The Leverage Leviathan

Leviathan is one of the seven princes of Hell and its gatekeeper.


I got a simple but very interesting query in my forum which prompted some thinking. What transpired thereafter was rather inspiring but ends rather depressingly. Enjoy the read …

Are the market’s fundamentals and sentiment right now the same with Oct 2008?

From your experience, can you share whether the market right now is as bearish as in 2008 or is 2008 is far worse than now?

The fundamentals previously were more focused on the US but it is all over the world right now. If things get worse, how much worse would it be?

Philip.

My good friend and fellow trader, Henry replied;

History never repeats itself in exactly the same way. It evolves with time. It may repeat in a different manner with different intensity & for different reasons – cause and effect. In fact, in the best of times or worst of times, there lies the greatest opportunity of wealth. A lot depends on how one positions himself/herself ready to see the opportunity ahead or only to see fear and stand frozen still.

The worst has yet to come…wait till US default on her trillions of debt!

And that got me thinking.

The world is wiser as a result of 2008’s crash. The powers-that-be are not likely to let the same mistakes repeat themselves. So they will know what to look out for and how to avoid a similar situation.

This has always been the case in history. And the result of these efforts haven’t always worked out for the better because instead of avoiding the same mistakes, they make newer, bigger problems. And for that, I would say history repeats itself because humans never change except to make things more complicated and messy.

What we have today as a main problem started as a fundamentally small issue. It is called Leverage (read: excess greed). Without going back too far in history …

• 1929’s capitulation (Black Thursday) was a result of the banks getting greedy and introducing leverage to the street in a time when the street couldn’t afford and couldn’t handle the greed.

• 1937’s crash was a result of the government leveraging on cheap money between 1933 and 1936 to stimulate the economy then cutting off that supply too quickly when the street needed the support.

• 1974’s failure was the result of the OPEC members’ greed to use their leverage over the world price setting mechanism for oil to stabilize their real incomes by raising world oil prices which brought on several years of steep income declines when negotiations with the major Western oil companies earlier in the month had failed.

• 1987’s crash (Black Monday) was blamed on many things but the main culprit seems to be over-dependency on the new computerized system trading programs which failed miserably and caused a worldwide capitulation when the world was over-leveraged on property and housing loans.

• 1997’s Asian Financial Crisis was the result of the region’s greed on foreign investments which drove up an asset bubble, especially in the property market that got Thailand greedy and over-leveraged on debt that was unsustainable and led into price drops across all assets across all Asian nations and saw a rise in consumer debt.

• 1998’s Russian Financial Crisis came about because of Russia’s over-leveraged dependency on exporting raw materials which accounted for 80% of the country’s exports and left its ass exposed to price swings in the wake of the Asian Financial Crisis that massively brought commodity prices down.

• The 2000 LTCM failure was a result of Wall Street’s greed of leveraging on leverage which eventually cost its creditors $3.625 billion to bail out the fund which eventually failed anyway resulting in total losses exceeding $4.6 billion in more than eight major investment categories.

I don’t think I need to express what brought on the Sub-Prime Mortgage Crisis and the ensuing Financial Crisis.

And now, we have another slew of over-leveraged contagion waiting to blow up in our faces;

• Europe – over-leveraged on debt that can’t be paid

• U.S. – over-leveraged on cheap money that has hit its debt ceiling but needs more debt to keep it from capitulating.

• Asia – over-leveraged on hot money coming out from China to keep inflation going up while growth slows down (sic).

• Australia – over-leveraged on exporting materials to China (see Russian Financial Crisis).

• Argentina – over-leveraged on Lionel Messi to bring glory to the country in the Copa America.

So in summary, the individual scenarios in the various parts of the world are not as bad as America in 2008 (with the exception of Greece).

But if one scenario blows up, this will have a domino effect. It will be a massive house of cards which could collapse the financial system as we know it.

That is my opinion. But then, I am over-leveraged with opinions anyway.

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Comments

“Argentina – over-leveraged on Lionel Messi to bring glory to the country in the Copa America”
I like this humor! HAHA

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