Many who will read this work have been sitting patiently waiting for the house of cards to collapse. For me personally, I confess the current maniacal financial bubble has gone on much longer than I ever imagined. What did we miss?
Are we wrong or just early? In my opinion, we were early, mathematically correct yet the “rules” changed. For my part, I can say that I missed just how much “leverage” could be used to extend the game. In the current instance, we are not even talking about garden variety leverage. We live in a world where leverage is leveraged, leveraged again and again and again.
We have personal, public, and “private” (OTC) leverage. The garden variety leverage is bad enough as is sovereign leverage, but the real problem are derivatives piled on top of derivatives with collateral which in many cases no longer even exists. Too much leverage in the past has always led to burst bubbles. All bubbles eventually burst …and it looks like this one is bursting now.
While I originally thought about talking of Venezuela and Ukraine today, and making a comparison and wondering which one will bankrupt first, it dawned on me …the current bubble is busting right now! From a big picture standpoint, the Fed was forced to stop QE because they were taking too much collateral from the system. The baton was then passed to Japan because the Germans said “nien” to the ECB. QE3 started in Sept. 2012 …which is exactly the point in time where the world of asset valuations was turned further upside down. Call these last two years the “last gasp” or whatever you’d like, the world does not have the ability to reflate any further and in fact, the “bubble of all bubbles” looks to be deflating piece by piece, let me explain this.
Oil is arguably the most important commodity on the planet from a financial standpoint. Oil has collapsed in price by over 40% in less than 3 months. There are many repercussions from this, oil exporting nations are watching as their coffers run dry and the economic activity from lower prices means lower individual employment. From a financial standpoint the oil derivatives outstanding have already killed someone (we just don’t know who yet) and the “underpinning” of the dollar has been weakened. My last point needs an explanation. The dollar is otherwise known as the “petrodollar” because petro revenues have been for years recycled back into dollar assets, lower oil revenues means lower recycling. This action had already begun while oil was still over $100 per barrel as less demand for dollar assets was evident. Now, on top of less “willingness” on the part of petroleum exporters to recycle, they have less (or none) to recycle. No problem because the Fed will just monetize you say? Think again!