In reviewing the events of the last few years, I have listed some key developments in the financial and economic world:
  • Build up of systemic risk
  • Cover up of risk by government (socialize the losses) (Opaque)
  • High Frequency Trading (Opaque)
  • Opaque Bank Balance sheets (Non-GAAP)
  • Low Tangible Bank Equity (TCE)
    A drop in equity of 3% would wipe out most banks in the present environment.
  • Quadruple Witching Day – September 18 & December 18, 2009
  • Angry Major Trading Partners – China, Japan
  • Dark Pools (Opaque)
  • Arrogant reliance on trading & financial models with relatively short track records (less than 30 years)
  • Public view of government as economic “savior”
  • Recent surge in gold despite "green shoots" talk for months in the media
  • Lack of reliable financial information - when something appears opaque, it is probably hiding something undesirable or even toxic.

The view into the near economic future is about as dim as we have seen in recent years, and the incredible build up of complexity, systemic risk and debt at all levels – consumer, corporate, and government leads me to one conclusion:
At some point, just as a relatively minor event touched off World War 1, some trigger in the financial system will set off a chain of events to dwarf the crash of 1987. A drop in stock prices of 40% or more over the course of a few days cannot be ruled out.