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How Serious is the Over-The-Counter (OTC) Derivatives Problem?

Mar 14, 2008

Jim Sinclair answers this question. The derivatives total about $550 TRILLION worth that have yet to be unravelled. It's all theoretical money (on paper) until the unravelling begins. Then it turns to real money that is owed.


Don't expect politicians or the Fed to be realistic about the problem in public. Their job is to reassure us, not to tell us the truth. White lies are for our own good, they believe. Don't cause a panic, they tell each other. That's their job, so I understand completely. But this does not mean we have to believe them.

Wall Street gyrates up and down according to the statements they hear from official sources. The S & P issued a statement the other day, telling us that the economy has just about hit the bottom in writing off all of its losses. Stocks rose 416 points on the "good news." The next day they discover that the Bear Stearns financial institution was in deep financial trouble, and Wall Street wavered. Then the Federal Reserve and J P Morgan announced that they had to intervene in a big way to bail out Bear Stears, and everyone suddenly realized that the company was in very deep trouble. So Wall Street took another deep nose dive today.

Wall Street specializes in knee-jerk reactions. They watch government officials and react accordingly like a wolf pack. They seem to have no sense of reality nor do they base their decisions on any long-term, fundamental knowledge of the true economic situation. I don't know if they actually believe the stupid statements coming from officialdom, or if they simply believe thateveryone else will believe those silly statements. But it is as if the officials tell the Wall Street stock brokers what to do, and they obey without question. It reminds me of the scarecrow that needed a brain.

We still have a long way to go before the bad news stops. By the time it is over, I suspect that most of the retirement funds, which are heavily invested in stocks, bonds, and mortgages, will end up with very little cash to pay their retirees. The only funds that will do well are those that are invested in gold, silver, and other commodities that always go up in value in times like these.

The latter half of this year will probably be the time when some banks begin to fail. (Even Fed chief Bernanke thinks so and has said so.) The FDIC will quickly run out of cash in their "insurance" fund. If your bank is the first to fail, you may be in luck. If it is the second or third or fourth to fail, you will be lucky to get any of your deposits back. Unfortunately, bank deposits are not as safe as they were just a few months ago.

Meanwhile, the price of oil has gone up to $111/barrel, on its way up to $120 and beyond. The dollar continues its slide to $1.56 to buy one euro. The Fed is poised to cut interest rates again next week to try to help the economy at the expense of the dollar.  At some point, the Chinese Yuan will have to be cut loose from the falling dollar, and when that happens, you can bet that the Yuan will rise in value dramatically. Anyone holding Yuans when that happens will make a killing. In the past month the price of silver has gone up from under $16/oz. to over $20.60/oz., a rise of more than $4.60/oz in just one month. That is an unbelievable gain of 28%. Gold has hit $1000/oz.

There are always many opportunities in any bad economic situation. You just have to do some study to find out what is going up and what is going down. I cannot do this for you. I can only make some general suggestions.

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Category: Financial

Dr. Stephen Jones

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