Sunday, October 12, 2008

It’s the end if the world as we know it…

Congratulations, you are present to witness the end of the world, the end of the world as we know it.

The stock market crash has started in earnest and world wide panic has set in as a result. Not that I didn’t expect this, but it came more suddenly and swiftly than I thought possible.

In 1907 J.P. Morgan engineered a bail out of the U.S. banking system that was eerily similar to this event but on a smaller scale. History will show that the current crisis started 100 years later almost to the month (November 2007) from that narrowly averted, long ago event. But this time, no joy. We don’t have Mr. Morgan with us anymore, and we are in deep shit.

Let’s take a look at our situation:

Americans are on the hook for $850 Billon more than the massive debt that we already couldn’t pay due to the hastily cobbled together bailout. A new bailout proposal is taking shape at this moment that will reach the House and Senate in mid November 2008. Who cares how much it will be, we can’t afford it.

Germany is working on a bail out that may reach $400 Billion. It seems world governments will soon own or control all commerce. The free market is dead, it will be sorely missed.

Stock markets around the world plunged last week with the DOW shedding 22% in a week long orgy of panic selling. Gold rallied for a short time but then got caught up in the viral infection of fear. The gold market is opaque but I’m guessing much of the selling there is to raise fast cash to cover margin calls in the derivatives markets. There may be more of this to come as many shadow investments unwind to the tune of perhaps hundreds of trillions of dollars. No one can say how much for sure but the possibilities are frightening.

UBS and Credit Suisse Banks, the two largest businesses in Switzerland are in big trouble due in part to their exposure to derivatives, and may not be around much longer. The implications for Switzerland and the Franc are bad. The two banks are together far lager than total Swiss GDP. Their failure will crush the Franc, historically the world’s most stable currency and formerly a safe haven in turbulent times.

So where does one put his money? U.S. dollars for now. At least until the world notices the flood of spanking new printed greenbacks that will be printed and circulated faster than the ink can dry. The U.S economic fundamentals alone should knee-cap the dollar but for the moment it’s the hot game in town, but only for the moment. Sentiment here may turn on a dime.

Anyone try to buy gold coins or bars at your local dealer lately? It can’t be done. Physical gold has been swept off of the shelves by frightened Americans since at least August and now is drying up globally. Paper gold will see deep selling in an effort to raise cash to cover stock and derivatives margin calls. Physical gold will most likely be swept up for a short time in this panic as spot gold falls bellow the mid $700 range or perhaps lower.

Fear is rampant and physical gold demand is very high. For this reason gold will probably see a neck breaking reversal upward once the Margin calls have wiped out enough derivatives players and their corresponding margin calls.
From there the sky is the limit for gold. Timing this will be tricky though as things from here start to move faster.

Watch for World governments to attempt to restrict trading or ownership of gold. As taxation suffocates Americans and other countries for that matter we will see a Soviet size Black Market emerge with citizens sheltering what little they have left from ‘The Man’ in the form of gold or silver.

Prices for Major assets will sink for perhaps a decade due to the unwinding of derivatives (the bursting of the bubble if you will) and a resulting over printing of world currencies will undermine currency values resulting in inflation and simultaneous deflation world wide. Ultimately gold and silver may become the black market currency of choice and real estate will be over for a long time.

In Part II of The end of the world I will discuss the effects of evaporating tax revenues, black markets, and the coming social breakdown.

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