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March 02, 2008 – Comments (8)

Where does one hide in this financial mess?  States and municipalities in trouble, big hit for Canadian banks... Junk where you didn't expect it...

I suspect gold bullion was a very good idea but it is simply at a risk for a correction at this point. 

The municipal bonds falling off a cliff this past week is a disaster.  That's people's pensions going down the tank...

When I first got wind of this thing called derivatives that I'd never heard of before, about a year and a half ago, I immediately tried to research them.  All I could find out at that time was that there were a few hundred trillion dollars of them.  It made my heart sink... a few hundred trillion dollars, an amount that makes the American economy look like chump change, and they are largely unknown.  That is about when I started keeping my eyes open to learn what I could about these things.

The Cambridge Investment conference in Vancouver in January of 07 was awesome for me.  It gave me the opportunity to talk to some very well informed people, and talk I did, Peter Grandich, Frank Veneroso,  Frank Holmes, Paul Van Eeden, just to name a few.  Having been ill informed of the down side in the past, with disasterous cost and consequences, although the mood was highly bullish, I made it my business to learn about what people were issuing warnings were saying and to find out more about these derivative things.

As I learned bits and pieces and thought through how it might unwind into the economy I identified three places I figured would be hard hit, banks, pensions and the wealthy.  Banks and pensions seemed highly obvious to me.  When there are mass losses, the banks are going to be hit because they hold loans.  Pensions are simply large funds and have no power to get out quickly, if at all and the wealthy because they have no hope of having their deposits insured.  I wasn't seeing how investments hold value, so the wealthy and pension funds have little hope of hiding.

Well, I missed muncipalities and how they've been hit by holding the worthless paper. I knew nothing about how treasuries work, and my goodness, those 30-year treasuries are going to fall off a cliff.  I would tend to think government does offer some level of safety, but this pricing to the market when the market has artificially low rates means it is priced to an artificial level and that level is about 2x what it should be...  If I was buying treasuries, I'd be sticking to short term treasuries and not worrying so much that I effectively have a negative return because of current cost increases.  It protects capital.  You might more on a 30-year treasury now, but let the market price a mere 2% increase in rates and you lose 50% of your capital.  It just isn't worth the risk.

I almost got into gold about 3 times now and I do wonder if the state of the financial system will create mass panic and I should be there to profit from mass panic...

8 Comments – Post Your Own

#1) On March 02, 2008 at 4:18 PM, DemonDoug (71.43) wrote:

swiss franc, canadian dollar, new zealand dollar, silver better than gold right now IMO.  maybe take a risk with the icelandic krona.

also, i believe that oil is a better hedge than gold, i'm just not a fan of gold, it is prone to huge speculative factors whereas oil, while it has some manipulation, the supply/demand is much more transparent.  At any point the Fed could open the vaults of fort knox and put 100 tons of gold on the market and drive gold prices down.  Can't exactly do that with oil.

The bond market is starting to price in inflation.  Look out below! 

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#2) On March 02, 2008 at 4:24 PM, dwot (49.06) wrote:

I've stated my thoughts that oil is going to have a downward correction, providing the US dollar remains stable, and that we just wait and see...

I am Canadian, so I'm already in the Canadian dollar...  I definitely don't some developments I am seeing in Canada, but because we have 20% less debt than a decade ago and less personal debt, I think we are in a much better place to weather the storm.

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#3) On March 02, 2008 at 4:26 PM, alstry (35.42) wrote:

The entire system is at risk.  You simply don't have enough money to pay off the counterparty obligations.

Cities can't pay workers.  Banks can't pay depositors.  Insurance companies can't pay claims.  Those that think they are insulated are likely deceiving themselves.  If you live on planet earth, you are likley going to be impacted.

This week could be the most interesting yet.  Hundreds of hedge funds are sitting on the fence waiting to see if their prime broker liquidates their bond portfolios.

The spillover effect could be catostrophic.  Ekkkkk is the word.

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#4) On March 02, 2008 at 4:29 PM, dwot (49.06) wrote:

Yup, those hedge funds are scaring me quite a bit in how they might be changing the world I live in...

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#5) On March 02, 2008 at 4:54 PM, alstry (35.42) wrote:

The entire system is at risk.  You simply don't have enough money to pay off the counterparty obligations.

Cities can't pay workers.  Banks can't pay depositors.  Insurance companies can't pay claims.  Those that think they are insulated are likely deceiving themselves.  If you live on planet earth, you are likley going to be impacted.

This week could be the most interesting yet.  Hundreds of hedge funds are sitting on the fence waiting to see if their prime broker liquidates their bond portfolios.

The spillover effect could be catostrophic.  Ekkkkk is the word.

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#6) On March 02, 2008 at 6:29 PM, AnomaLee (28.60) wrote:

My next post was going to be about the amount of hedge funds @ risk of closing.

alstry:  "Insurance companies can't pay claims." 

I think insurance are the best of all financials to take advantage of this enviroment.

dwot: I'm with DemonDoug here, and I completely disagree with the assumption that the dollar will stabilize. (Too long to explain here.) The dollar may gain stability vs the Pound and maybe the Euro, but the dollar index is likely going to the high 60's, and we are already at the lowest levels on record for the Dollar-Index. I'd much rather hedge my currency with the currency of another, and I am short the US-Dollar vs the Yen. 

My belief is that gold is not a currency, and if you believe it is then it simply can't be any long-term investment. I think gold is neither because it's a commodity....

The odds are (ignoring any short-term corrections) oil will continue to rise. I am a firm believer that oil will correct (as it did recently December 07) but I'd love to hear why you think it's going to flatten or go lower long-term. 


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#7) On March 02, 2008 at 6:41 PM, jahbu (85.24) wrote:

cattle, farmland, gold

Old school wealth

Jahbu

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#8) On March 02, 2008 at 7:59 PM, dwot (49.06) wrote:

AnomaLee, last summer I heard about 500 were at serious risk and with how the markets have been going, who knows how many are in trouble now?

I think insurance companies might take a bigger bite than expected because they are invested somewhere and their investments aren't going to immuned to market conditions.

I think the dollar will weaken further as well, but I think might take a while.  I added a tie to currency because I meant oil prices to come down relative to world prices, not just the US price.

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