It is instructive to note that the outlier events or mini black swans occur every three to seven years. Here’s the list:
1987: Junk bonds, savings and loan crisis led to stock market crash.
1991: US recession exacerbated due to worries about first Gulf War.
1997-1998: Asian currency crisis, originated from Thailand and a domino effect then spread. Russian debt default and bailout of Long Term Capital Management hedge fund (relative value/non directional trades gone awry due to high leverage).
2000: Dot-com boom and bust.
2001: 9/11 attacks on World Trade Center.
2007: Subprime mortgage crisis.
2011: ???
Notice any patterns? History has shown that governments have switched between fiat monetary and commodity based systems as one system fails and the other becomes feasible. Fiat systems allow the government to print money, which leads to credit expansion, and the injection of liquidity prevents the sordid depression. Commodity based systems (for instance Bretton Woods system, were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments. Source: http://en.wikipedia.org/wiki/Bretton_Woods_system)
What will be the next seismic shift? Share your thoughts below.
There’s another article by Wall Street Journal reporter Greg Zuckerman on The Greatest Trade Ever, Profiting From the Crash.
Quotes:
“I can’t tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.”
Mr. Pellegrini spent hours in Mr. Paulson's office, debating how to deduce a turn in the housing market. Mr. Paulson charged Mr. Pellegrini with figuring out whether homes were, in fact, overpriced. Late at night, in his cubicle, Mr. Pellegrini tracked home prices across the country since 1975. Interest rates seemed to have no bearing on real estate. Grasping for new ideas, Mr. Pellegrini added a "trend line" that clearly illustrated how much prices had surged lately. He then performed a "regression analysis" to smooth the ups and downs.
The answer was in front of him: Housing prices had climbed a puny 1.4% annually between 1975 and 2000, after inflation. But they had soared over 7% in the following five years, until 2005. The upshot: U.S. home prices would have to drop by almost 40% to return to their historic trend line. Not only had prices climbed like never before, but Mr. Pellegrini's figures showed that each time housing had dropped in the past, it fell through the trend line, suggesting that an eventual drop likely would be brutal.
As Mr. Paulson and others at his office discussed how much was being spent by the United States and other nations to rescue areas of the economy crippled by the financial collapse, he discovered his next targets, certain they were as doomed to collapse as subprime mortgages once had been: the U.S. dollar and other major currencies. Mr. Paulson made a calculation: The supply of dollars had expanded by 120% over several months. That surely would lead to a drop in its value, and an eventual surge in inflation. "What's the only asset that will hold value? It's got to be gold," Mr. Paulson argued.
Paulson & Co. had never dabbled in gold, and had no currency experts. He was also one of many warming to gold investments, worrying some investors. Some investors withdrew money from the fund, pushing his assets down to $28 billion or so.
Mr. Paulson acknowledged that his was a straightforward argument, but he paid the critics little heed.
"Three or four years from now, people will ask why they didn't buy gold earlier," Mr. Paulson said.
He purchased billions of dollars of gold investments. Betting against the dollar would be his new trade.
1987: Junk bonds, savings and loan crisis led to stock market crash.
1991: US recession exacerbated due to worries about first Gulf War.
1997-1998: Asian currency crisis, originated from Thailand and a domino effect then spread. Russian debt default and bailout of Long Term Capital Management hedge fund (relative value/non directional trades gone awry due to high leverage).
2000: Dot-com boom and bust.
2001: 9/11 attacks on World Trade Center.
2007: Subprime mortgage crisis.
2011: ???
Notice any patterns? History has shown that governments have switched between fiat monetary and commodity based systems as one system fails and the other becomes feasible. Fiat systems allow the government to print money, which leads to credit expansion, and the injection of liquidity prevents the sordid depression. Commodity based systems (for instance Bretton Woods system, were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments. Source: http://en.wikipedia.org/wiki/Bretton_Woods_system)
What will be the next seismic shift? Share your thoughts below.
There’s another article by Wall Street Journal reporter Greg Zuckerman on The Greatest Trade Ever, Profiting From the Crash.
Quotes:
“I can’t tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.”
Mr. Pellegrini spent hours in Mr. Paulson's office, debating how to deduce a turn in the housing market. Mr. Paulson charged Mr. Pellegrini with figuring out whether homes were, in fact, overpriced. Late at night, in his cubicle, Mr. Pellegrini tracked home prices across the country since 1975. Interest rates seemed to have no bearing on real estate. Grasping for new ideas, Mr. Pellegrini added a "trend line" that clearly illustrated how much prices had surged lately. He then performed a "regression analysis" to smooth the ups and downs.
The answer was in front of him: Housing prices had climbed a puny 1.4% annually between 1975 and 2000, after inflation. But they had soared over 7% in the following five years, until 2005. The upshot: U.S. home prices would have to drop by almost 40% to return to their historic trend line. Not only had prices climbed like never before, but Mr. Pellegrini's figures showed that each time housing had dropped in the past, it fell through the trend line, suggesting that an eventual drop likely would be brutal.
As Mr. Paulson and others at his office discussed how much was being spent by the United States and other nations to rescue areas of the economy crippled by the financial collapse, he discovered his next targets, certain they were as doomed to collapse as subprime mortgages once had been: the U.S. dollar and other major currencies. Mr. Paulson made a calculation: The supply of dollars had expanded by 120% over several months. That surely would lead to a drop in its value, and an eventual surge in inflation. "What's the only asset that will hold value? It's got to be gold," Mr. Paulson argued.
Paulson & Co. had never dabbled in gold, and had no currency experts. He was also one of many warming to gold investments, worrying some investors. Some investors withdrew money from the fund, pushing his assets down to $28 billion or so.
Mr. Paulson acknowledged that his was a straightforward argument, but he paid the critics little heed.
"Three or four years from now, people will ask why they didn't buy gold earlier," Mr. Paulson said.
He purchased billions of dollars of gold investments. Betting against the dollar would be his new trade.
