Sunday Musings: The Trillion Dollar Meltdown

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I just finished reading Charles Morris’s “Trillion Dollar Meltdown,” which describes the recent years of easy money, high rollers and the great credit crash.

According to Morris, an acclaimed financial writer, the sub-prime crisis is only a preview of the havoc that will play out across the full spectrum of financial assets. Arcane credit derivative bets are now well into the tens of trillions. The astronomical leverage at major banks and their hedge fund and private equity clients virtually guarantees massive disruption in global markets.

The book explains the arcane financial instruments, the chicanery, the policy misjudgments, the dogmas, and the delusions that created the greatest credit bubble in word history. Paul Volcker slew the inflation dragon in the early 80s, and set the stage for the high performance economy of the 1980s and 1990s. But Wall Street’s prosperity soon tilted into gross excess.

Now global confidence in American securities has been shattered, the dollar debased, and the crown jewels of American industry put on auction to foreigners. Continued denial and concealment could cause the crisis to stretch out for years, but financial and government leaders are still downplaying the problem.

This is where things can get ugly for your portfolio, if you don’t realize that a Black Swan event could be lurking around the corner. While you can’t do anything about the facts as Morris describes them in his book, you can take simple measures to protect your portfolio should the crisis accelerate. Have a disciplined entry and exit strategy and never ever work without the use of a sell stop.

The book is an easy read and will get you up to speed, in case you missed some of the developments leading up to the unwinding of the greatest credit bubble in history.

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