Any of you who read this blog and have listened to my ramblings should know that I have long touted that another stock market crash cometh. I have even posted how it would happen. One of the reasons I believe this is that if the dollar comes under too much pressure an intervention would be needed.
Last fall, before the market crashed the Fed had been pulling liquidity from the markets. This, for many reasons I will not get into was a key factor in the crashing of the market. This process takes 6 months or so to manifest. The Fed started pulling liquidity from the markets back in March. Now, new information has come my way that you must be aware of.
Here is a post by Karl Denninger at the Market Ticker…..I’ll have comments throughout and comments that follow.
Possible Credit Dislocation: Be Warned
I have reason to suspect that the "monetary transmission mechanism" is full of rocks (again), and we are about to have another instance of what could colloquially be called "fun." (Yes, that's sarcasm.)
Here's what we know and what I can deduce from it:
• JP Morgan's "cash position" was analyzed by a writer who published on SCRIBD, which showed that actual cash held has deteriorated radically. By more than half in the last year. The deterioration is continuing, not slowing.
• I am hearing repeated anecdotes from multiple areas that foreclosed property held by banks with multiple full-price offers that include a financing requirement are being sold instead to people with actual cash at radical reductions from that price. This implies that these financing contingencies are regarded as not only potentially no good but factually no good, as if the banks know for a fact that the credit pipeline will (not might), within weeks or months (in the time required to close), disappear. There is no other rational explanation for this behavior.
• Citibank's credit-card terms change implies a willingness to accept and even provoke a complete and intentional destruction of their credit card business as a very high probability outcome, given that nobody in their right mind will accept a 30% interest rate who has an alternative. The obvious implication is that only those who can't transfer balances out will remain and if your credit is that impaired there's a good chance you will default - either intentionally or otherwise. This too implies foreknowledge of a near-complete impending freeze in the credit markets. (From SP: this means there will be a mad dash to cash. That’s why the market crashed last year, everyone moved to cash. It also caused the dollar to rally and gold and silver to get hammered! It’s very important for the Fed to crush gold and silver even though they give a rip about the currency. Capiche?)
• The change in terms on credit accounts is NOT confined to Citibank. I have received a fax from a customer of Infibank with substantially identical terms, in which both the standard and penalty rate was adjusted to 29.99%. This strongly implies that whatever Citibank smells the problem is not confined to them.
• Both of these credit card "adjustment" letters are of course marginal rate changes. That is, they are both based off the PRIME rate. The importance of that is missed by many. Don't be one of them (more on that below.)
• I recently received a back channel communication indicating that The Fed is aware that this has been and still is a solvency problem and has so briefed certain members of Congress. This from a source believed reliable, but which cannot be independently confirmed.
This data is not conclusive. But - if you are dependent on credit access and these anecdotes are in fact indicative of actual knowledge of an impending lock-up you are at grave financial risk.
Note that "margin" type rates that are based on the PRIME rate could hurt you far worse than you believe. With PRIME at historic lows should any such dislocation spike the prime rate your interest rate could go much higher with little or no notice or ability to do anything about it.
IF this is going to manifest as a dislocation of some sort it will probably occur within the normal closing window for real estate transactions (30-45 days, sp), since the anecdotes related to that have the best-defined "reach", and the discounts being accepted to avoid this risk are massive to the point of denoting near-certainty of this event in the minds of the market participants who are electing to accept these cash-discounted offers.(Money talks, sp).
Therefore, if you are dependent on such credit access I would take immediate action to do whatever is necessary to mitigate, to the extent you are able, the consequences of such a dislocation.
Consider how you survive returning to what essentially amounts to a cash economic posture in your business and personal life.
Note that the indications above are far stronger than what we saw going into last fall before the wheels came off. As a consequence if these actions are those of people with real knowledge (and this is not a guess on their part) I would expect the outcome to be worse than what we saw last fall in terms of economic impact.
Those who are short dollars (synthetically or in the actual market) need to beware - if I am reading this correctly you're about to get a really ugly surprise.
If you want to speculate on this outcome levered bets on radical dollar appreciation look like one of the best choices out there, followed closely by bearish levered bets on commodities. I would not consider such a speculative play that is not characterized by defined risk, as this analysis is based on nothing more than observation of behavior by market participants that all point toward their foreknowledge of an event that might happen in the reasonably-near future and is not, at present, backed up with actual significant credit-spread widening or other objective criteria.
Disclosure: Initiated a small speculative, defined-risk play LONG the US Dollar (UUP CALL options for March 2010)
From Finn: If you’re confused you need not be. It’s simple. The dollar is in its death throes and it can be manipulated highly on a short term basis but the long term trend cannot be altered. The easiest way to cause a dollar rally is to force contract settlement. The easiest way to do that is to take down markets and call debt due. Everything is pointing to this outcome and I have been saying it for months.
So in short, the market will crash, the dollar will rally and gold and silver will get beat down providing us with an excellent opportunity. GIRD YOUR LOINS. This is the biggest market you have ever participated in. These events happen every COUPLE OF HUNDRED YEARS! This will test all of your mettle.
Here is what I am going to do next to immediately even if it does cost me a little bit in gains over the short term, and again, read my disclosure below.
1) I am moving to cash over the next few days or a week. I’m going to try and get a few more cues from the market place and will then liquidate all my stocks and sell my gold and silver in my GoldMoney.com account.
2) I WILL NOT be selling ANY of my bullion. It is in my belief that after this next crash faith in the markets and currencies will be shaken to the core. The potential rush to metals could be staggering. It may not happen immediately but it will cause shortages and trying to pick up bullion after such an event could be nigh impossible.
3) After a crash, I will move back into my positions and buy back my silver and gold in my GoldMoney.com account.
I do believe any rally in the dollar would be short lived. In currency terms that could be from 1 week to a month or two. I will of course keep you all updated on this scenario and will also provide what I believe to be some decent investment opportunities for this play.
In closing, I’m going to post a chart you should all be familiar with. Keep in mind that after the market crash of ’29, Hoover and many prominent economists said the recession was over. There was nothing more to fear. Good times are upon us again. Then, shortly after, the markets crashed again for a full 90% loss of their 1929 highs. The situation today is far more grim than 1929 and ’32.
One other note, I do believe that there will be one last push for a short dollar trap. One last chance for the banks, currency traders and the Fed to suck people into the belief that the dollar will “collapse” any day now. I don’t believe it. That means you could see gold and silver go a little higher in the short term. This is the cue I am going to look for and will then liquidate everything. If I don’t believe that will happen I’ll move beforehand.
If any doubt this info read my previous blog post and then go do your own due diligence. I always appreciate information as well.
Good luck and do remember, this is all speculative based on mine and others research. But if you invest, you speculate and you must live with the consequences.