As we approach the climax of the global systemic crisis (which should be reached in the second half of 2008 according to LEAP/E2020), it becomes easier to grasp the big trends about to affect foreign exchange rates, global trade and regional dynamics over the next five years. Indeed some of the characteristics of the so-called “decanting” phase of the crisis (1) are beginning to emerge. In this 24th issue of the GEAB, LEAP/E2020 therefore decided to introduce its first anticipations on big trends between now and 2011/2013. These anticipations are of course meant for the use of private investors willing to enhance their mid-term visibility. They are also relevant for exporting companies and for the economic and financial authorities in need of a similar visibility to make their strategic decisions, at a time when all the landmarks and beliefs which used to found the global economy and finance in the past decades are collapsing altogether.

In the past weeks, the world’s economic and financial operators appeared utterly disoriented, while the institutions in charge of dealing with market regulation and of supervising global economic trends display sheer powerlessness.

In this 24th issue of the GEAB, we describe four trends particularly illustrative of the global systemic crisis’ impact phase as it is about to unveil between mid-2008 and 2011/2013. It is the first time that our team is able to provide some accurate indications (completed in the “Strategic recommendations” section, P. 17) about the next 3/5 year-period.

Global financial crisis – Savers and investors trapped into USD 10,000-billion worth of « ghost-assets »

USD-denominated asset crisis – End of 2008: The US Federal Reserve and its network of « Primary Dealers » fight for their institutional and financial survival

Foreign exchange crisis - Horizon 2011/2013: Sustainable changes in the hierarchy of foreign currencies

Global social crisis – From hunger riots worldwide to the 25 million unemployed of the Very Great US Depression

Each of these sector-based crises both illustrates the historic scope conveyed by the ongoing global systemic crisis, and indicates that we are just at the beginning of the phase of impact, indeed as protections disappear one after the other, the situation automatically gets worse. This is the specific “spiralling” process of development of the present global systemic crisis, described by LEAP/E2020 in the previous issues of the GEAB.

In this public announcement, LEAP/E2020 chose to present an excerpt of the first part on the global financial crisis: Savers and investors trapped into USD 10,000-billion worth of "ghost-assets"

If your banker managed to convince you to invest in the USD 10,000-billion worth of ghost-assets currently haunting the financial planet, then you have most probably lost everything even if you do not know it yet (2).

And neither G7-finance ministers nor IMF governors (who met last April 11, 12 and 13) can do anything about it. All of them are totally helpless in the face of the ongoing crisis. With staff cuts and gold sales in order to fill its deficit, the IMF today embodies the sinking of all the institutions created after WWII to regulate the world economy. The outcome of the mid-April meeting clearly reveals how incapable of working together are the various players gathered within the IMF and its various branches: on the one hand, public institutions longing for greater supervision over banking activities in order to prevent further financial catastrophes; on the other hand, banks quite satisfied with pledges of better behaviour. The only tangible result is near-to-mid-term inaction: the current crisis will continue to worsen while debates will go on at the IMF. As a matter of fact, the very concept upon which the IMF is based is outdated.

In any event, according to our experts, the estimated USD 1,000-billion worth of assets lost in the current crisis is largely underestimated (3). It is probably closer to 10,000-billion of USD (4) that are about to be lost over the coming two years (5). In other words, several large international banks will be swallowed up in the maelstrom, and along with them many companies, too fragile or depending too much on the US consumer (6).

Indeed, LEAP/E2020 would like to insist once more on this aspect: the nature of the current financial problem is both very simple to define and extremely difficult to grasp properly. There are today approximately 10,000 billion of fictitious US dollars (7) circulating on the planet which large banks are now trying to get rid at any cost in order to limit their own losses (8). But even at a reduced price, these assets remain dangerous traps because they are not worth anything and will not recover any value (9). They are “ghost-assets” no longer capable of being “embodied” in real assets.

Most of these « ghost-assets » are made of US mortgage loans, US dollars, and more generally US dollar-denominated assets, as well as British Pound Sterling-denominated assets (10). They were created from nothing in the financial euphoria of the past decade by the “sorcerers’ apprentice” of Wall Street, the City and the other major financial places of the world (11). Remember! Those were the times when every one raved about the “miracle” of this new finance which permitted to create a “financial economy” 1,000 times worth the real economy (12). Well, for some months now, the happy beneficiaries of these infinite virtual riches have been striving to find them some tangible incarnation (13). But derivative markets altogether are either collapsing or giving birth to new bubbles always more fragile and transient: real estate, US T-bonds, stocks, food commodities,... these enormous virtual financial masses are spinning around the world at an increasing pace in search of some profitable investment, of some sustainable incarnation… in vain! This quest generates fast tectonic up and down movements (over a few weeks) of asset bubbles (knowing that in the past decades bubbles used to last a few years at least), causing a general rise in prices and bringing the world each day closer to the ultimate outcome: galloping inflation... at a time when fear of a collapse in the value of all assets (including the benchmark currency) is the only thing that prevails.

The « fabulous » reserves in US currency or T-bond of China, Japan, UK, etc… are part of this cohort of « ghost-assets », and for many years to come they shall continue to haunt bank balance sheets, investors’ losses and central bankers’ nightmares. The favourite shape collectively taken by these “ghost-assets”, when they can be embodied, is called inflation. Therefore, according to LEAP/E2020, real inflation (food and energy included) will reach a yearly 10 percent average in the US, starting in the second semester of 2008 (14); it will go above 5 percent in Europe; and approach 20 percent in China. In developing countries, which depend a lot on the rate-variations of the US currency, inflation will surge as a result of different strains: energy, food, currency weakness… (complete article available in GEAB N°24 - on subscription

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Notes:

(1) According to the sequencing established by LEAP/E2020 as early as May 2006 in GEAB N°5. About our sequencing of the global systemic crisis, see also GEAB N°6 and N° 18.

(2) Cases of savers trapped by their own bank into « risk-free » investments are multiplying. Source: New York Times, 04/13/2008

(3) Sources: Bloomberg, 03/31/2008 & Turkish Daily News, 04/10/2008

(4) It is on purpose that LEAP/E2020 uses the « billion » as benchmark unit for the enormous amounts at stake on global markets. Indeed the word « trillion », overwhelmingly used in the financial media, does not mean the same thing according to the country. In the United States, United Kingdom and Brazil in particular, a « trillion » refers to one million million, 10 to the power 12 ; but elsewhere in the world, it refers to one million million million, 10 to the power 18. Source: Wikipedia. The current crisis could nearly find its explanation in an unfortunate misunderstanding: the rest of the world thought that Wall Street was trading “big trillions” (1018) of USD-denominated assets when in fact it was “small trillions” (10 to the power 12 ), i.e. one million times less. A good enough reason to start a global systemic crisis! Ultimately, History is settling the question between defenders of the short scale and defenders of the long scale (source: Wikipedia, between those who see more billions in a trillion and those who see less of them.

(5) All those who are surprised by such an enormous figure may remember the first estimations of the subprime crisis-related losses: last summer 2007, only nine months ago, anticipated losses reached a maximum of USD 100 billion. Over less than a year, the “official” estimation was multiplied by 10. It is high time to understand once and for all that, in the coming period, worse is more likely than better, contrary to the rule that prevailed in the past ten years.

(6) The great victim of this crisis, as already explained by LEAP/E2020 in the previous issues of the GEAB.

(7) With 45,000 billion worth of CDS (Credit Default Swap - see GEAB N°19 losing value day after day, 10,000 billion only means a 25 percent drop in value. Therefore, according to LEAP/E2020, this estimation is extremely reasonable. As a matter of fact, Citigroup illustrates this situation with its recent sale of USD 12 billion of leveraged loans and bonds at an average price of 90 cents on the dollar, with a guarantee for the purchaser that Citibank will cover up to 20 percent of any further drop in the value of the loans (i.e. an anticipated drop reaching up to 70 cents on the dollar: already a 30 percent drop in the value of the financial assets of America’s largest bank). Knowing that, in the light of the past months, it is very unlikely that Citigroup was completely honest about the situation. For an increasing number of operators, these assets could be worth 10 to 30 cents on the dollar only in a few months; that is why derivative markets are frozen. Source: Reuters, 04/09/2008

(8) After Citigroup, Deutsche Bank and Goldman Sachs have also began selling off their dubious assets. Source: Reuters & MarketWatch/DowJones, 04/14/2008

(9) Worth reading: « Banks : Bleeding value and Hiding Desperation », Financial Sense, 03/24/2008

(10) In the past two years, on various occasions, LEAP/E2020 warned that the British currency would certainly collapse against the other main currencies (except the US dollar) and that the British economy, which depends completely on the US economy on the one hand and on international finance on the other hand, would be sucked up into the global systemic crisis affecting in particular those two components of the global economy. It is now obvious, even to the British authorities, that the British pound and economy are free falling. But it is only in the coming months that the negative impact of the collapsing British pound-denominated assets will combine with the negative impact of the collapsing US dollar-denominated assets. From Hong-Kong to Scandinavian countries (thus two times exposed), the shock will be hard.

(11) Worth reading: an interesting article by the Institutionnal Risk Analyst dated 04/14/2008 illustrates how « ghost assets » in fact pullulate inside financial institutions’ balance sheets.

(12) It is always enlightening to review the learned analyses produced by those institutions in charge of regulating the development of regional or global economies, such as this enthusiastic contribution published by the European Central Bank in 2005 about the evolution of financial markets by 2015. Source: ECB, 10/28/2005

(13) Senior officials from international accountancy institutes today acknowledge that bank off-balance sheet accounting rules (off-balance sheet assets accounted for a large part of the last decade’s financial growth) were « irretrievably broken ». This confession, quite surprising coming from high-level international accountants, indicates clearly that no one has the faintest idea what these assets are worth. Source: Financial Times, 04/09/2008

(14) Asia today exports its inflation towards the US. Source: New York Times, 04/08/2008