World Markets about to Crash Together?

[Logan]

By Chris Laird
May 31, 2006
http://www.kitco.com/ind/Laird/may162006.html
http://www.kitco.com/ind/Laird/may312006.html

Recent stock headlines include a collapsed India stock market, collapsed not just dropping. Collapsed Middle East stock markets on the order of 50%. Dropping European markets, and US markets. Very weak Japanese stocks, probably looking to crash like the Middle East and India markets because the Nikkei is/was up 50% in a year.
Very weak Chinese stocks, rapidly weakening ‘emerging’ markets because of a slowing commodities bull. Weak Russian markets. … In short, the whole world is just about to fall into a synchronized stock cascade.
Here is a typical headline, one of many these last weeks:
European sell-off continues after U.S., Asia falls
Autos, miners among decliners following steep Wall Street fall


LONDON (MarketWatch) -- European markets dropped sharply Wednesday morning, extending the week's losses and taking their cue from a steep fall in the U.S. on the back of rising oil prices and falling consumer confidence.

I offered a theory in World Speculation Dominoes that the world financial markets are all synchronized and will crash together. It appears that we are very near such an event right now.

The causes
I have written several articles with ‘stock crash alert’ in the title this year. One of the major impetuses was the imminent unwinding of the Japanese Yen carry trade. In that ten year old free money spree, Japan allowed financiers world wide to borrow Yen for a literally zero interest rate and then invest that money in world stock markets and to buy other nations bonds for about a 3% interest rate premium. The amount of borrowed Yen invested in the world’s financial markets is astounding. We are talking trillions of dollars value in Yen that has found its way into every major financial market in the world.
The US is considering a pause in its interest rate hikes of late. The interest rate differential the US holds over Japan and Europe is as much as 3%. If that differential is not maintained, trillions of dollars of US denominated financial investments are going to be unloaded on the world markets. A combination of unwinding the Yen carry trade and a serious drop in the value of the USD will just simply pull the rug out from under every major financial market that has benefited from the cheap USD and Yen.
Liquidity is being pulled from world markets as we speak. It could get really ugly in a very short time friends. There are substantial reasons for major stock collapses due to very large macro economic trends affecting both the Yen and the USD.
This is made worse by the bubble nature of world stock markets as of the last year, where many Asian markets saw gains over 50%, such as the Nikkei and Korean markets. They are/ were in stock manias. And then add the literal collapse of the Middle Eastern markets in Saudi Arabia and Kuwait….and India.
Then add emerging market weakness, and the fact that the Nikkei and the US stock markets are also definitely tipping down as we speak, and there is definitely a little panic in the winds.
To say the least.
I’m going to go out on a small limb and say we are looking right now at a gigantic world stock collapse. I don’t like writing this, I get no fun out of writing gloomy financial analyses. It is still possible that these world market drops will be forestalled, but the end is nearing now for a world financial mania that started in Japan in the early 1990’s with their ridiculous zero interest rates. As a matter of fact, the whole financial mania we are about to see collapse began in Japan in the 1980’s when they created their own stock and real estate bubbles that collapsed in the early 1990’s.
Then the US had its financial and real estate bubbles in the late 1990’s and early 2000’s. Just as late as last year, the financial manias took hold in India, the Middle East and Korean and even emerging markets….and are now crashing as we speak.
Now the flagship markets of the US and Japan are shuddering. The final gasp of a world financial mania is appearing before our eyes right now.

The big story out now is the appearance of world stock collapses that may get out of control. I have been writing about this for months already for my readers. The other big story is an impending energy war in the Middle East.
Look at your stock portfolio right now. Imagine how you would feel if it dropped 50%.
That has happened this year in the Middle Eastern markets. Something like this has happened in India as well just recently. It’s so bad in the Middle East that the Saudi Royal Family has offered to guarantee middle income people ($144k a year there) with guaranteed stock purchases for several years if they will go back into their stock markets. How about that one?
As a matter of fact, I am only giving a brief rehash of the quite recent stock collapses. The number of nations involved is many. Trust me, go look for that kind of news, you will find a lot of it recently.

There are two major forces that are propelling gold upward. One is fear of financial market collapses that are appearing like burned popcorn everywhere. The other is an imminent energy war in the Middle East. Iran is the pretext. It does not help that their leader is a maniacal Iranian mystic/politician that believes he is ushering in the end of ‘history’ – his own words.

So, we have a huge overhang over the world financial markets with the unwinding of the Yen carry trade. The over blown real estate markets that are now collapsing just like everyone feared world wide. The imminent dropping of the USD that is making world central banks very afraid that a lower USD will pull more liquidity out of the speculative bubble world stock markets. And fear of an energy war in the Middle East with Russia and China and Iran on one side, Israel right in the middle, and the US and its few allies on the other side.

No wonder gold is up about 200 bucks this year, and is having no problem holding onto its 650$ range.
I’m sure gold is going to go well over 700 quite soon now. Read my article about “Huge Action and Earth Shaking Change Imminent”.

Now there is talk among central bankers that they are in crisis mode. The ECB and BOJ have both made comments like that, the BOJ much more gentle, but just as concerned. The ECB and friends are talking of crisis mode operations and financial crisis war games as we speak. They are concerned about the implications of a dropping USD and the liquidity that will pull out of world financial markets.
The list goes on. Russia, emerging now from its decade old financial collapse following ‘perestroika’ is now joining a growing list of energy producers who are creating oil bourses denominated in anything but USD. The Proposed Ruble bourse is the latest.
This is just one snippet, to be added to Iran’s Euro Oil bourse, and all the coordinated oil / resource nations now collaborating with hostility to the Western Economies.
A new world financial order is just now emerging and it looks very much, very much like the pre 1930’s.
Oh, did I mention that we are seeing the highest insider selling of stocks since about 2000??
I think this delineation of financial market bad news could be ten pages. I’m just hitting some of the more recent high points.
So perhaps some of you with gains in stocks should take some money off the table and put it where it is safe. OF course that is the big question of the day isn’t it?
What, with the usual safe haven of good sovereign bonds being very questionable. Besides the imminent decline of the USD and that affecting the yield of USD bonds, Japan will have some trouble maintaining their bond quality if they tip into deflation again. And of course who else has bonds people want? Not many.
There has been a lot of discussion about the Euro becoming the next alternative to the USD. Problem is there aren’t enough of them to do the job. There are probably over 100 trillion US dollars out there now working as the de-facto world currency. The number and penetration of Euros is less that one tenth of that.
It is going to be interesting to see what happens should there be a simultaneous precipitous drop in world stock markets of the order of 50%. I wonder if the USD is going to survive that. The last time there was a great world depression the USD was a flight to safety. This time, it could be just the opposite.
There are two big stories out now. One, and the biggest, is the impending energy war in the Middle East. The other is an emerging world stock collapse.
The Prudent Squirrel Newsletter is a big picture gold and economic commentary. Stop by and have a look. (This week’s issue was very short because I was ill this last week.)
Christopher Laird
Editor-in-Chief
www.PrudentSquirrel.com

[Logan]

Wobbly World Markets

by Bill Bonner
LewRockwell.Com
Thursday, May 25, 2006
http://www.lewrockwell.com/bonner/bonner247.html

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

World markets have begun to wobble.

Over the last ten days, emerging markets have had the longest stretch of selling since 1998. India's Sensex Index collapsed 10% in a single day...officials had to close the market.
The story was the same throughout the world, with only a few exceptions – notably China.
What goes up must come down. And leading the way down were commodity producers. Commodities – especially copper – have soared this year; a correction was inevitable. Silver has given back nearly 20% of its value. Even gold is headed down, though stuck for now around $655, a loss of about 10%.

In the developed world, stock markets are shuddering too. The Dow took a big hit last week and so far has not managed a bounce. But neither has it fallen further. Here in London, the FTSE shed another 2% yesterday, bringing the total damage over the last two weeks to nearly 10%.
What next? We're waiting to find out.
While we wait we note that markets go down as well as up. Usually a lot faster. And usually as much down as they went up...if you strip away the inflation.
Gold goes down too...even when it is in an uptrend. During the 1970s, for example, gold rose from $35 to $200. Then, just when newspaper headlines and ordinary investors were beginning to take notice, a correction began. The metal corrected over a 19-mo. period, losing 50% of its value. That shook the gold coins out of the grasp of weak and wobbly holders. It also set the stage for the next phase of the bull market, in which the metal shot up to $850 an ounce in January of 1980.
We suspected gold was ready for a major correction when we noticed Britain's major newspapers urging readers to buy it. The mainstream press is almost always wrong about gold. It only catches on when the bull market is nearing correction or completion. It comes to the conclusion that nothing can stop the metal's rise...just about the very moment the rise has come to an end. Then, when the bear market is finally over, it boldly announces that gold is a 'relic of the past...worthless from an investment point of view.' This is precisely what the British press – and the American press too – was saying in the late '90s, as gold hit its lowest point in half a century. The Financial Times wrote a famous editorial entitled, "The Death of Gold," in December of 1997.

Britain has the added distinction of having a central bank led by wits as dim as those in its financial press. As gold bottomed out, the Bank of England sold. If it had gone back 100 years it could not have found a worse time to do so. And if it had gone back 1,000 years, it couldn't find a worse reason. The BOE wanted to replace gold – a tried and true financial reserve for thousands of year – with paper money! Had no one at the central bank bothered to review even the sorry history of its own paper currency since the gold backing was removed? Did they not notice that the pound has lost nearly 99% of its value?
What set off the worldwide market frisson is anyone's guess. It appears that the same central bankers who missed the run-up in gold were becoming alarmed by it, after they finally read about it in the newspapers. They decided that it was the bud of inflation needed nipping. So, they talked up the dollar...raised rates...and tightened liquidity. Newspaper headlines tell us now that speculative money is headed into cash...particularly the dollar...as a refuge. We don't see much evidence of it. The greenback has barely risen against the euro...and gold remains above $650.

We don't know what happens next. But we wouldn't mind a stronger correction in gold – so we can buy more at a better price.
Still, we feel we should repeat our caution: in the short run, markets are voting machines. They can deliver any fool result the voters want. It is only in the long run that fundamentals matter...and that vox dei is heard.
And we deliver another caution at no extra price: we're not at all convinced that the inflation theory is correct. That is, the central bankers might be wrong about the cause of rising commodity prices, just as they are wrong about so many other things. Deflation may still be the greater danger. And clipping liquidity now might be just the thing to bring it on. American debtors might not sink in a sea of too much cheap currency, in other words. Instead, they might not have enough of it to stay afloat. More on this as we figure it out.... In the meantime, buy gold on dips...sell stocks on rallies. And watch the headlines. Whatever they urge readers to do; do the opposite.

Investors have been uncommonly sure of themselves. The VIX is called the 'fear index,' because it measures investors' attempts to protect themselves. They protect themselves by buying put options. When the market goes down, the puts pay off. When they don't expect the market to go down, they don't bother to buy the options. So, you can tell how fearful they are just by looking at the VIX.
Well, the fear index has been in a decline for the last three years – since April of 2003. More and more, investors think they have less and less to worry about. Until last week. All of a sudden, the VIX seemed to come alive, popping up to a 2-year high.

One of the things investors might be worried about is the fact that so few of them bother to worry at all. The market in derivatives has grown to nearly $300 trillion, says Asia Business Times. In theory, some investors are long and others are short. And in practice, there must be someone on both sides of every trade. But when shudders turn into terror...then and only then will we see what all those derivative contracts are really worth.

"Las Vegas developers folding high-end condo plans," says a headline on CNBC. By some estimates, the housing boom is responsible for half of all new jobs in the U.S. since 2001. The other half is in government. When the boom finally ends, we wonder, how long will the halves hold up?
This is the "new road to serfdom," says Michael Hudson. In the odd logic of the housing bubble, he points out, "debt has come to equal wealth." But this, he argues, is a mistake because "debt throughout most of history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bounded to Spanish plantations or the sharecropping children of slaves in the postbellum South."
Ah, but won't the coming inflation wipe off the debts of America's middle classes? Isn't that what the house speculators are praying for? Isn't that what the central bankers are aiming for? Isn't that what we are all betting on?

We don't know. "As ye sow, so shall ye reap," it says in the Bible. Neither the modern economists, nor the central bankers, nor the lumpen homeowners believe it. They think there are knobs they can turn...levers they can pull to get whatever crop they want. How about another rate cut? How about easing up on lending requirements? Yes, they have sown debt. But why can't they reap financial liberation? Why can't they get what they want, rather than what they deserve? Anything is possible, we admit. But we just don't think the world works that way. And if it does work that way, we don't want anything to do with it.
"The bubble will burst," continues Hudson's prophecy, "and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom."