VeriSexy

Ceasar was supposed to be a god. Julias Caesar was killed on the Ides of March. (March 15th)

Today, we don't make men gods. Instead society has made our financial system into a false god.

On March 15th, 2005, (the ides of March) we may have just witnessed the beginning of the death of our financial system as General Motors stock took a nosedive from $34/share down to $30.

http://finance.yahoo.com/q/bc?s=GM&t=5d&l=on&z=m&q=l&c=

It does not seem like much (GM down just over 10% in one day), but as of March 17th, the stock is down to $28.35, and the market cap is down to $16 billion. (GM is down nearly 18% for the week.) It's the type of volatility that we usually only see in silver stocks!

What does this mean?

GM's stock price decline is like a dagger right into the heart of the U.S. financial system, and the dollar itself!

Why did it happen?

Apparently, someone in power did the equivalent of shouting "the emperor has no clothes" and people woke up, and are beginning to see more clearly! The media decided it was time to expose the truth that GM is nearly insolvent, and will expect to lose $1.50/share in the first quarter alone! But the story is worse than that! GM has $300 billion in debt
http://finance.yahoo.com/q/ks?s=GM

...and has a market cap, now, of $16 billion. See the problem there? The bondholders could buy the company nearly 20 times over if they used their money to buy stock instead of loan it to the company. The implication is clear--that GM is headed towards bankruptcy, and will default on the bondholders, who will then own a company worth less than $16 billion dollars!

For every one point that interest rates rise, refinancing GM's debt will cost an additional $3 billion in annual interest payments -- money that they clearly do not have! Where is GM going to get another $3 to $6 to $9 billion as interest rates rise by 1%, 2%, and 3% more? Selling cars? Nope. Selling stock? Unlikely in this market! Borrowing more?

From who? The U.S. government itself is propping up this bond market, and there are no buyers even for U.S. bonds, and there haven't been for months now!

So, therefore, GM will soon be a $300 billion dollar blow-up! How big is that? It's bigger than Enron, Global Crossing, LTCM, K-Mart, and the IRAQ war all put together!

$300 billion going belly up is a big enough event to topple the U.S. government! How so? It will shake the confidence in the entire financial system. Companies as big as GM are not supposed to go bankrupt in our "normal" world. They are "supposed" to be "too big to fail".

The value of the "official" U.S. gold hoard of 261 million oz., at $440/oz. is only a mere $115 billion.

See what this $300 billion blow-up will mean? Imagine the financial chaos as a pile of wealth almost three times larger than the current value of the U.S. "official" gold hoard evaporates!

The annual deficit is around $700 billion. How will the U.S. government sell bonds to finance the deficit if bondholders are getting wiped out?

If the government can't sell bonds while running a deficit, then the government must simply be printing money to fund the deficit--and they are, as can be seen in the rate of growth of the money supply, M3! Therefore, inflation is raging, and interest rates must keep pace, which is why GM is doomed!

Interest rates must head up, as confidence in the U.S. dollar bond market will be shaken like a tree in a hurricane!
Foreign nations are all sounding the alarm already that they will be selling U.S. bonds to diversify the holdings of their central banks: Russia, India, China, South Korea, Japan... what major foreign nation is left to buy them?

A tsunami of dollar selling is about to begin, and will make the recent dollar decline seem like a small bump in the road.

It may take a few months for this to play out. You may have time to buy silver at under $10/oz. for a few more weeks or months. But after GM declares bankruptcy, which may take between 3 months to a year, get ready for the dollar to crash by more than 90% in the following 6-12 months.

Germany's hyperinflation in the 1930's took about a year and a half. Recently, Argentina's took place nearly overnight. Who knows which way the dollar will die, whether a quick death, or a more slow and painful one?

http://www.howestreet.com/mainartcl.php?ArticleId=1046

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BRISK

House of cards

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I post on GFY so that when people ask me what I do,
I can tell them that I work with the mentally retarded.

rickholio

I've seen this article before (and citations thereof), and while the conclusions it draws are plausable it seems even to a cynical bastard like me as a little tinfoil-hand-wavy.

The fact that GM owes a significant fraction of what the US government does (in corporate vs. treasury bonds, of course) is something that a MAJOR problem, and should be a great concern. I believe the US Gov't would be pressed to back the debt and bail GM out, at least to some extent, which could lead to the far more dangerous scenario of people trying to remove THAT debt.

In absense of other 'extreme' scenarios (oil suddenly running out, alien invasion, bush proclaiming himself no king but caesar, et al) here's how I can see it play out:

- GM starts to flounder. They put a lot of pressure on US Govt to reduce gas prices, because the only cars GM makes halfway decent are enormous gas hogs and high gas prices will have the natural effect of making people want to buy more fuel efficient vehicles. GM will need time to develop / steal ideas for their own affordable fuel efficient vehicles.

- Some 'strings' will be pulled, reducing the price of gas for a while. It won't be enough.

- US Gov't will give GM some additional backing, pushing off the inevitable for a while longer.

- In the absense of some amazing discovery or incredible turn of events that makes GM competitive once again, ultimately GM will fold or be left as a shell of its former self. Creditors and the US Gov't will be on the hook for the debt, many tens of thousands of people will suffer hits to their 401k's. Many fingers will be pointed and congressional hearings commenced as a dog-and-pony show attempt to mollify the now-hungry hoardes who'll be the ultimate sufferers of this incompetance and/or malfeasance. It will help push Interest rates higher by increasing the air of FUD regarding US investment (due to equally unsound financial basics in government spending), with attendant pain and suffering.

- Meanwhile, foreign investors that already see the dollar on shaky ground will continue to reduce their holdings. This does not mean a 'massive sell-off', but a limiting or cutoff on the UPTAKE of US debt. Remember, most of this debt is in long term treasury bonds that don't mature for a decade or two, you can't just demand payment on a whim. However, you can avoid buying more and convert the matured bonds to other currencies (like china is doing with the Euro)... the trick is in balancing how much to reduce spending in order not to fuck your own economy back into recession (japan), kill your vertical growth (china), or piss off the people you depend on to keep you safe (korea). I believe this tightrope act in the still putative 'asian economic bloc' will probably determine how hard or soft a landing the US has in the coming years. Someone should start a pool as to how long it'll be before Wal-Mart gets rid of the 'roll back'.

Of course, this is all crystal ball stuff, and is dependant on nothing external taking place to further decrease world opinion of the greenback (ie. more wars, other high profile bankruptcies, continued or enhanced financial incompetance by administration, accelerated interest rate hikes, inversion of the yield curve, etc etc etc). Don't plan your portfolio around any of this stuff happening... with the except of shorting GM. That one seems to be a pretty safe bet for now.

reynold

Interesting read.

flashfreak

man I hear this for more than 18 months.
please stop.

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Manowar

Exactly.

$5 submissions

The worst that can happen is another round of 70's-style stagflation. Unlikely.

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