Is today start of perfect financial storm? (caused by "6L cycle")

The "6L Cycle":

LIQUIDITY caused the “dot.com bubble.” When it burst Greenspan’s FED, fearful that the world was heading into recession, possibly becoming a depression, pumped out more money. This lead to:

LOANS to unqualified people, who could not afford the house they bought, but both buyer and lender were confident that rising home prices would bail them out of any trouble, and it did for several years. The buyers refinanced their mortgage at lower rates provided by the FED and often for longer terms with lower monthly payments once they had some unrealized capital gain. This put cash in their pockets, which they quickly spent. This lead to a:

LINKAGE between increasing home price and the general economic prosperity, but jobs were being exported and “Mac –Jobs” replaced the lost higher-paying factory jobs. Joe American’s real wages went down for a several years and his ability to carry his mortgage decreased. That is his home became a:

LIABILITY, not an asset that he could borrow more against to live better but business, importing more services and goods from cheap Asian sources was prospering as never before, even when selling less in many cases. The US might have been able to avoid depression and only have mild recession if it were not for the

LEVERAGE, which pooled many of these low quality mortgages together in packages (diversifying the risk, while keeping their high rate of returns, especially as the ARMs in the package reset to higher rates). These packages were very attractive and supposedly “secure” because of this diversity so banks and brokerage firms allowed large investors to buy them with only small fraction of the face value. These investors and private equity firms resold the packages among themselves and to ETFs and used them as collateral for other bank loans to buy more. Perhaps at the end of the chain, only one dollar was buying 25 dollars of face value assets. But then the “failure to perform” (mortgage default rate) went up and exposed the last buyers in the chain to bankruptcy and the:

LIQUIDATION that is happening today, not only in the US, but in EU also. A large French firm, tied to the US mortgage market, just went under and hundreds of billions (if not trillions?) of stock values have evaporated over night around the world in one day. (High leverage means that only a few percent drop in homes values or increase in the default rates completely wipes out all equity of the investors holding the bag at the end of the re-sale chain. It threatens the entire banking system, but I expect that it will still be possible for central banks to save the system one more time with more

LIQUIDITY (starting this “6L cycle” again) before this house of cards all comes crashing down in history’s worst depression with the dollar collapsed to pennies of current value. The EU central bank is trying. It pumped out 125billion dollars today alone! - Here we go again, but this is the last time, I predict, before the crash.

 

Log in or Sign up to hide all adverts.

Billy T., you've been predicting world financial collapse, collapse of the US markets, etc for ages now on this forum .....and none of it's come true. So ...why do you continue to predict such things???

Baron Max

 

Log in or Sign up to hide all adverts.

Hey Billy, appreciate the post. Just WTH to do? I recently bought some real Gold and Silver, is that the only option? What will have real value? Working on getting my handgun licence and plan on obtaining a large amount of ammo( I have access to shotguns and perhaps a 30-06 rifle). I'm the type that likes to cover a lot of bases, I suspect ammo is going to be worth more than anything intrinsically valued.

Is there any part of the current economy that could survive the coming Credit crash->currency crash-> stock crash domino? You think some really big old time Corps like say "GE" might make it?

 

Log in or Sign up to hide all adverts.

It is true true that I have been predicting dollar collapse and deep depression for US and EU for several years, but I have always said it would be several years yet before the run on the dollar send US and EU into deep depression. Everything is on schedule or actually moving closer to the present than my earlier predictions.

When I first realzed the risk, about 10 years ago, I wrote my book, Dark Visitor,* hoping to encourage more students to select the hard sciences instead of the law and business programs. (The CURRENT greater earnings potential of these areas has made too few select the programs needed to keep US in the lead - in technology Asia already leads. In next generation Asia will lead in science also. Most of these money hungry students will end up without the jobs they expected. Wall Street is already contracting /firing brokers and moving back office to India. London just recently passed the US as the world's main financial center. When dollar collapses, this trend will greatly intensify and "Wall Street" will almost be a "ghost town.")

After GWB was in office about one year, with destruction of Clinton's budget surpluses, I got scared of the US economy's future, and began posting warnings here, trying to reverse the disaster GWB was leading the US into.** With his second election, the invasion of Iraq, etc. I began to set a time table for the collapse of the dollar of "in about a decade."

After Greenspan's foolish increase in liquidity, (resulting in historically low interest rates and unsustainable surge in home prices) and GWB's continued "twin deficits", his lack of understanding or the tribal nature of the middle east "nations" and his big business tilt against the interest of the population, etc. I began to predict the the collapse of the dollar depression in "less than a decade"

When confidence in the dollar began to sag, I got most of my wealth into ADRs to protect myself and held in dollars mainly already high-risk early-stage drug development stocks (about 40 for diversivication as most will fail to get drug to market). My ADRs are mainly companies in Brazil and India as I do not trust China or Russia. Best is SBS, Sao Paulo's water/sewer company, up about 900% now in dollars and about 350% in Brazilian Real. SBS still pays high dividends, with double digit growth of income, etc. Many people are now also getting out of dollars, but it is not yet a run on the dollar.

When the sagging confidence in the dollar forced up US interest rates (US must pay higher interest to persuade foreigners to buy treasure debt - and even at current rates they have had a net loss in purchasing power for more than a year, so rates will go even higher still.) I realized that the collapse was nearer than I had thought, so began to predict it as due "in 5 + or - 3 years."

In view of what happend to global wealth yesterday as the US mortgage problem spread beyond the US, I think I can safely move my prediction of the dollar collapse a year closer, so now I predict it as: "in 4 + or - 3 years"

I continue to think, as stated in first post this thread, that central banks will be able to prop up this house of cards they have built for one more 6L cycle. (The first cycle I remember was the rescue of hedge fund LTCM. Next cycle was the steming of the "dot.com" fall out, and now, I expect a sucessful containment of the "sub-prime" spread will occur with little global damage.)

SUMMARY:
It looks like things are going as I predicted and expected for the last 5+ years. You are premature and foolish to think otherwise. You should be trying to protect your wealth from the approaching dollar collapse.
--------------------
*Visit web site under my name to learn more, including how to read for free.

**See my old thread, created just before GWB ran for reelection, called "How DUMB can US voters be?"

 

Although they will surely hold their value as dollar drops, I do not recommend precious metals because:
(1) They produce no income
(2) They produce expense, if held in bank vault.
(3) They produce risk, possible even your death, if held at home.
(4) They may be only worthless paper if held at some "metal investment firm" (I suspect that at least some issue many more certificates of ownership than they have actual metal. - This BTW is how paper money was invented in the middle ages. A few wealthy individuals, often jews, would lend money but only the certificates of ownership actually left their vaults. It did not take them long to discover that most people like to exchange the certificates instead of carry around the gold so they could (and did) issue more certificates than gold in their vaults, without fear that anyone would know. This greatly increased the interest they earned. Banks still do this, but they are at least now regulated and must deposit some money with the central bank.)
(5) Gold may not offer any protection in deep depression because there are thousands of tons of it above ground and little industrial need of it. What will happen when governments begin to sell some of their holdings? The IMF is at least considering (if not actually) selling now. This is because many countries that were in debt to IMF, and providing cash flow to it for its expenses, have paid off their debts to it. Brazil has. - If you must hold a precious metal, choose anything but gold. Same goes for gem diamonds, even worse choice - far too many with essentially zero real use above ground. (Diamond dust for grinding etc is man made now.)

I bought ADRs five years ago, before the crowd. I think they still offer the best protection as well as income, if in India or some countries that supplies raw materials, energy, or food stocks to China. These countries will escape the worst of the global depression by becoming "economic colonies" of prosperous Asian countries, especially China.

I also converted more than half of my retirement plan assets into TIPs about 6 months ago. I could not take them out of dollars quickly without giving most to the IRS, but CREF/TIAA where they are (I worked for Johns Hopkins U.) has a TIP fund. I do not expect any capital gain, or need it, as the face value will fall as interest rates rise, but the inflation correction makes them much better than regular bonds. I.e. if they just keep their real (purchasing power) value I will be happy with them.

 

Thanks,

I guess you are not seeing as big a fall as I think. Well that is good news(to me)

 

I hope its a huge fall...good for the UK!

 

Now Billy are you sure its a 6L cycle and not a 4.5L cycle engine modification ?

 

I am not predicting it will but it could get bad enough for your gun and ammo to be needed.

In about 15 or 20 years the liquid fuel (oil?) needs China and India will be greater than US's and with collapsed dollar the US will not be able to import what is required by even a reduced version of the "suburban infrastructure" it has foolishly spent its money on for decades. The poor are concentrated in the cities. The food for them is transported on average more than 500 miles. The cost of this tranport alone, in the high cost era of oil the Asian demand will make, will make them hungary and despirate.

They will know that there is canned food, etc. stored in you basement. It will be very hard to stop a hungy mob from trying to take some.

Again: I am not predicting this will happen, but also I would not predict it will not. No one can know what will happen in a prolonged depression in a society whose infrastructure was built on the assumption that cheap oil was "forever."

 

More cash pumped out again today also by FED, EU & other central banks. (Total well above what they did following 9/11 as this is potentially much more damaging. !!!):

"...The Fed on Friday followed an earlier $19 billion injection into the banking system with a second addition of $16 billion.

The Fed's decision to conduct two operations could mean "there is a greater strain in the market than is evident" or that the central bank wants to make sure there is enough liquidity in the financial system to help it stabilize, said Tony Crescenzi, a bond strategist at Miller Tabak & Co. LLC.

Earlier, the European Central Bank added another $83.6 billion, after Thursday's $130 billion injection, and the Bank of Japan on Friday added $8.5 billion.

The U.S. Federal Reserve on Thursday added $24 billion in temporary reserves, and Canada's central bank put $1.55 billion into the markets. See full story.

"It's become a very emotional market," said Peter Cardillo, chief market economist at Avalon Partners. "The great fear out there is, 'who's next?'" ..."

From:
https://wwws.ameritrade.com/cgi-bin/apps/Main

Billy T comment:
A new liquidity cycle is clearly underway. The question is: Will it work, or will it be taken as sign that system is broken? I.e. if dollar is dropping, more of them pumped out will only make each less valuable. FED must walk a thin line to help instead of make problem worse. FED is being wise to let EU's central bank carry most of the new liquidity ball.

Clearly there is "a greater strain on the market than is evident." This is because the re-packaged / resold mortages I spoke of in the first post (LEVERAGE Section) rarely trade so their worth is not well established. Brokers like Bear Sterns etc. can continue to carry them on the books at cost. (The purchase price, which is now much higher than their true market value. I.e. they are hidding their losses as long as they can, but this is so obviously wrong that the SEC has started to investicate this mis-representation to investors.)

 

Sounds just like the crash of the 20's. They desperately tried to pump in money to prevent the crash, but it only worked temporarily.

 

I think your history is incorrect. The depression of 1929 was made worse by the TIGHTING OF MONEY SUPPLY. Back then economics was not a s well understood and "keeping the dollar strong" was thought to be the way to solve the problems.

If governement had not done anything, the depression would have lasted a year or two at the most, not basically until WWII stimulated the economy.

 

I do recall some famous bankers trying single-handedly to reinforce the market with their own cash. It didn't work.

 

That is true. Individual bank owners, and some of their big investors* did use their own money to try to keep their bank from going under. In some cases, it did work - they saved the bank.

It is important to realize that this action DID NOT INCREASE LIQUIDITY. I.e. no new money was created out of thin air as today - only existing money was credited to someone else. Back then, some bankers identified with their bank and it was a matter of personnal honor to keep it solvent - Many were in small towns and would have been pelted with tomatoes if they had behaved differently.

That movement of existing dollars has nothing to do with what is happening today. Today 100s of billions of dollars have ceased to exist in 24 hours. More will soon disappear as mortgage packages are marked down to their real value, EVEN if the central banks succeeds in containing the damage. (As I stated in the first post, I think they will, but this is the last time printing presses can save the economy. The higher the economy climbs on paper money the harder it will fall. - The coming depression will be much worse than 1929s at least in US and EU.)
---------------------------
*I do not think it still true, but back then, before the Federal deposit insurance existed to insure the bank depositors that at least they would get their dollars** back, the investors/ owners of the bank were lible for twice the total of the capital they supplied. - This served as some assurance that the depositors would not get stuck holding the bag and made the banks more conservative in the loans they would make.

** They might not be worth as much, but today they can go to pennies of current value when the system collapses.

 

It's just a scare to shake out some stock.
As soon as the US gets cheap enough, China will buy it!

 

They tried to buy SoCal (not sure now of which company - it had unusually large part of its value as proven oil in the ground.) but Congress would not let them. They do reasonable well with their long term (up to 50 years) planning, so I expect they will soon be quietly buying up US farm land, if they are not already doing so.

About the only thing that the US has that China will need in a decade is productive farm land. If it were not for the fact Brazil and many others will sell food to China cheaper, the US could also become an "economic colony" of China instead of sink to "has been" status by 2030.

 

Actually it's really interesting to watch China becoming almost as capitalistic as the USA.

Baron Max

 

I hate to break it to you Billy T, but the Fed Chair doesn't agree with you.

http://www.msnbc.msn.com/id/20215976/

"Just days ago Federal Reserve Chairman Ben Bernanke and his colleagues held their regular August meeting and elected to leave interest rates unchanged, issuing a mild statement that expressed optimism about the economy."

Optimism sounds like a good thing to me.

 

Spouting optimism is part of Bernanke's job, if only so the rich have time to move their wealth out of the country.

I agree with Billy T's predictions. I think in the long run (like 50+ years) things will work out fine, even if the oil runs out, but for a decade or more the standard of living of the average American is likely going to be significantly lower than it is today. Many signs are strongly pointing in that direction.

 

What did you expect him to say? Do you think it would have been responsible to "tell it like it is?"

Let us look at actions, not words. The central banks are running scared - pumping out newly created (from thin air) money at the fastest rate in history. (Approximately a third of a trillion dollars in less than three days!)

It all reminds me homopathic medicine's idea that the cure for a dog bite is built on the "hair of the dog that bit you." - As I explained in first post, the current problem was started with the excess of liquity that Greenspan's FED pumped out to "cure" the problems resulting from dot.com bubble bursting. Actually just to delay the problem to post his retirement date.* (And he is smart enough to know that doing so would just make the problem worse when central banks can not indefinitely sustain the "house of paper" they are now adding a new addition to.)

I think the central banks will save the economy once more, with a flood of paper (money from thin air), but this is the last 6L cycle.** Paper money is after all just paper, when confidence in it is destroyed. This flood of paper should succeed for the next year at least, but soon do that destruction.

Thus, I am sticking with my three long standing predictions:

(1) The DOW will flirt with 15,000, if not pass it, before the end of 2007 (or early 2008 at the latest). The flood of fresh credit now coming out will make each dollar less valuable still (but not immediately as EU's central bank is carrying most of the new liquidity ball. - For a month or so, the dollar will gain vs Euro.) It takes more of less valuable dollars to buy all the stocks in the DOW. Many may think 15,000 is too far away, but I am confident the weaking dollar will push the DOW up a lot still. If you have guts and good timing / luck there is a lot of nominal profit in stocks still before the crash, but your gain in real purchasing power will probably be negative after the IRS taxes you on the nominal profit.

(2) The run on the dollar will come in 4 + or - 3 years from now. (Before the partial destruction of confidence in the dollar / world's financial system of the last few days, that prediction was "5 + or - 3 years from now" in earlier posts. Thus, I am more scared and certain now than before. I note few are now arguing my POV is crazy as several did less than a year ago.)

(3) A few months after the run on the dollar, the US and EU and everyone else not supplying raw materials, food stocks or energy to Asia (China mainly) will be in deep depression. Unfortunately, there is no way to avoid this now that the debt and the house of paper has grown so large under GWB, even if he had not started the Iraq invasion against good advise from all of the EU nations (Poodle Blair, excepted, of course.)

---------------------------------
*IMHO, it was not easy to find someone well versed in economics, yet dumb enough to take the job of replacing Greenspan, but compared to his "appointing boss", GWB, Bernackie is a genius!

**BTW, in case any economic historians are reading, I noticed that many of the terms related to the problem did start with "L" so I concocted a few more and invented the phrase "6L cycle" - just in case it catches on and is used by others.