So Many Black Swans I Can’t See The Sun
October 30, 2012
Nassim Taleb popularized the theory of the Black Swan in his 2004 book Fooled By Randomness as an unexpected event that is not seen until it arrives. What I want to do here is to make people understand they are living inside a Bubble and there are many Black Swans, such as, Bear Stearns, AIG and Lehman Brothers out there on the horizon. We cannot rely on former Goldman Sachs VPs like Gary Gensler at the CFTC, Adam Storch at the SEC and Mario Draghi at the ECB. The two candidates mentioned to replace Mervyn King at the Bank of England are both former Goldman Sachs VPs.
We have had collapses of corporations due to fraud that was not detected by the SEC because they are paid not to investigate. This fraud discourages clients from doing business with Wall Street. And that can destroy markets. I cite Bernie Madoff, MF Global and Peregrine Best.
The US bond market is in a Bubble. The Federal Reserve has announced they will continue its policy of low interest rates. The value of an existing bond varies inversely with interest rates. People overseas are still willing to buy US Treasury and corporate bonds. They see the dollar as a haven of safety. It is not. An investor needs a return of his capital. The US does not have enough employed people making wages above the poverty line to pay the interest on its 20 trillion dollars in federal, state and local government debts. At some point, someone will figure out that the US inflation rate is three times interest rates so they are losing money. The first person to exit the US bond market will keep his money. Everyone else will lose their fair share of tens trillions of dollars.
The dollar is in a Bubble. The value of a currency is set by supply and demand. The demand for the dollar should be lowered because interest rates are a third of the inflation rate. The demand for the dollar is less than for other countries because American politicians shipped 50.000 manufacturing plants and 12 million jobs overseas. The dollar is doing well compared to the yen, the euro and the pound. But compare them to gold and silver. At less than $35 an ounce, the entire annual global output of silver could theoretically be purchased for 35 billion dollars. That is less than 1/10 of 1% of the value of the bond market. Situations that cannot last will not last.