By Jim Sheridan
“The collapse of the financial system as we know it is real, and the crisis is far from over. Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt.” – George Soros, 2010.
Welcome back, and I hope you’re ready for a bittersweet letter today. There’s bad news and good news, but the good news will require some action on your part. How does that sound?
You will probably recall times in the past when you saw something happening that would become hugely significant in retrospect, but at the time you didn’t give it much attention. We look back and wonder, “How did I miss that? The clues were all there. What a dumb ass I was!”
China entering the WTO in 2001 is perhaps one such event. We look at the economic giant China has become, but we could’ve seen this would happen in 2001.
What I’d like to put to you this week is simply this: what events are going down this very second that we will look back on and kick ourselves for not seeing?
So let’s begin…
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There are 3 institutions that play a part in keeping you stuck at the grind forever: Governments, Media, and Unethical Corporations. We expose the scandals of each in great detail in the League of Power monthly course. Last week we had a shot at governments, so this week let’s move on to the Unethical Wealthy. Read: Banks.
‘They’ are the banks. Let’s take a look at why they screwed us last time, how they’re about to do it again, and how you can profit (or suffer)…
A little recap then. I know you’d rather sweep the train wreck of 2008 under the carpet, but this where our story starts. In fact, it starts even earlier, in 2002, when the tech-stock bubble burst…
If you recall, decrepit pensioners and toddlers alike were rioting in the streets to snatch up shares of Internet companies that weren’t making any money, and nobody understood their business model (because there wasn’t one). Shades of the Facebook IPO here, but I digress…
Everyone said that “it was different” this time, that a new order of economics was in play. They said the same thing in 1929, and they’ve been saying the same thing ever since. When the bubble burst, the Bush administration reacted by slashing interest rates as low as possible to avert a recession.
But, as in life, there’s no free lunch in economics…
Imagine for a second what it’s like trying to apply window tint, or a protective film on your phone screen. There’s always a darn bubble, right? And then, when you press your finger on that bubble to smooth it out, the bubble simply pops up somewhere else, yes?
Well, that’s precisely what politicians did in 2002: by artificially lowering interest rates to obscene levels, they transferred the tech-stock bubble to the housing market.
So for the 5 years after, everyone thought they were rich. Their houses made more money than they did. Nurses quit their jobs and became realtors. Everyone thought they were a financial genius. Credit came cheap and easy, and people sucked up every last drop from the punch bowl, and then some. A la 2000, decrepit pensioners and toddlers alike rioted in the streets to buy houses, and amnesia reigned. After all, it was “different this time.” Wasn’t it…?
But while everyone danced on the stage, the people directing the drama were getting edgy about how many nights this could play for.
On August 9, 2007, an analyst at Bank Paribas (BNP) worked late in his cubicle. He kept running the numbers and scratching his head. He couldn’t figure out how much the bank’s mortgage assets were worth. So other banks got worried as well. Then they all realized that a scam had gone on where risky loans had been bundled up and repackaged into financial products that were low risk.
That’s why Lehman Bros went broke. Then the plummet into hell followed, and you know the story into 2009 and 2010.
That’s how they screwed you. Here’s how they’re going to screw you again…
Only this time the costs will be far higher and the damage much worse. This time the fall could be $2.6 trillion or more.
Both JPMorgan and Bank of America are quietly selling a new product designed to “transform” low-quality assets into quality assets. They’re doing this to create the impression that they are holding high-quality assets, as required by the new financial stability regulations (which clearly failed).
The reason the financial regulators require banks to hold high-quality assets (like government debt- ha, what a joke), is so if anything goes wrong in the system, the banks have enough liquid capital to keep the doors open.
But banks just figured a way around that, using the same smoke and mirrors as before. “Don’t worry, sir! You don’t have enough high-quality assets to back that futures trade with us? Well, use your low-quality assets and we’ll secure those against US bonds that we don’t have. Oh, but the fees will have to be higher than normal, sir.” That’s the scam this time around: a bit like a payday loan only with lots more zeros and a lot more at stake.
Why are they doing this? To make money, of course. Clients these days just don’t have the same amount of collateral as they used do back in the boom times, so these clients couldn’t be such big customers to the banks as they were (that was the intention of the new regs!), and that means lower bonuses for the boys who want an even bigger home in The Hamptons. And that won’t do.
$2.6 trillion worth. And you’re on the hook for it if you have a money market fund or any kind of pension whatsoever.
That’s how they’ll screw you again- with yet another house of cards and emperor’s clothes. But now onto the brighter side of this looming catastrophe (that’s aside from the inflation problem)…
You’re now at one of those moments when you may look back and not have seen the writing on the wall.
As in 2007, all appears rosy on the surface, and complacency reigns, but the problem that started way back in the 1990s hasn’t gone away, politicians (pandering to voters) have simply pushed that bubble in another direction. That bubble is now government debt (= bonds = Treasuries). Why do you think gold refuses to sink down to any significantly lower level?
But as I said, all is considered rosy. That’s why the VIX is so low now. The VIX is a measure of complacency in the market; when it’s low, complacency is high, and vice versa. The proxy for the VIX is a fund called VIXY (the Proshares Volatility Index). It’s now sitting at around it’s 2-year low of $18. It was as high as $122 only last year, when we had the European debt crisis flare up, and this crisis hasn’t gone away.
What the VIXY is saying then is that nothing bad will happen in the future. So a lowly $18 is what the big boys on Wall Street clearly value the VIXY at currently. And Wall Street is always right.
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