There is a new report from the US
Comptroller of the Currency titled "OCC's
Quarterly Report on Bank Trading and Derivative
Activities, Fourth Quarter 2007", which shows that
total bank holdings of derivatives is estimated to
be "only" US$164.2 trillion, whereas I seem to
remember that the global glut of derivatives is
upward of $700 trillion, which are both numbers so
big that I cannot even begin to comprehend the
enormity of them.
The report shows that
the notional value of derivatives held by US
commercial banks has suddenly plunged by a
whopping $8 trillion, which is (unbelievably)
still only 5% of the total, and which merely takes
the total down to the
aforementioned-yet-still-staggering $164.2
trillion.
When I realized that $8 trillion
is more than half of America's
GDP,
that is when I realized that "Houston, we seem to
have a problem, as we are on fire, and we are
tumbling out of control into the sun where we will
soon be fried to a cinder."
And let's not
forget that even this baleful news is the best
that the banks can come up with, as the whole
report is based on banks volunteering to tell
stories about themselves, which is unbelievably
the same as with, according to an article in the
Financial Times, Libor rates, which are the
agreed-on interest rates that London bankers agree
to charge on short-term loans to each other.
The upshot of asking lying, greedy bankers
(the villains of history) to tell the truth and
let everyone know what disreputable, untrustworthy
scum they are has now proved to be an unreliable
system of self-regulation, and thus the Libor rate
may be understated because the rate is based on
self-reports of people who are bankers, which
means that they are lying scumbags who falsely
report that their short-term borrowing costs are
lower than they are, because they know it looks
bad that they are getting charged a high interest
rate, which proves that the people who are loaning
the money to them know what kind of lying, scumbag
bankers (as redundant as that is) they are.
But it is these self-reports, like the
American OCC reports, that are the backbone of the
Libor rate, which affects lots and lots and lots
of other rates.
By how much is the Libor
lending rate understated? Maybe as much as 0.3%,
which doesn't sound like that much, but when you
are talking about trillions and trillions of
pounds and euros of debt, it adds up to a lot of
money! Now you see why they are so interested in
lying!
And the last thing we need is
higher interest rates, as Bloomberg.com reports
that "US corporate bankruptcies are accelerating
as the economic slowdown compounds the end of easy
credit", which is being made manifest by noting
that a Merrill Lynch index showed that "The amount
of distressed corporate bonds jumped to $206
billion April 11 from $4.4 billion in March 2007."
Wow! What's that, an increase of 5,000% or
something?
And another scary Bloomberg
item was that loans are becoming harder to get,
regardless of the interest rates, and "Banks
worldwide are demanding 60% more in collateral
from investors such as hedge funds to cut the risk
of derivative trades going bad, the International
Swaps and Derivatives Association said."
And another horror is that the stock
market went up, which is Pretty Freaking Strange
(PFS) since Barron's reports that falling earnings
by Dow Jones Industrials members have produced the
unbelievable price-to-earnings ratio of 57!
Earnings are going down, but the stocks are going
up! To a P/E of 57! Un-freaking-believable!
Not only that, but the drop in the DJ
Transportation index took this index's P/E to 23!
And while the venerable S&P500 has not yet
shown any more deterioration in its earnings, the
fact that the market went up made the P/E of this
index go to a lofty 21! All of this in the face of
deteriorating conditions and economic collapse!
This is beyond incredible!
How can you NOT
run to gold in such crazy times? Ponder this
question well, as a lot depends on your answering
it correctly, much like when the minister asked
you, "Do you take this woman to be your lawfully
wedded wife?", and you know how well that turned
out. So, like I said, ponder it well!
The
Mogambo Sez: The nice thing about owning
exclusively gold, silver and oil is that you make
a lot of money when inflation is roaring like
this, and you are sure to make a lot more in the
future, too, which is even nicer!
There is
a valuable lesson in there for you if you will
look for it and then act on it. If not, then you
are not as smart as you look! Hahaha!
Richard Daughty
is general partner and COO for Smith Consultant
Group, serving the financial and medical
communities, and the editor of The Mogambo Guru
economic newsletter - an avocational exercise to
heap disrespect on those who desperately deserve
it.
Republished with permission from
The Daily
Reckoning .
Copyright 2008, The Daily
Reckoning.)
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