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Marc Cuniberti: Volatile markets raise new questions

With the markets now again in turmoil and Washington acknowledging the recovery is starting to look like a no show, investors are left wondering if we are in for another meltdown or just a temporary soft patch.

Problems stemming from the ongoing European debt crisis and rumors of continuing banking concerns worldwide combine with our own slowing economy, putting a dampener on investor enthusiasm.

The latest consumer confidence numbers are dismal and a falling Dow Jones Industrial average attest to new stresses in financial markets.



Seven years after the economies of the world nearly imploded and with trillions of bailout now gone, the crisis that many thought was behind us may be once again rearing its ugly head.

The reason we are seeing new volatility in both the banking sector and the markets is because the underlying problem was most likely misunderstood by monetary authorities around the globe.




You need look no farther for proof of that in a statement by Luc Coene, Governor of Belgium’s central bank who told French-language daily newspaper La Libre Belgique “The chief problem in Europe is that of liquidity.”

Many analysts think however that this is not a liquidity problem but a solvency problem.

Liquidity can be described as you asking me for the 10 bucks I owe you and I tell you I have the 10 bucks but don’t have it on me. I have a liquidity problem. I have the money but it’s just not available to me right now. In this case, a loan will solve the problem.

A solvency problem is where I owe you the 10 bucks and not only do I not have it on me, I don’t have it anywhere. I don’t have a liquidity problem. I now have a solvency problem. A loan does not help me.

Trillions of dollars in home loans (essentially IOU’s) were sliced, diced, packaged up into complicated asset offerings and sold worldwide. Eventually debt markets everywhere were saturated with this stuff

When the housing market imploded, many of these IOU’s became worthless. They were essentially insolvent.

Instead of liquidating these loans and allowing those holding the debt to swallow the losses, central banks made more loans to backstop the original ones, essentially borrowing from Peter to pay Paul.

The debt never really went away. The amount of liquidity in the system was never the issue. It was the actual solvency of those loans.

By allowing all those loans to “survive” sort of speak, financial institutions, central banks and entire countries holding this stuff are still insolvent according to some analysts and no amount of money conjured up to fill their operating balance sheets will make that problem disappear.

Much like a housewife gone crazy with credit card debt, you can pay off this month’s bills but next month you have the same problem.

Couple that with higher government deficits and the amount of debt and promises that now exist in markets everywhere are soaking up any and all monies tossed at them.

Like the proverbial hungry alligator whose appetite can never be satiated, it will continue to reappear in many forms and likely grow ever larger due to the compounding interest on that debt.

This is why the amounts we hear about the bailouts to Greece, Spain, Portugal, Freddie Mac, Fannie Mae, the FHA, and who knows who else is getting larger with each news headline.

Each time you cover each “feeding of the alligator” with another round of bailouts, loans, stimulus or whatever you call it, it’s just adding more debt to the pile and our growing deficit figures from Washington seems to confirm this.

The solution instead lies in eliminating or reducing the debt, either through default or discount.

But because the debt is held by the world’s most powerful institutions the death or even reduction of these massive debt loads will most likely cause tremendous upheaval and financial convulsions in markets worldwide. This is what the central bankers of the world are desperately trying to avoid so they continue on with the same remedy: Amass even more debt to pay off previous debt.

The first step in solving a problem is recognizing the problem:

Can you solve a debt problem by amassing even more debt?

This article expresses the opinions of Marc Cuniberti and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at MKB Financial Services 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. MKB Financial Services and Cambridge are not affiliated. Website: moneymanagementradio.com.


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