Collapse of Financial System?
The central banks around the world continue to pump unprecedented amounts of printed money into the financial system. Why? There are at least 500 Trillion reasons!
The vast, mysterious, and unregulated world of hyper-leveraged financial derivatives are conservatively estimated to total $ 500 Trillion. These remain off-books and constitute a huge black-hole that continues to suck-in all manner of central bank money. Yet, because of it's immensity, perhaps it cannot be satisfied.
So what happens? In the long run (1 to 4 years out) the US Dollar has to be devalued to the tune of about 40% +/-. Keep in mind, that's only if the central banks can manage this in an orderly fashion. If not, well, all bets are off. As mentioned in previous observations, so far the central banks are flying by the seat of their pants trying to stave off marking-to-market these $500 Trillion of exotic derivatives. Why not mark-to-market? Ah, there's the rub. Because these dandies are work only pennies on the dollar. And THAT will hit all asset classes (stocks, bonds, et.al.) like a Mack truck going 90 mph into rush hour traffic!
Summary: expect further deleveraging throughout 2009. It took decades to build the tower of debt, so expecting a quick-and-dirty solution is pure pollyanna! The stock market will test it's November lows. In the event the November lows are taken-out, keep a sharp eye out for just how low things go. A sub-4000 DOW could signal an imminent collapse: Simply too may stressors that are go beyond the systemic ability of central banks to control.
Cheers!
