Those with a great stock market education know there’s a time to be cautious.
For thousands of years, gold has been the store of value, the medium of exchange and the revered metal used to adorn us as jewellery. For decades, it has been frowned upon by central banks and economists as a barbarous relic which should be consigned to the dustbin of history. The thing is…it seems to be making a comeback!
In the last 10 years, gold has soared more than 3 fold from under $300 per ounce to, at around the $900 per ounce today. What has caused this massive shift and is it likely to continue? Well, paper notes haven’t held their value well over a long period of time. Paper currencies have been coming and going for hundreds of years. In fact, with the introduction of the Euro, Greek coins were replaced by the British pounds as the earth oldest currency still in existence.
One of the reasons the British pound remained in place was due to the use of it in the empire. One of the reasons that Gold is making such a comeback is that the paper currencies of most major economies are today being debased by the increases in the money supply, which went into overdrive after the dotcom bust in order to avoid a recession. It is this monetary expansion which has led to the increase in the price of gold. All with a solid stock market education knew this. More accurately, the price of gold isn’t increasing, it’s just that the value of currencies is decreasing, as they have been doing for a long time.
With the huge bailouts all over the world taking place right now, this looks set to continue. This should be great news for gold, which unlike other commodities, hasn’t fallen back considerably from 2007 highs. The reason is that gold is a safe haven during times of trouble, such as the ones we are in now. That and the fact that an ounce of gold was able to buy a quality suit and a nice pair of shoes in Roman times…the same is true today and will be true in the future, unlike any paper currency.
Gold is popular because governments can’t print more gold. Expect it to go up in price and when you have a solid stock market education, you will know exactly when to benefit from it.

Stock market education

Stock market education

stock market trading strategy

Many people, especially today, need a stock market education. A CDS or credit default swap is an instrument like an insurance contract. It allows the holder to the Credit default swap to claim money form its issuer (usually a bank) in the event that another third party defaults on its obligation to repay the money that was lent to it. It’s a kind of insurance against going out of business. In the last few years, this market has exploded from $1tr to about $60tr as all sorts of financial institutions sought of offset risk in their dealings. So Goldman Sachs lends $10bn to Barclays bank. Goldman wants t offset the risk of Barclays going out of business. Goldman goes to AIG and asks them to write a credit default swap. AIG looks at Barclays and comes up with a premium….let’s say $50m. Then AIG, knowing that if Barclays goes out of business, offsets that risk to another issuer, let’s say, Lloyds of London. It packages up all the insurance policies that it’s written and asks Lloyds to insure against them going bust…and so on and so on. The bottom line is that this type of risk was passed around and around until everyone had a little bit of it but it was unclear who exactly was the insurer of the initial risk. This is the CDS market, all be it a little simplified.
Now, here’s the bad news about this market…it is HUGE. The insured liabilities are around $60tr. That’s one year of GDP for the entire planet. Here’s the really bad news…it’s totally unregulated. The reason the banks are so hesitant to lend…the factor that is actually preventing them from lending…is this market. This is a key discovery in your stock market education to get to the bottom of what’s going on.
This is how banks are thinking. If we can just get through this crisis, we will have a huge market share…we must survive. What do we need to do to survive? We must not run out of money or the ability to raise capital. Hence, they are hoarding capital. Even though the government is throwing money at them like a drunken sailor in a lap dancing club, they are taking it but not lending it. They don’t trust each other…they can’t figure out how big the liabilities are which are owned by other banks in the vast CDS market.
They know more high profile bankruptcies are coming and they can do little about it. It then could become like a chain reaction. Lets say company A goes bust, Bank B is owed a $500m in a loan it made to company A, it asks it’s insurer, Insurer C for the $500m for the CDS insurance policy payout. Insurer C can’t pay it or raise it and they go bust as a direct result of it. Bank B can’t pay it’s obligations to the people who it sold insurance on Insurer C collapsing….then Bank B goes bust. This is the chain reaction nightmare scenario that is unfolding before the eyes of senior bankers and insurers…but they haven’t slept for days and are wide awake. They’re getting a stock market education.

Stock market education

Stock market education

stock market advice

If you want a stock market education, follow the people who predicted the credit crunch. Believe it or not, there were a lot of people who saw the problems build and tried to bring attention to it. The problem was that no one in authority would listen. They waved all comers away with standard “It’s fine” rhetoric. How can we have in the UK a tripartite financial regulator and not see an issue as huge as this before it surfaces? No doubt, there will be many people who will pay for the oversight once everything settles down and the blame game and the lawsuits start in earnest.
Let’s start at the very top. The Chancellor of the Exchequer (he could use a stock market education) for the period leading up to the credit crisis – please take a bow Mr Gordon Brown. He labelled his own time as the chancellor as “the age of irresponsibility”. How those words must be haunting him now. Not only did he not oversee the banking system effectively, as the huge credit binge got underway, but neither did the FSA, his flagship regulator, or the Bank of England, who he stripped of many powers as soon as he got into Number 11.
They literally sat there are the housing bubble grew to sizes that were both unprecedented and unsustainable. They oversaw explosive growth which led to record levels of personal debt. They stood by as the banking system went on a derivatives binge that would is bringing it to its knees…and yet they said nothing. Why?
There is no answer to this, but you could argue that there was coordinated ignorance or wilful participation. Only months before the crisis began, the powers that be told us that the economy was in great shape and GDP growth was expected to continue clipping along at a decent pace. How could the people who led us in our economic destiny get something so fundamental so wrong?
The answer is simple. Either they are all incompetent to the extent that they should all be fired and personally immediately for negligence, or they are all lying to us. Either way…they have to go or get a stock market education.

Stock market education

Stock market education

stock maket for dummies

Welcome to WordPress.com. This is your first post. Edit or delete it and start blogging!