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PART ONE: Considerations
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I was speaking with a life long friend last Friday whom is not only a great human being but is also very good at what he does in the area of commodities and stock trading. Very good. And when he speaks about financial matters on this kind of a scale I listen. Insight regarding important industry topics is critical to Clear Moves. Our team on the ground must be able to spot potential challenges for our clients before they become problematic and often these trends are first sighted on a computer screen via the trading patterns of commodities such as Gold.My friend was speaking about how high the price of Gold could realistically go, based on the how incredibly fragile our global financial system remains. As the conversation went on, I could imagine someone over hearing us and yelling, 'Hang on you doomsayers. What risks? I thought the government solved it. Don't they solve all our problems? What about all that money they are giving away? You know- all the advertising the government has purchased and put in magazines and on TV about projects creating jobs? And recently the economists are saying 2010 is looking rosier. Come on, what's your problem?' (rosier is my personal favorite.)
Let's take a glimpse of what we need to consider before we start fantasizing about a recovery.
Consideration One: Government spending.
My friend went on to explain that as much as 80% of the government stimulus money has gone to cover the institutions who were owed money from losses stemming from things like derivatives trading. Remember in order for a trading loss to have occurred, there has to be someone on the other end whom gains and these investors are owed money. For example, many of the institutions who bet wrong on mortgage backed securities were so over exposed, there was no money left to cover the positions they bet against. Companies like A.I.G who came up with the ingenious idea of insuring these risky financial instruments at firms like Lehman Brothers couldn't pay the insured investors. So the government pays. Well, actually you and I pay once our taxes are inevitably raised to cover the ballooning deficits.
Consideration Two: The derivatives market.
Derivative instrument: 'a financial instrument whose value is based on another security.' You don't need to be a Princeton educated Economist to feel the definition sounds a little risky. But how risky?
Let's take a closer look. According to records kept at the Bank for International Settlements, the OTC derivatives outstanding as of June, 2007, pre- financial crisis was $516 trillion and as of June, 2009 it is $604 trillion. Huh? Seems basic math tells us the risk is increasing without any real financial reform having taken place. And what happens if these cowboys blow up once more? Do governments print more money and bail them out?
Consideration Three: Debt and more debt.
Just a few examples to wet your whistle.
1. Regarding the most recent news regarding the financial crisis in Dubai: 'Dubai's overall debt might be higher than the generally assumed $80 to $90 billion due to potential off - balance sheet liabilities.' UBS analyst Saud Masud wrote in a research note.*
2. The Canadian Government projects it will incur a $33.7-billion deficit in 2009 and $29.8-billion in 2010.(optimistic) **
3. US government debt is a whopping $12 trillion and growing.
4. The estimated population of the United States is 307,000,000 so each citizens share of this debt is app. $39, 000.00.
Perhaps most disturbing and a very sad statistic comes from a recent New York Times article saying one in eight Americans are now using food stamps. See the link http://bit.ly/5gOKCI
Have a good week,
Kevin
Credits
* Wall Street Journal, November 30, 2009.
** The Globe and Mail. November 29,2009
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