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Alert - Global markets melt down.

Friday, October 24, 2008, 6:59 AM

Hang on, it's going to be a bumpy ride.

Last night global markets sold off more than 10% in a few spots in Asia (Korea & India) and are down between 7% and 8% in Europe.

Here in the US, our stock futures are "Lock Limit Down," meaning that automatic circuit breakers have tripped, preventing any further trading.

If the US markets are not rescued (or closed) and do not sell off by a similar amount, we are looking at a loss of between 500 and 700 points on the Dow.

We have clearly hit "phase II" of this crisis.  We are witnessing the violent deleveraging of more than a decade of failed risk modeling and extravagant borrowing.

There are black box computer programs melting down in trading centers all over the globe as their fancy MIT programmers never anticipated a "3 sigma" event.  A fat tail has arrived and swept across their trading platforms, destroying assumptions and wealth.

Gold and silver sold off as well last night, but I have never felt better about owning both.  I know several relatively wealthy people in the US who have been attempting to buy both in size and they are on waiting lists. 

What this tells me is that the world of paper wealth - all of it - is no longer sending appropriate pricing signals.  That world is breaking down. I expect several decades of mistrust in all things paper to result from this mess. 

Deflation is now firmly in control, and the central banks (assuming they wanted to prevent this) are not.  

At any rate, take a deep breath, this too shall pass. Or, rather, we will find a new equilibrium, probably a lower one, and live there for a while before starting the next leg.

More to follow....

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24 Comments

leo0648's picture
leo0648
Status: Bronze Member (Offline)
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Posts: 48
Re: Alert - Global markets melt down.
Of course the dollar is up again today.
danaroypatton's picture
danaroypatton
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Re: Alert - Global markets melt down.
burn, baby, burn.
doggett's picture
doggett
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Re: Alert - Global markets melt down.

 

"Deflation is now firmly in control and the central banks (assuming they wanted to prevent this) are not."

Would anyone care to comment as to why central banks would NOT want to prevent this?

GR8TFUL's picture
GR8TFUL
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Posts: 79
Re: Alert - Global markets melt down.

 

Danaroypatton:

 Burn, baby, burn?! What's that supposed to mean--R U somehow gleeful about all of this?!

Sure, if bad times have to come it's nice to be one of the ones who anticipated & prepared for this, but cheering millions of senior citizens hard earned savings be flushed down the toilet is hardly the appropriate response & unlikely to be appreciated.

 Do you laugh at all tragedies, or just the one's you think you'll somehow profit by?

 Doug

scotthw's picture
scotthw
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Posts: 59
Re: Alert - Global markets melt down.

So... is the dollar up or down ?  I am confused by seemingly contradictory statements like this:

TOKYO (AP) -- The U.S. dollar is down to its lowest level against the Japanese yen in 13 years, pressured by traders unwinding so-called yen carry trades and worries about a recession in the U.S. economy.

and:

Oct. 23 (Bloomberg) -- Gold fell to a 13-month low in London as the dollar strengthened and fund investors liquidated their holdings across most commodities. Platinum also declined.

If the dollar falls - its weaker isn't it, yet I see headlines of a stronger dollar.   What salient point am I missing ?

Sheesh, I need to get some books recommended hereabouts and re-educate myself.

 

Second, Chris says:

"Gold and silver sold off as well last night but I have never felt better about owning both.  I know several relatively wealthy people in the US who have been attempting to buy both in size and they are on waiting lists.  "

So is it pointless, or at least a siginificant challenge, for the little guy (me) to try to buy PMs right now ?

Thanks, Scott

bearing01's picture
bearing01
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Re: Alert - Global markets melt down.

Assets purchased with debt, as their prices decline, it puts the loan under water.  This increases the chances the borrower will default on the loan.  This fuel the credit crisis.

Stocks purchased on margin (loans) will also suffer.  As the portfolio asset value comes down the broker will issue a margin call which means the investor has to throw in more money to keep their share of "skin in the game" of the investment.  If the investor doesn't throw in more cash then the broker will sell off some of the valuable stocks until sufficient cash is restored to the investment.  This is the forced selling of things like healthy company stocks, gold, etc.. and this forces down the prices of good stocks.  On a grand scale, this is one reason why the entire stock market is coming down in price.  This scenario propells itself.  As prices come down, due to forced sales, more investments reduce in value which forces more margin calls, forcing more sales of assets / stocks.

Also, when you get these margin calls the broker sells off stocks and this turns equities into cash.  When you got foreign investors, this keeps up demand for turning equities into US dollars to pay back the broker.  This drives up the demand for US dollars and keeps the dollar strong.  When everything has finished unwinding the demand for the dollar will come down and gold will likely spike.

krogoth's picture
krogoth
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Re: Alert - Global markets melt down.

I think food and services will be the commodity of the future, not Gold and Silver. I see a big barter system coming.

 

 

 

 

 

 

 

srbarbour's picture
srbarbour
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Posts: 148
Re: Alert - Global markets melt down.

[quote]Of course the dollar is up again today.[/quote]

And it will continue to do so, as demand for dollars remains high because they are necessary to pay off the enormous amounts of debts denominated in dollars.  (Whether those fellows buying the dollars like it or not, they still must buy dollars)

That is, at least, until T-Bonds fall dramatically in value killing the 'asset' backing the dollar note.   An event that recently became dramatically more likely. 

--

Steve

bearing01's picture
bearing01
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Re: Alert - Global markets melt down.

The US dollar is up, but the Yen is up even more.  The rise in Yen is due to a yen short squeeze.  What that means is that people borrowed the yen at low interest rates and then converted to another currency to invest in other countries.  Since then, a wave of investors have been paying back their Japanese loans and they have to buy back the Yen to do so.  This is driving up the exchange rate to buy the Yen.  Others see the rise in Yen exchange rate and see that it's time to cash out their foreign investments and buy Yen to pay back their loans.  As Yen exchange rate rises this puts more pressure to pay back their Japanese loans before the exchange rate gets too high.  This is called a short squeeze for Yen, where everyone at one time is trying to get the Yen.

There aren't any fundamentals supporting a strong USD.  Hedge funds are unwinding (deleveraging) and people in financial fear are selling stocks to get US dollars to buy US treasuries.  Foreigners in the same fear wanting to buy US treasuries also have to convert their currency into USD to do so.  This suppresses foreign currencies and boosts the USD exchange rate.  The boost in the USD does drive down the price of gold.  Just wait until the banks start lending again (when the TED spread falls) and the hedge funds have deleveraged.  You will see a fall in the USD.  People run to USD or US Treasuries right now because the US has the green light to print money and the USD is the global trade currency.  It's just one big vicious cycle that's bound to reverse some time.

SwedishChef's picture
SwedishChef
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Re: Alert - Global markets melt down.

@ScottHW

 Go to yahoo and do the chart for the Dollar Index.  This is the dollar strength relative to a basket of currencies.

 

Also our dollar can be down against the yen and up against the pound or others.

 

 http://finance.yahoo.com/echarts?s=DX-Y.NYB

scotthw's picture
scotthw
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Posts: 59
Re: Alert - Global markets melt down.

Thank you everyone, it is a bit clearer now.

 

Still need to educate myself about PM investing, not hopeful I will figure that out during the brief interval ahead when it will be down, before "... everything has finished unwinding the demand for the dollar will come down and gold will likely spike"

 But that won't stop me from proceeding anyway, seems a good idea long term regardless the price.

Scott

Davos's picture
Davos
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Dollar Up?!?!

On the dollar:this was an interesting read...

 

http://www.financialsense.com/fsu/editorials/willie/2008/1023.html 

 

 

pir8don's picture
pir8don
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Time 4: Heads out of the sand into the soil

S2S (corporate logo?)

Don

Xflies's picture
Xflies
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Posts: 157
I got more bars of gold today, did anyone want to Buy?

I'm still confused as to why there's a shortage in the US but I bought some more 1 oz bars today... does anyone know if I can send them to the US via Fedex?  I'm more than happy to help those that want to get gold and I will send anyone that wants it pics of the 1 oz bars and I was thinking if Ebay is the easiest way to transact since don't they give protection to the buyer up to a certain amount?  If anyone is interested, just post and leave me your email address.

 

pinecarr's picture
pinecarr
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Re: Alert - Global markets melt down.

Hey  bearing01-

    Thanks for your clear explanation about what you see happening with the US $ right now.  I think it is possible some folks are also buying the US $ and Treasuries near-term as a preceived safe haven relative to other currencies and investments.  But once the deleveraging you are talking about has played out, it seems like the fundamental weakness of the dollar would start becoming a stronger, less diluted  force, at which time it may not look like such a great safe haven.  I guess I'm wondering if that's what's going to happen, anyhow!  I don't have any idea what kind of a time frame we're looking at for deleveraging to complete, though.  Thoughts anyone?

-C

 

scotthw's picture
scotthw
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Posts: 59
Re: Dollar Up?!?!

Davos said:

http://www.financialsense.com/fsu/editorials/willie/2008/1023.html  

OMG!  The more I read and actually understand the queasier I get.  Thanks for that link, VERY informative.

 

Scott

Davos's picture
Davos
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Re: Alert - Global markets melt down.

Anytime, makes me want to go for an ostrich change surgery so I can bury my head in the sand for the lunatics in charge of the insane asylum won't figure out that going green will save the world. 

capesurvivor's picture
capesurvivor
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Re: I got more bars of gold today, did anyone want to Buy?

Xflies,

 

Please send info to [email protected]. It should be legal; gold is not contraband. Also, it should be cheaper for you (and buyer) if you don't have to pay Ebay to sell it.

 

SG

Xflies's picture
Xflies
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Posts: 157
One thing I should mention about my gold purchase...
The line up today was huge!  It took me over an hour waiting in line just to get my gold.  The bank's bid/ask was only $15 (not bad for a commodity that trades at over $700) and there was a small processing fee.  I don't think the bank will run out but there sure was a lot of demand...
joe2baba's picture
joe2baba
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Posts: 807
Re: One thing I should mention about my gold purchase...

xflies

there is a service online to handle escrows. it is escrow.com

it protects both buyer and seller. i have not used it but investigated it a few years ago 

and it seemed like a good option other than ebay or paypal.

i do not know what their current fees are

capesurvivor's picture
capesurvivor
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Posts: 963
Re: One thing I should mention about my gold purchase...

Hey X, 

Still have not heard from you about gold. 

[email protected]

 

SG

Xflies's picture
Xflies
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Posts: 157
Re: One thing I should mention about my gold purchase...

hey there!  I emailed you yesterday... I'll try again, my apologies.  Actually, anyone can feel free to email me, I'll post it here.  [email protected]  please don't spam it

Xflies's picture
Xflies
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Posts: 157
thx joe! so if anyone wants to buy gold through escrow.com
I'll offer my gold at a small 20% premium.  First come first serve, I've got 20 x 1 oz bars... it should be cheaper than buying coins or junk silver and it's certified by a bank with 99.999% purity.  The buyer has to pay for delivery and any fees associated with escrow.com.
Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
and for Chris Martenson, I won't charge any premium for the gold
so Chris, if you're still finding it difficult to get, let me know and I'll sell you the gold at my cost... we can talk about a method of payment that you're comfortable with so just let me know.  It's the least I can do for all of the good work you've done for everyone.

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