By Tom Dyson in The 12% Letter:
I just finished reading Michael Lewis's new book, The Big Short.
Before Michael Lewis became famous book for writing the book-turned-movie The Blind Side, he wrote Liar's Poker, one of the most important financial books ever... and required reading for anyone who wants to understand high finance. Liar's Poker is a first-person narrative of life inside Salomon Brothers' bond trading department during the booming 1980s, when Salomon was the richest and most profitable company on Wall Street. It's funny and entertaining, and you can't believe how easy it was for Salomon Brothers to exploit the savings and loans industry.
The Big Short is the same way. It's a great explanation of the subprime debt bubble... hidden within the story of three hedge funds making a-once-in-a-lifetime killing. This time, Wall Street itself was the dumb money.
For me, The Big Short is also a great explanation of why the forces of deflation are so strong. Lewis shows the subprime crisis was a symptom of the same gargantuan credit bubble that crafted the culture 25 years ago at Salomon Brothers. It fueled the entire world with borrowed money and lifted the S&P 500 from 100 to 1,500.
Unbelievably, the credit bubble is still expanding. The Fed is now using government balance sheets to sustain it. When governments max out their credit lines, it'll be curtains for the world economy. There won't be anything left to hock. The credit bubble will deflate, and we'll see a decade of defaults, liquidations, and fire sales.
I don't see any way to stop this from happening. And when the Fed tries to fix the situation by printing money and guaranteeing debts, it'll only make things worse. The markets will tank every time the Fed announces a bailout.
Crux Note: Tom Dyson is the editor of The 12% Letter. He's been recommending readers prepare for a bear market by holding more cash than normal and investing in only the world's safest high-yield stocks and bonds. To learn exactly how 12% Letter subscribers are protecting their wealth, click here.
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