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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Deleveraging Pain Continues

Stock-Markets / Financial Crash Oct 24, 2008 - 04:27 AM GMT

By: David_Vaughn

Stock-Markets Best Financial Markets Analysis ArticleLooks like the markets are giving us a little more pain as the weeks pass. A good time now to look at personal portfolios and see how much they have crashed. So much for retiring any time soon. I keep hearing how the savings rate is too low or non existent. What about the 401K? Weren't these supposed to be savings for our retirement? But what makes these things damnation is that they are totally controlled by the government as well as general market conditions. A real savings plan allows freedom of access instead of waiting till you're 60 years old. For gee whiz! A lot of us are going to be dead by age 60.

Many are really depressed watching their 401K and life dreams go down the sink. Is there any positive element of depression? Perhaps this personal depression and individual suffering will teach us new strengths and incite us on to work even harder than before. Maybe even this new personal depression will help us to develop new skills, teach us humility and help us to develop personal character. Those would be worth while benefits to learn since now all of us are poor or broke.

“With (Abraham) Lincoln we have a man whose depression spurred him, painfully, to examine the core of his soul; whose hard work to stay alive helped him develop crucial skills and capacities, even as his depression lingered hauntingly; and whose inimitable character took great strength from the piercing insights of depression…”

For those who believe gold will be worthless in the coming years then I guess that leaves common barter to survive. But how did we even arrive at this mess? Let's go back to the year 2004 when derivatives were new and bringing excitement as a new-fangled and exhilarating investment vehicle.

2004 - “…every investment banker and intermediary worth their salt is now pushing the idea (hedge funds). I have lost count of the number of acquaintances and professional contacts who are now the proud owners of some kind of hedge fund, even if they are not always quite sure why.”, 5-22-2004

The gold mining stocks bombed this past summer as we are all aware of. While that raises the eyebrows physical gold and gold coins are still in very strong demand. Gold bullion and gold coins represent insurance and gold equities represent speculation. If you believe this financial crisis has a long way to go it seems inevitable that the precious metals equities should climb back up. After all, gold has to come from some where and that “where” is generally deep in the ground.

“…continuing strong physical demand for gold has to be a harbinger of gold's ultimate ascent.” "It's no longer just "gold bugs" buying the yellow metal but regular investors and savers of all stripes..." "These are not traders looking for quick gains but scared people driven by fear seeking to protect their wealth."

Did you catch what we just read above? “…scared people driven by fear seeking to protect their wealth." You are buying gold for asset preservation. Gold will fluctuate in price, but over the long haul your assets will be preserved. So why the weird price fluctuation in the gold market? Jim Sinclair does a good job of explaining this in the text below.

Jim Sinclair – “The war between paper gold and bullion gold is a war to determine which will take command of the price of gold, nothing more, nothing less.” 10-19-2008

So, is this financial meltdown for real?

“…to quote the hideous '70s band Bachman Turner Overdrive, b-b-b-baby, you just ain't see n-n-nothing yet.” “One mordant TV executive puts it this way: "The auto industry is out. And Campbell 's Soup (CPB) is in." “But the coming downturn means that what once was unthinkable ... well, you better start thinking it.”, 10-9-2008

During this time you will hear some writers proclaiming gold is headed back to 200 dollars an ounce. And you will read the bulls who predict in the long run record breaking highs. Ultimately, you have to make the decision yourself what to believe.

“…the underlying cause of the Great Depression — as Milton Friedman and Anna Jacobson Schwartz argued in their seminal book A Monetary History of the United States: 1867-1960, published in 1963 — was not the stock-market crash but a "great contraction" of credit due to an epidemic of bank failures.”

If you believe your money to be safest in institutions such as Lehman Brothers and Wachovia Bank then keep your money there. Keep your faith in the present financial system. Oh, excuse me. I forgot. Lehman and Wachovia are bankrupt…gone and swallowed up. Gee… Maybe if you keep telling yourself, “I believe!” “I believe!”

“…the consumer finally appears to be cracking.” “The actual deterioration in the data in the last few weeks has been much more severe than anyone was expecting,” said Frederic Mishkin, a professor at Columbia University and former Fed governor.” “Alan Blinder, a professor at Princeton and former Fed vice-chairman, said: “It looks to me like the economy has fallen off a cliff.” “We may be talking about one of the most severe recessions in the post-war period,” said Larry Meyer, chairman of Macroeconomic Advisers and a former Fed governor.”

“I believe!” “I believe!”

“A financial meltdown is when banks - whose entire business is repeatedly phoning other banks and then declaring they've made or lost money based on those phone calls - suddenly realize that all the money they made is partially fictional. At the same time, they find out that all the money they borrowed from other banks is worryingly real…”

“I believe!” “I believe!”

Larry MacDonald - “A Return To Depression-Era Market Shutdowns?” “Just like the U.S. banking system had to be shut down at times during the Great Depression of the 1930s to halt the ruinous rush to withdraw deposits, could the same now happen…?” “Specifically, it would not be too surprising to see the whole hedge-fund industry to go into an indefinite lockdown period to keep withdrawals from fuelling waves of forced selling…”, 10-9-2008

As time passes memories become simply closed chapters in our lives. The good times of the 90s will in the end become only a closed chapter out of an old dusty book whose title we don't even remember. If those who believe gold will be worthless in the coming years are correct then I guess that leaves us to bartering cans of Campbell 's tomato (and bean with bacon) soup for money.

"For the moment, the weight of the deep funk felt in the global markets is keeping gold on the defensive, while would-be buyers ... find more comfort sitting on the piles of cash," said Jon Nadler, senior analyst at Kitco Bullion Dealers.” "Investors worldwide are selling everything, including the kitchen sink…”

Even now the big question remains just how deep and wide this problem will be. Is the pain over? Or has it just begun? I am inclined to believe this calamity is just getting warmed up. Too much debt. There are still many, many more foreclosures to come. And hedge fund derivative unwinding will continue. And does China and Asia continue to be in love with the yellow metal, gold?

Larry Edelson - “ China Is Soon Going to Make Some Big Buys In the Gold Market” “…Over the next few years China is essentially going to corner the world's gold market.” “Mind you, Beijing won't intentionally set out to corner the gold market. But, in effect, that will be the end result.” “Take it from me (Larry Edelson). I've met with central bankers, regulators, and gold traders in China and Asia . I know Beijing 's views on the Yuan and gold.” “You see, Beijing knows that the dollar's status as a reserve currency is soon going to be history.”, Larry Edelson

It's important to understand that this meltdown will continue for a very long, long time. Even while we forget about it during the day somewhere a multi billion dollar hedge fund is collapsing. There are still over 50 trillion dollars of derivatives waiting to implode. We just have to be patient. Kind of like popcorn popping in the pan. Seems to keep on popping for ever.

“Corporate debt has been pressured by ``incessant selling by hedge funds and leveraged institutions as they unwind…'' “…there are a lot of redemptions and hedge fund liquidations coming.'' “The de-leveraging that we're witnessing will probably continue,'' said Paul Scanlon, team leader for U.S. high yield and bank loans at Boston-based Putnam Investments LLC, which manages $55 billion in fixed income.”, 10-17-2008

Don't forget to email.

Nouriel Roubini, October 2008 - “There are significant downside risks still to the market and the economy,'' Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. ``We're going to be surprised by the severity of the recession and the severity of the financial losses.'' “The US and advanced economies' financial system is now headed towards a near-term systemic financial meltdown” “The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity…” “And given the rising risk of a global systemic financial meltdown the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.” “A vicious circle of deleveraging, asset collapses, margin calls, cascading falls in asset prices well below falling fundamentals and panic is now underway.” Nouriel Roubini, October 2008,

David Vaughn

The future legacy of the United States will be the refined art of financial leverage.

© Copyright 2008, Gold Letter Inc.

“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed. © Copyright 2008, Gold Letter Inc.

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