 Gold is on fire — surging nearly $20 through Wednesday … jumping another $8 yesterday … catapulting to a new, 18-year high … and making a beeline for our target of $540.
Supplies of gold are tight as a drum. Investor demand for gold has just surged by 56%. Escalating wars, spreading social unrest, and sinking confidence in world leaders is driving still more investors to the relative safety of the yellow metal. And now, an entirely new group of frightened investors are rushing to safe havens like gold — investors who fear the consequences of a General Motors bankruptcy. This is precisely the scenario we’ve been warning you about. It’s happening. And it’s now. Later, I’ll tell you about what we’re doing to convert this situation into an unusual profit opportunity. But first, let’s take a closer look at …
The Consequences of If General Motors goes bankrupt, it will rock the foundations and bring down the walls of the financial establishment. Big banks will be hit with mammoth losses on their loans to GM, to GMAC, to GM’s suppliers, and to others sucked into the sinkhole. Corporate bonds will crash, wiping out the yield of bond mutual funds … blowing a hole in the portfolios of pension funds … and gutting the retirement of millions of investors. GM’s stock, already at 18-year lows, will turn to dust, dragging down shares of other giant American corporations and blowing still another hole in investor portfolios. No, it will not be the end of the world. No, it is not an absolute certainty that General Motors will go bankrupt, and this week, the company again denied any plan to file for Chapter 11. But, as I’ve warned repeatedly this year and last, the company is on a collision course with failure that no one can seem to stop. Nor can it be said that GM’s strategic planners have not tried to turn the company around. They ran aggressive triple-zero financing campaigns — no interest, no money down and no payments for many months. They launched their employee-pricing-for-everyone campaigns. And now, they just announced yet another discount program. But each time, they have done little more than borrow from future revenues, cheapen their product, and erode their pricing power.
Unfortunately, however, that has not been the case. A broad internal investigation, plus an even broader SEC probe, are turning up accounting irregularities that go far beyond anything ever seen before in GM’s nearly 100 years of existence. My view: General Motors’ accountants and strategic planners have long ago veered from sound business practices … and have long ago embraced untested tricks and gimmicks that border on magic and sorcery.
What We Know … and Don’t Know … In the event of a GM bankruptcy, we have a pretty good idea about what would happen to individuals or institutions that hold their stocks and bonds. We also can guess what might happen to the banks that have granted them loans. But there’s one other major category of investments that are in an entirely different category. I’m talking about derivatives — high-leveraged bets that are a giant blind spot in the rear-view mirror of Wall Street. First, here’s what we know about these derivatives: 1. We know that the amounts involved are huge: $82 trillion held by US banks alone, according to the Office of the Comptroller of the Currency (OCC). That’s the “notional” or face amount, which overstates the problem. But it’s still far too big — 33 times more than the entire budget of the U.S. government. 2. We know that 85% of these bets are tied to bond prices and interest rates — the category most likely to be impacted in the event of a GM bankruptcy. That’s nearly $70 trillion, or over 28 times the entire budget. 3. We know that a very common practice is to bet on the “spread,” or price difference, between high-quality bonds (like U.S. Treasury bonds) and low-quality bonds (like GM’s). If the spread stays narrow, they win. If the spread gets larger, they lose. 4. We know that many large banks and other players have been betting that this spread will remain very small, as it has been for many months. They assumed that big companies like General Motors would stay solid … that their bonds would retain a high value … and that investors would be able to find ready buyers — all assumptions that are turning out to be incorrect. 5. We know that, back in 1998, when Russia defaulted on its debt, major players placing similar bets were severely wounded or even wiped out. 6. We know that the failure of just one of these players — a relatively obscure hedge fund by the name of Long Term Capital Management — nearly brought the world’s financial system to its knees.
By that measure, if the Russian default was tantamount to, say, a Category 3 hurricane, GM’s default could be close to a Category 5. 8. We know that derivatives are highly concentrated in the hands of a small handful of large banks: According to the OCC, 99% of all derivatives are held by only 25 U.S. commercial banks. Worse, 96% of all derivatives are held by just FIVE commercial banks. 9. We also know which banks are taking the biggest risks associated with derivatives.
JP Morgan Chase has $6.25 in risk per dollar of capital, according to the OCC. HSBC has $4.07; Citibank, $3.10; Bank of America, $1.68. Even in the absence of a major What concerns me most, however is what we DON’T know about these derivatives …
Unregulated and The OCC reports that a whopping 91% of derivatives are traded “over the counter.” In other words, they are private, custom-built, one-on-one contracts directly between the parties. This makes it extremely difficult for any central authority to keep track of precisely who owns what, when, or where. Indeed, there are thousands of different derivatives contracts … with a myriad of terms and parameters … with new, unique permutations created daily … with many counterparties overseas … and with no agreed-upon international law governing what happens in defaults. In short, it’s a world that is simply too fluid and too complex for anyone to account for with accuracy. Therein lies the great uncertainty of derivatives … AND … one of the immeasurable risks of a blow-out event like a GM bankruptcy.
My View of a Possible
GM Bankruptcy Scenario Event #1. Long before an official bankruptcy filing by General Motors, the value of all corporate bonds — especially junk bonds like GM’s — plunges.
Event #2. Investors who hold GM bonds or debts rush to buy a form of insurance to protect themselves against the coming storm. But it’s like buying flood insurance in New Orleans before Hurricane Katrina. It’s either too expensive or simply not available.
Event #3. Unable to adequately fortify themselves from the coming tempest, investors abandon their home base and rush to the nearest shelter. In the investment world, that means scrambling to buy anything they feel is more likely to hold up against the high winds. Gold goes through the roof.
Event #4. Some financial institutions — banks, insurers, brokers and others — are either too stubborn or too slow to get to shelter in time. When General Motors files for bankruptcy, they get swept away in a flood of defaults. Their share prices plunge. Event #5. Credit of nearly all kinds suddenly becomes scarce and expensive: Many corporations can’t raise money to finance their operations. Consumers can’t borrow on their credit cards. Home buyers can’t get a mortgage. Interest rates surge. What to Do First and foremost, if you have not yet acted on my warnings, please reconsider. Fortunately, you still have time. But I worry that someone — your broker, a business partner, or a family member — may try to dissuade you from protective action. They will argue that companies like General Motors aren’t as important as they used to be, that a GM failure alone would not be enough to shake the established order. Perhaps. But the fact is GM is not alone. If GM fails, it will join a growing group of major companies that have filed for bankruptcy in recent months — Delphi, Delta, United and more. And it could soon be followed by an even larger group in the wings. Second, take a moment to review our recent e-mails. In each one, we provide a prescription for your financial safety — to help you protect your savings and investments from precisely this kind of a situation. It’s common sense: If a company as large as General Motors is going under, you need to fortify your portfolio and find shelter well before the majority of other investors rush to do the same. Right now, most others are still complacent, which is quite amazing given the news that’s already out. Take advantage of this lull before the storm to get your house in order. Don’t wait any longer. Third, in case you don’t have our earlier e-mails handy, here are our recommendations in a nutshell: * Keep a substantial portion of your money in cash, and keep that cash in the most liquid, highest-rated investments in the world today: U.S. Treasury bills or Treasury-only money market funds. * Stay away from long-term bonds, including not only junk bonds like GM’s, but also U.S. Treasury bonds. Although the Treasury bonds can rally a bit due to a flight to quality, all bonds fall in value when interest rates rise. * Get out of all stocks that are vulnerable to higher interest rates and concentrate on companies that benefit from inflation. * With money you can afford to risk, transform situations like these into potentially large profit opportunities. You’ve seen how gold is skyrocketing. You’ve seen how copper is on a rampage. But even these may pale in comparison to the rise we’re expecting in other natural resources that are not so well known. Larry and I are especially excited by what our colleague Sean Brodrick is about to recommend to subscribers to his new Red-Hot Canadian Small-Caps. He’s flying up to western Canada Sunday morning, 48 hours from now. On Monday and Tuesday, he’ll meet with the companies to make sure all is OK. And immediately after the Thanksgiving holiday, he’ll be issuing his recommendations to his subscribers. With the price of these companies’ products going through the roof this week, we believe the timing couldn’t be better. Sean’s latest report provides the details. Best wishes, Martin About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. If you have a friend, co-worker or family member who you feel could benefit from Money & Markets, please forward this issue to a friend. To make sure you don’t miss our urgent updates, add Weiss Research to your address book. Just follow these simple steps. The information included in this electronic newsletter is subject to these terms and conditions. View our Privacy Policy. Would you like to edit your email notification preferences or unsubscribe from our mailing list?
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If GM had at least retained adequate controls over its accounting, these blunders by its strategic planners might be forgiven by future historians.
7. We know that GM’s total debts today are close to $450 billion, many times larger than Delta’s or Delphi’s, and THREE times greater than Russia’s debt in 1998.
corporate failure, that’s excessive by any measure.
