Rick Rule - This Can Bring Down the Entire Financial System

Today King World News interviewed one of the wealthiest and most street-smart pros in the business, Rick Rule. Rule, told KWN there is a “mismatch of some amount of money in the $100 billion range between credit default swaps.” He also said this is similar to what “brought down Long Term Capital Management (LTCM).” Rule, who is now part of Sprott Asset Management, also discussed gold and the mining shares, but first, here is what he had to say about what is taking place: “Well, I think that frames a big issue. We’ve been asking our clients to consider the macro question, if the institutional risk-off trade is to the US dollar and US Treasuries, that suggests the institutional investors believe that this rally and recovery in the United States is real. That’s big news if it’s true.”

“If it’s true and if the recovery is real, it means that the United States, which accounts for 25% of worldwide demand, is back on track. If the recovery is real, it’s going to boost demand for industrial commodities like the base metals complex and energy. If you believe that, there are contrarian bets to be made in base metals and energy.

If you don’t believe the recovery is real, and you don’t believe the US dollar and US Treasuries are a reasonable store of wealth, then it would appear that the gold thesis is intact. One of my fears surrounding the US dollar and other currencies, has always been the prevalence of black swan events.

The news that JP Morgan Chase had to disclose to the market, with regards to out of control credit derivatives bets, is indicative of the type of black swans that could come into the market. What JP Morgan Chase has said is they have suffered a $2 billion loss and it could be more than a $2 billion loss. They don’t know how much it could be....

“There would seem to be a mismatch of some amount of money in the $100 billion range between credit default swaps. They seem to have been net sellers or providers of about $100 billion in unhedged credit default swaps.

When I say seems, these are extremely complex instruments. Investors should be aware that derivatives such as these can bring down the entire banking system. The point of this is nobody really knows how much net credit protection JP Morgan Chase has provided or in what markets or in what type of instruments. We just know that they have a large, unhedged position in what was intended to be a hedged trade. It would appear their ability to handle volatility or perturbations in the market is less robust than modeled.

I would note to you, Eric, that it is precisely these perturbations in a semi-hedged model that brought down Long Term Capital Management (LTCM). It’s just an example of the potential black swans that exist in a very, very leveraged banking environment. This should cause all of your readers and listeners to be concerned about the possibility of a response to anomalous events like what occurred in 2008.”

Rule also warned: “The thing that’s really on my mind today is the state of the junior equity markets. John Kaiser recently published in his newsletter that some thing like 60% of the junior equities, on the TSX Exchange (in Canada), are selling at half of their 12 month highs, at less than 25 cents a share, and have less than six months of working capital in their treasury.

That’s a different way of saying that more than half of the TSX is headed for extinction if the market doesn’t change. It’s difficult for people to get their heads around the fact that they bought a stock for a dollar and it’s selling for a quarter. They don’t want to sell it until the price goes back up, but the price is not going to go back up.

The point of all of this is that the length and breadth of the TSX Venture Exchange is in extraordinarily difficult circumstances. Juxtaposed against that is the fact that the best 5% or 6% or maybe 10% of TSX Venture stocks have very bright futures, are very undervalued and can extract capital.

I’d like to share with you, Eric, an event that happened to me yesterday. In a market that is starved for cash, and extraordinarily depressed psychologically, I had to threaten legal action to get in a $30 million financing that was seriously oversubscribed.

The prospective CEO of the company, that will be the beneficiary of this offering, said to me, ‘Rick, I’m engaged in a surreal discussion. Most of my peers, in management, at TSX Venture companies, are wondering what they are going to be doing for a living in six months. And I have a $30 million financing that is so oversubscribed that the various participants are threatening litigation.’

I think this story is a metaphor for where we are with that exchange. There is sophisticated money, with good technical skills, and there are people on the exchange that have good assets that they have advanced well, and they will do extraordinarily well in the next two or three years.”

This is Rick Rule’s most powerful interview ever on King World News. Rick is one of the wealthiest, most well-connected people in this sector and he is telling KWN listeners what the big money players are doing with their money right now in these dangerous times. All KWN readers globally need to listen to this audio. The interview with Rick Rule is availavle now and you can listen to it by http://www.kingworldnews.com/kingworldnews/Broadcast/Broadcast.html">CLICKING HERE.

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