Ombow, That's what Rickards has been saying for some time - that we know a financial crisis is coming, it's inevitable. We don't know exactly when, but it's 100% certain to happen again at some point, and it could be a whopper, bigger than 2008.
The system is fragile and vulnerable, and the Fed is still 'tapped out' from 2008 and would be unable to bail out the world again. That means the IMF would have to do the bailout with their SDRs, and could involve an 'Ice-9' scenario for at least a few months (frozen accounts).
Financial crises have been coming fairly regularly, each bigger than the last - 1987, 1998, 2000-2003 Dotcom crash, 2008 mega crash. We're due, or overdue, for the next one.
Rickards uses 'complexity theory', which says that as systems get larger and more interconnected, risk goes up exponentially. If you double the size of a complex system, the risk doesn't merely double but goes up by a factor of 10 fold, or 100 fold.
Rickards points out that during the 2008 crisis, the Fed had to bail out the entire world. Derivatives were the problem (layer after layer piled on to the underlying mortgages), and European banks were co-parties to many of these Derivative bets. Under its charter, the European Central Bank was not able to bail out the European holders, so the Fed had to transfer $16 Trillion to Europe to cover the Derivatives losses. The total amount made available to bail out US and European banks was $27 Trillion. Up until the late 1990s, these types of Derivatives didn't exist, but were made legal in 2000.
Compared to 2008, the Derivatives books are larger, the 'too big to fail' banks represent an even bigger percentage of the banking system, national debt levels are far higher now, and the Fed is tapped out and will need 3-4 years of QT to get back to a reasonable level.
Here are the numbers -
Prior to the 2008 crisis the Fed's balance sheet was approx $800 bil. To save the financial system they took it up to approx $4.5 tril. Rickards says they need to get it back down to $2 tril or less prior to the next big crisis. QT is running at $600 bil per year, so figure approx 3-4 years. Rickards thinks they won't make it, but on the plus side they'll at least have interest rates more or less 'normalized' by the end of 2019, which gives them the ability to drop rates if there's a recession.
Despite the dangers, we can't assume that a crisis is imminent. Since no one knows for sure, one way to handle the risk is via one's asset allocation model (stocks, bonds, cash, gold, etc). Limit your percentage in stocks and you've limited your risk.
Rickards recommends up to 10% in gold as disaster insurance, a large cash position, plus real assets like land and fine art. I like my dad's allocation of 1/3 stocks, 2/3 bonds, a big cash position, plus your house/real estate holdings and some gold.
