[CAMWEST-discuss] global financial crisis
danny_hannan at yahoo.com
Fri Nov 7 09:21:36 EST 2008
Because I trade on international markets I need to keep abreast of what is happening internationally.
To lend support to what I have to say I will quote from past articles I have written.
The level of debt in western countries and around the world is high. The USA is the prime example requiring 20% of its GDP to service its debt. Escalating oil and energy prices will cause economic downturns and recessions as is current in 2001. As the price of oil and energy increase through this decade it will cause further economic recession, the burden of debt will increase. As the GDP reduces due to recession, the percentage of GDP required to service that debt will increase. Companies and individuals will start to go bankrupt under the burden of debt. These collapses will have effects on other companies and individuals and will eventually cause a domino collapse leading to a depression. I believe some time 2011-2015 but very possibly much sooner. (written 2001)
By plotting estimates of global GDP growth (3%pa) and using the above price model I have estimated that with a price in excess of US$150/barrel in 2008-9, oil will be the highest price relative to GDP ever recorded and be the cause for the world to be in an economic recession or worse. (written 2005)
More on the global Default Swaps that mostly originated in the USA. Mortgages, other debt and insurances policies on that debt were bundled into securities that were sold to other finance companies to raise more funds to lend more money.
Completely analogous to me borrowing $100,000.00 secretly then presenting with the money as mine to use as a deposit on a property. The bank then says because you have good equity in the property they will lend the money. Because of taxes and charges the total borrowings are actually much more than the property is worth or negative equity.
That is the problem right across the western world; far too much negative equity.
As the mortgages are defaulted on; those credit defaults are redeemed, and the insurance on those mortgages is also claimed.
Causing those holding the default swaps to pay up real cash, causing many financial institutions to be short of cash and profit.
So where are we with those default swaps?
Somewhere around a quarter of the value of those default swaps has been redeemed. The value of the possible default swap redemptions does not peak till second half of 2009.
If the international financial institutions have written off the total value of all those default swaps (as some Australian banks have done) the global finances will slowly improve. If there are significantly more defaults swaps to be redeemed as I suspect (no one appears to know who holds what, even those that hold them do not appear to know their liability) there is much more bad news to come.
Rarely is all the bad news released with a full disclosure as a company goes to the wood. The information only trickles out of companies slowly as they cannot hide it anymore.
For this reason I am quite pessimistic about the global financial situation and am expecting more big writedowns, bankrupties, and more countries becoming bankrupt as Iceland has, as they try to bailout multinational financial institutions based in thier countries. The USA total net debt I believe is now not serviceable or sustainable and that the USA is technically insolvent. Only China, Japan and the Arab states continuing support with loans are keeping the USA affloat.
This is a gloomy out look but I believe it is a realist out look, that allows you to make decisions that will best allow you to cope with the situation.
1. Get out of debt if you can.
2. Unless you have specific earing ability from assets that will be effective in hard times, they are safer in cash.
I see no reason for assets including realestate to do anything but decline in value for the future.
I have been in cash except for my house for over a year. I have to live somewhere and we own the house and our children have somewhere to come back to if it gets that bad and I believe there is a high chance that it will.
Best of luck
danny_hannan at yahoo.com
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