As you know, the stock markets took a big hit this past week and emerging markets and currencies were blowing up left and right. I was reading a Zerohedge article regarding subprime home loans (and autos) where Jeff Gundlach is making a repeat call of Kyle Bass’s 2007 housing bubble/subprime implosion call. The article mentioned that 8 million homes are still stuck in the “shadow inventory” and how some homeowners have not even made one payment in 4 years. As I read down into the comments section there were questions and comments regarding this and the dropping equity markets…the question arose, “Will Kyle Bass go short again?” and “Will Jeff Gundlach put his money where his mouth is?”
I got to thinking about this and thought to myself “why.” Why would anyone who truly understands what is happening go “short” now? Yes of course, because many of these markets are going to implode and the “shorts” will “win.” But what exactly will they win? What if the markets do actually enter an “unscheduled holiday” because downside momentum picks up and it gets to a point where there are only offers and no bids…and they CAN’T open the markets? Will these shorts be jumping up and down singing “kumbayah we won” and partying like its 1999? I have just a few questions that might enter a few minds.
Questions like how will you be settled? If the other side of your trade is broke…who pays you? Most importantly, “what” do you win? Let me put this in perspective for you. Let’s go back in time to 1914 to 1923 Weimar Germany and assume that an astute trader shorted the stock of a bank, German bonds or even the currency itself (if that was even possible back then). Whoever put this trade on was a “winner,” a BIG winner! In some cases the asset actually went to zero and the short never needed to be covered because “zero is zero,” they “won” their bet 100%. But what did they win? They won Reichmarks, lots and lots of Reichmarks! But… there was a small problem with this “BIG win.” When all was said and done, it took something like 2.3 trillion Reichmarks to purchase just one ounce of gold so what were “lots and lots of Reichmarks worth?”
Do you see the problem here? Bass, Gundlach, Soros or any of the other great speculators may indeed “short the world” and win but they will be “paid” in dollars or other fiat. If (when) we do hyper inflate which mathematically looks to be assured then what is their “winnings” worth? Even if they do get paid by a counterparty that survives and has the ability to settle, what happens to these winnings when the dollar (or other fiat) is either grossly devalued or even replaced? In the case of Weimar Germany, how well off was the speculator who shorted 1 trillion (an enormous and unthinkable number in 1920) of German bonds and won 100% of the bet? Less than 1/2 ounce of gold…that’s how “well off!” If I’m not mistaken, 1 Reichmark equaled .25 cents in 1918 and an ounce of gold was $20 so it took 80 Reichmarks to purchase 1 ounce of gold before the hyperinflation began.
Am I saying that gold is going into the trillions of dollars? No of course not but I do want to caution you that it certainly could happen. Given the current federal debt and future entitlement obligations, couple this with the possibility (odds better than 50%?) that we no longer have a gold hoard in Ft. Knox, an overleveraged economy and financial system that has been driven, steered and buoyed for years by a derivatives market that is over $1 quadrillion …and top it off by a central bank with the ability to print dollars in unlimited quantities means that it is possible for the dollar to actually go to zero. Overly dramatic? Yes most probably but I wanted to illustrate the point that the conditions exist for the dollar to do what every single “pure” fiat currency has done throughout history…on a very grand scale…devalue at a minimum (until changed or altered) and actually die in the end game.
If you look at Zimbabwe, Venezuela or Argentina (the hyperinflation poster children) you will see that their stock markets have gone up dramatically, exponentially. Is this because business is so good? No, they are all in a depression where many goods even as simple as toilet paper are unavailable. Their stock markets have gone “up” only in terms of their local currencies…but down versus “REAL THINGS!” This is the crux of what you need to understand, it doesn’t matter if you “win” Zimbabwe dollars, Venezuelan bolivars, Argentine pesos or even U.S. dollars because they will/are devaluing to zero purchasing power.
I guess the best way to put this is “it doesn’t matter how much you win…it only matters ‘what’ you win!”