The two next bubbles to pop, countries defaulting, hyperinflation?

Well, it now seems obvious to many that the stock market was more than overvalued (which I have been writing about for many months...) even though some people would like us to believe that we have reached the bottom (last weeks rally was a nice bear rally, that fooled many). So where we go from now?

I think two major type of assets that are going to collapse (and I am not even mentioning credit card debt, since they are currently collapsing) next are:
  1. Private Equity - often seen as an alternative investment. Well TPG lost several billions in Washington Mutual, Cerberus has been fooled by Daimler and is now unable to get rid of Chrysler, BlackStone went public and since that time has lost 80% of its value in 18 months, and KKR has postpone its IPO. The problem is that these companies are over-leveraged and won't be able to bay back their dept on time. Take the example of these idiots at BC Partners who acquired Foxtons at the very top of the real estate bubble in the UK... Clearly, many Pivate Equity firms took over hotels, commercial real estate, offices, etc. in the US and the rest of the world. The loss are going to be huge and will also spread to the banks which lent the money. It's going to be ugly, that's for sure.
  2. US bonds (treasuries bonds, notes, etc.) and more specially the long term US debt. I already mentioned that I am short these bonds via TBT. If you go on TreasuryDirect.gov and more specifically the Dept to the Penny page, you will see how much the US government owes and how quickly this dept is increasing. More below:

Just how much dept can the US take?

The total debt (excluding liabilities such as pension, healthcare etc.) reached $10 trillion on the 30th of September 2008, and just one month later, as of the 30th of October 2008, it had reached $10.5 trillion, that is a massive $500 billion increase, or 5% in a single month, which is about 80% annualized!

One question that I don't find often asked and never answered is: from whom are they borrowing? Because debt must be coming from some entity right? The answer is: they can be borrowing from the Fed (printing money) or borrowing from other private investors and sovereign countries.

Let's focus just a bit on that latter: the countries. I have had hard time finding the information that I need, but the CIA web site provides the total foreign exchange and gold reserves of each country.

Playing just a little bit with this data, you soon discover that the 30 richest countries have a cumulative total reserve of about $5.873 trillion (including all the various currencies they hold and their gold reserves!) while the whole list of 155 countries barely reaches the $7 trillion.

I honestly must admit that I hope this figures are not right, that something is wrong here. The total debt of the US is currently bigger than the total cumulative currencies and gold reserves of the rest of the planet! Can this be right? Please let me know if I am wrong, because if I am right, not only does it mean that the USA are insolvent (nothing really new here), but it also means that should they be willing to keep on borrowing that much, they will have washed the whole globe off their currencies. Which obviously is not going to happen.

So they will either not be able to borrow, or will have to turn to the Fed for their borrowing needs. In either cases, the USD is going to collapse, as well as the US bonds.

On a side note, I think one must be stupid to lend their savings for 20 years to get a return of 3-4%. At some point, lenders will start to notice what is going on.

Finally, today the BoE slashed interest rates by a massive 1.5%, and the ECB by 0.5%. It seems like we are going to see a competitive devaluation and most rates are going to reach 1% if not less pretty soon (the USA and Japan are already there). Hyper-inflation might be what will happen after a short period of deflation?

1 comment:

gillberk said...

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression.Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement. Inflation generally is defined in terms of a rise in general prices due to an increase in the amount of money in circulation. The inflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.