Wednesday, January 21, 2015

Jim Rickards On The Perfect Storm

Jim Rickards reviews the potential losses in the junk bond market around the world due to the oil price decline and the dollar's impact on emerging market debt. The following is a quick summary; the full article can be read at The Daily Reckoning in A Perfect Storm.

Over the coming months, I believe we could see an economic meltdown at least six times the size of the 2007 subprime mortgage meltdown.

In the national defense community, military commanders are known for fighting the last war. They study their prior failures in preparation for the next conflict. The problem is that each war inevitably involves new tactics for which they’re completely unprepared. The same mistake is made in financial circles. Financial regulators are no different than military commanders. They fight the last war. The last two global meltdowns, in 1998 and 2008, are cases in point.

The next financial collapse, already on our radar screen, will not come from hedge funds or home mortgages. It will come from junk bonds, especially energy-related and emerging-market corporate debt.
The Financial Times recently estimated that the total amount of energy-related corporate debt issued from 2009-2014 for exploration and development is over $5 trillion. Meanwhile, the Bank for International Settlements recently estimated that the total amount of emerging-market dollar-denominated corporate debt is over $9 trillion.
If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be six times larger than the subprime losses in 2007. The world is looking at a debt catastrophe much larger than LTCM in 1998 and the mortgage market in 2008. Regulators are completely unprepared for this because they have been busy fighting the last war.

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