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Rick Rule continues:
“The banking system is globalized, the trade system is globalized, so things that impact us in one part of the world impact us on a global basis. There are any number of calamitous events (which could take place), and I would suspect the world is full of potential black swans.
The point that Nassim Taleb makes, in his work, is it’s always the black swan that you don’t anticipate that knocks you for a loop....
Continue reading the Rick Rule interview below...
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“So in addition to being nervous about things like quantitative easing, the European Union, the malaise in Western economies, Japan, a Chinese economic slowdown, or war in the Middle-East, unfortunately, and this is the cheerful note, Eric, you have to be concerned about stuff you haven’t thought of either.
Beyond keeping a lot of our firm’s assets in cash, and a lot of the cash in physical gold and silver, one of the things that we are very concerned about is non-derivative counterparty risk. I am perfectly prepared to concede that the people who run the big financial supermarkets around the world are smart.
What I am not prepared to concede is that they are smart enough to run trillion dollar financial institutions on a balance sheet that has 3% equity. Yes, derivatives absolutely concern me. But the other thing that concerns me is simply the fact that many financial services firms operate with way too much debt on the balance sheet.
I don’t think the people that run them, in fact I don’t think anybody in the world is smart enough, in a volatile set of circumstances, to run a trillion dollar balance sheet with a 3% equity slice. I just don’t believe it’s true. I think it’s extremely destabilizing because the financial services community isn’t required to account for the correct valuation of their assets, and the correct description of their liabilities.
One party to a trade may default. So you look at the major bank’s balance sheets, in the notes, not in the balance sheet itself but in the notes, (it reveals) the bank has ‘exposure to derivatives with a notional value of $40 trillion.’
That bothers me a lot because when I say these companies are trying to run big financial services businesses on a 3%, 4%, or let’s be generous and say a 7% equity slice, that doesn’t take into account the contingent liabilities they have exposed themselves to, assuming that we have a great enough wobble in the financial system that it would expose them to some counterparty risk, which I personally believe is a probability, not a possibility.”
Global investors need to be aware of the dangers of counterparty risk, and how quickly this can wipe out financial firms. People need to be very careful about where they have their assets in this type of environment. Fortunes can be lost because of carelessness or a lack of understanding of the present dangers in the current financial system.
The information above was just a small portion of this powerful interview with Rick Rule. He discussed the fragile financial system, gold, mining shares, and what to expect going forward. The KWN audio interview with Rick Rule is available now and you can listen to it by CLICKING HERE.
© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
The interviews with Rick Rule, Nigel Farage, Ben Davies, Dr. Keith Barron, Jean-Marie Eveillard, Bill Fleckenstein, and Egon von Greyerz are available now. Also, be sure to listen to last week’s line-up of other KWN interviews which included and Felix Zulauf, Rob Arnott, Michael Pento, and Gerald Celente, by CLICKING HERE.
Eric King
This Is Frightening & Destabilizing To The Financial System
Today Rick Rule spoke with King World News about the current danger and frightening instability in the global financial system. Rule, who is now part of Sprott Asset Management, also noted this has created a situation where, “One party to a trade may default.” This reveals that the financial system could once again be in a 2008/2009 crisis type situation in the blink of an eye.
Here is what Rule had to say: “What’s interesting, Eric, with the world increasingly globalized, is the shocks that affect Japan don’t just affect Japan. They affect Europe and the rest of the world. We’ve seen, as an example, the follow-on impacts in 2008 when the US housing crisis tightened up inter-bank lending around the world, and that led to a psychotic break in the markets.”
© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,
rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
September 25, 2012
