“Black Tuesday”; Après le deluge
By Mike Whitney“
Ring around the rosy
A pocket full of posies
Ashes, ashes, We all fall down” Children’s lyric Hank Paulson is sweating bullets right now. In fact, a shrewd investor could probably make a fortune just figuring out what type of high-blood pressure medication he’s on and then betting the farm on the manufacturer.Last week the stock market bull plopped down on an I.E.D. and wound up in intensive-care sucking food from a straw and drifting in and out of consciousness. That put Paulson on the road to South Korea, Japan and China where he’ll meet up with his foreign counterparts to strategize on the deteriorating state of world markets. It’s a daunting task. The sudden rise in the yen has set off a brushfire that’s swept through the global system clearing out the dead-wood and sending panicky fund managers out onto the streets. Paulson downplayed worries that the roiling markets were reason for concern. Before leaving for Japan he confidently proclaimed that the global economy was “as strong as I’ve seen in a lifetime. All the economies are growing, inflation is low, and liquidity is high.” That may be, but today’s market is built on an ocean of red ink and any upward movement in the yen is likely to send listing indexes to Davy Jones locker. Glub, glub! This is the most over-extended, over-leveraged, debt-plagued stock market in the history of the world; a sudden gust from Tokyo or Beijing and down-it-goes like a straw house in a wind-tunnel. That’s what happened last week when the yen lurched upward and Wall Street suddenly plummeted 416 points. That’s why Paulson quickly tossed his toothbrush and an extra pair of astronaut diapers in his duffle-bag and scampered off to the Far East. For years, savvy investors have borrowed trillions through the Yen Carry Trade (YCT) at nearly zero percent scarfing up US government debt (paying 4.25%) or maximizing their leverage in other riskier funds or derivatives. It’s created a daisy-chain of debt (similar to fractional banking) which will inevitably be broken by disruptions in the money supply and a decrease in liquidity. When interest rates go up; money gets tighter, and equity bubbles come crashing to earth. That’s what’s happening right now, although Paulson and his fellow-pranksters at the Federal Reserve think they can keep the balls in the air a bit longer. Chris Laird of prudentsquirrel.com summarizes the state of the current stock market like this: “Up to now (even still), speculators could borrow and leverage to the hilt – the Yen carry trade made that what appeared to be a relatively riskless endeavor. The amount of leverage in financial markets is at historic highs, and people did worry about that. First one investor puts up some capital, then, funds leverage that among themselves multiplying that leverage several times. Then multiply in derivatives that have infected every financial vehicle. I have stated you can consider markets at 50 to 1 leverage at the price margins” chris laird I’ve been hearing the same shocking news from analysts who’ve studied this issue for more than a decade, Steven Williams who sent me this e mail just yesterday:“Without regulation or oversight of any kind, traders will always find ways to maximize profits... a path of least resistance. The yen carry trade (YCT) for a very long time was a zero risk opportunity. Buy cash at zero interest and use it to purchase higher paying interest securities, also zero risk, such as US Treasuries or other country treasuries & notes.´
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