alpha Fund)
Author at Investing Contrarian