Sunday, November 27, 2011

This Has To Be Exhausting Work, Warding Off the Economic Apocalypse

All you can do is laugh. The world is getting a margin call.

What I am going to try and do today, is explain why the world is broke and why it can't fix itself.

I have this picture in my mind of a bunch of stodgy assholes sitting around tables somewhere and everywhere, desperately scheming. Trying to preserve the status quo banking operations that they have used to fleece people for generations. They have two problems.

The bankers have to create the illusion of fiscal wellness. In simple words, they can't let you see them sweat. These guys will go to any lengths to do that and they have. They have even managed to prop up stock markets. A US market that by my estimation should be trading 4000-5000 points lower than it is. Other averages chopped in half.

The bankers need the politicians to comply and help. So far, so good.

The other problem that bankers and politicians have created is far worse. The world is bankrupt. The bankers have used fractional banking and money creation, debt on steroids, to fuel this crisis. Japan has been dead money for over 20 years. Europe is toast. The U.S. is heavily damaged and listing in the bay. There are some insiders in China that will tell you that even China is not a safe haven. The bankers cannot find a way to get economies up and running, to repair the fiscal damage they have caused. This time it is different. This time, unlike all of those other times, there is no rescue helicopter on the horizon.

Years ago, I opened my first margin account for 10k. Put up ten thousand bucks and the bankers will loan you another ten thousand. This is margin, leverage. The ability to buy 20k worth of equities with only 10k. This is a tremendous asset when things are rolling your way. Unfortunately, and this will make sense, when things don't go your way they are doubly worse. If I lose 20k worth of equity or stock, I owe somebody 10 thousand don't I?

So if you are fully invested, 20k, and the market turns against your positions- the bankers call and ask you to put up more money or sell stock. Your equity is being reduced by the market- eroding twice as fast as normal. To satisfy the margin call- you must retain your equity one of those two ways.

Here is a simple rule about trading and leverage. If you have ever received a margin call, you should not be trading on margin. Ever. Margin calls are the real walk of shame. That is why bankers everywhere should be punished. They know better.

There is one tremendous problem with using leverage. The more leverage you are using, the more your losses are magnified. Banks don't just employ the 1-1 margin like they give you. They are much greedier than you. They are allowed to fractionally bank at margin rates of 9-1 or greater. In other words, they are allowed to loan 9 (minimally) times more money than they have on deposit. This is fractional banking. European banks are even worse. The best estimates I have read put their fractional lending rates at 13-1. 

So let's imagine that a bank has 10,000 dollars on deposit. You walk in for a 130,000 dollar loan for a house. You have good credit. The bank makes the loan. Two years later the economy collapses and now the house is only worth 60,000. You quit paying on it. Maybe even damage it a little on the way out. The bank is screwed. The house did not appreciate, you quit paying on the loan and somebody has to pay for that mortgage and now someone's got to fix the house and sell it. Someone has to pay taxes on it.

So somebody has lost 70,000. But wait! There was only 10,000 on deposit to begin with. Where does the bank magically get the other 60,000 it just lost? Answer- it doesn't. Not until the economy rebounds, the losses are absorbed and accounts and balance sheets are refreshed with new money. Then the cycle begins again. Only this time, it can't.

There is a lot of evidence that points to a european monetary collapse. They did the same thing we have done- only worse. There is no way for their bankers to pay for their losses. Italy has to refinance 300 billion in debt in February and they simply can't do it. In fact, I think that will be the tipping point. There is evidence that the FED is already backstopping US banks in preparation for the european run on US banks.

The only tools left for the bankers are electronic zeroes, politicians, rhetoric and bullshit. We have seen plenty of that so far. They have given themselves a margin call- victims of their own greed. So sit back, relax, and enjoy your life. Be happy that you are not a central banker or a politician- trying to ward off the inevitable.


Always On Watch said...

I'm trying to figure out what the coming collapse of the euro is going to mean on this side of The Pond.

And I'm sure that the euro's collapse will impact us here in the States within a few weeks.

The bankers are not going to be able to lie their way out of the coming disastrous economic tsunami.

Brian said...

Here is my best guess. None of this is original. A compilation of the authors I have read.

The Eurozone will run on American banks. Any assets that have value, gold, silver, oil will be sold. Profits will be used to pay off debt. Another great round of deflation will occur.

The Fed is out of tricks. A period of great deflation (they cannot stop this) and then a period of great inflation. The euro is toast. I think the dollar will follow it.

Over what period of time? Who knows? I have consistently underestimated bankers and politicians willingness to lie and kick the can.

The first big shock occurs in Feb when Italy tries to finance 300 billion dollars worth of debt. That may be the critical mass moment.

There isn't anything any of us can do to stop this or fix it. It's too late. All you can do is ready your own life for the possibilities.

There gonna raid the whole house this time.