However, those following the charts still look at the three waves in the S&P chart since March 2009 as an upward trend. To them what we have is just another setback like in 2010 with the May ‘flash crash’ of 1,000 points on the Dow and the similar dip of 2011.

Major top

But what if this turns out to be a ‘head-and-shoulders’ top? That would either point to a major breakout to the upside, not very likely on fundamentals but achievable with extreme money printing by the central banks, or more likely a reversion to previous lows.

Mike Swanson hits the nail on the head by citing Greece as the principle problem but like any US observer he tends to regard Europe as a place apart. Yet Wall Street does not live in glorious isolation anymore than it did in the 1930s.

Europe is as loaded up with sovereign debt now as the US was with subprime loans back in 2007-8. Once this bubble implodes then the damage to the banking system and credit will be every bit as bad as Lehman, a crisis the Fed completely failed to prevent as the ECB will fail to prevent the Greek tragedy unwinding.

Lehman deja-vu?

Lehman going down put the world into deep recession in 2009 and stock markets fell to a major low. Will it be different this time?

You can certainly understand why anybody with money in a Greek bank would pull it out now and put it into Germany. It is a classic bank run situation and you need nothing else now to bring down the dominos of the eurozone banking system.

Equally holding on to stocks in this environment is madness. Only shorting them makes any sense. Still Mike Swanson makes all the right points in his chart analysis, he is just not drawing the correct conclusion:

However, banks do have a function and an important one. How did this little girl’s family afford to buy a home for her to grow up in? Most likely they got a mortgage from a bank. Where do they keep their savings safe and earning interest? Aren’t credit cards very convenient when you have a lot of money to spend?

Too big to fail

The problem of course is excess. Banks have grown too big to fail and too important in the national economy. Bankers pay themselves way more than elected politicians who take bigger risks with other people’s money.

It seems a little ironic that this young critic is from Canada whose banking system is upheld as a model of prudence in comparison to the rest of the world. Still in Greece there are riots and fiery protests everyday. It has gotten way beyond public speaking for minors.

And it is really to Greece that attention should turn for an insight into what the financial collapse of a society entails. This is what the rest of the world needs to avoid but it is contagious.

Ringfencing, printing loads of money and a return to old fashioned banking will all be required to fix this quagmire, perhaps a gold-backed IMF currency too. Yet if banks are to operate more conservatively then they will lend less and this little girl may have to wait a lot longer than her parents to own a house or a car.

Credit not evil

Credit is not a univeral evil. Used in moderation it stimulates economic growth and raises growth levels. Without it things can turn pretty stagnant and unemployment rises up and up.

The young suffer most as the least experienced and without prior positions to hold on to. And actually it will only be when the banking system is not only purged of debt and currency values are reset that the credit cycle will start pumping up growth again and new jobs will be created.

Banks will always be with us. Without them we are really lost. Actually its the same as blaming government. Try living without one. Anarchy is worse than any of the alternatives.

If JP Morgan cannot get the derivatives market right what hope is there for any mere mortal. These are the guys that write the derivatives and ought to know best how to trade them.

Derivatives mountain

The global derivatives market is worth a multiple of many times global GDP. Gold guru Jim Sinclair has often pointed out that the perilous situation in the global derivatives market guarantees that money printing will have to move to a much higher level. This is where the global debt mountains are submerged and the only way to keep them underwater is to pile paper money on top.

Those selling gold and silver for paper money are making the wrong trade. They should be buying more at these low prices. All the risk is to the upside and trying to time a short-term market bottom and missing the uplift is likely to be far more costly than simply sitting this out or buying now.

For how long will it be now before the derivatives volcano errupts? It cannot be very long. The Greek exit from the euro which will almost certainly follow another election is not yet priced into financial markets. How can it be? Nobody knows how this will play out.

This is very reminiscent of the Lehman downfall that markets were supposed to have priced in before it happened. We know from the 2008-9 financial crash that markets had done no such thing. Is Greece another Lehman? Well the warning has been there for so long nobody is taking any notice anymore.

The 2008-9 precedent would be for enormous money printing in the wake of a eurozone financial blow-up. Really the authorities would have no other policy option and even the Germans would understand it by then.

Debt upon debt

Trading derivatives in a volatile financial market situation becomes inherently perilous because this mainly entails using leverage upon leverage. One slip and your equity is gone and the debt remains. Derivatives are the very epicentre of everything that has gone wrong with the global financial system in recent decades.

Only when this house of cards has fallen can things be put back together again. It will be done. Mankind has survived world wars, revolutions, plagues and depressions before. But don’t imagine it will be easy, except for the owners of precious metals whose assets will have enormous buying power in the final stages of this crisis.

Gold and silver are still the best protection against the derivatives blow up that has started with JP Morgan’s loss. You want to hold real assets, not paper money and its derivatives.

It is not how you would think this ought work as lower commodity prices might be expected to be good for industrials. However, these companies lose their own pricing power as commodity prices fall. A strong dollar and weak euro also means commodity price weakness.

His advice to those in the financial sector is to become farmers. He owns no US equities and is mainly short stocks around the world. Next year is a post-US election year and will be a mess for the US economy. Be very careful, he says. Rogers was a big short seller of JP Morgan and thinks money printing will eventually drive commodity prices back up.

Sadly the $2 billion blow-up at JP Morgan last week, not to mention the eurozone banking crisis, points exactly in that direction. It is a cycle and the excesses of the last cycle inevitably mean a regression back to old-fashioned banking.

Credit cycle

The good news is that once this banking cycle is corrected then credit can begin to expand again. The bad news is that we have not gotten there yet. Indeed, the bad loans and the debt reset that is required have really only just started.

Can we then forgive TD Bank CEO Ed Clark for appearing on Bloomberg to dance on the grave of his flashier rivals (see video below)? He does so with good grace. But is this really the future of banking? Perhaps it should be. The banks have forgotten for what they are intended.

They are not supposed to be machines for paying staff high salaries and bonuses for doing a pretty cushy white-collar job. They are supposed to be guardians of the nation’s savings and prudent lenders, not gamblers on the global financial markets. Whose bonus will be docked for the JP Morgan losses?

Endgame coming

Things really have gone wrong in global banks and the final endgame is not likely to be pretty for anybody concerned. Perhaps TD Bank will be a model for the future but getting there is going to be very painful. Yet that is the whole point, the banking sector has become far too big and greedy for the good of the economy in the long-run. Short-term we are less certain.

Leverage fuels up economic growth with the cost only coming later to the downside as inflated asset prices fall back to earth. That is when the most painful losses occur and seems about where we are heading now. Only massive money printing by central banks can offset this deflation and that is where we are going next.

Basically once Greece is out of the euro, you have to ask who is next? And if you have money in that country you will want to take it out. That means chaos for banks in Spain, Portugal, Ireland and most probably France which will be hardest hit directly by the Greek exit anyway.

Greek tragedy

No wonder then that bond prices have slumped and interest rates rocketed in these countries since the Greek tragedy returned for its final act. Those who have seen a Greek tragedy may recall that generally everybody on the stage ends up dead. A solitary death has never been the Greek way.

So we can anticipate one last attempt by the eurozone to put its house in order and get Greece back in line. However, democracy rules in the European Union and a second inconclusive Greek election result can really mean only one thing.

The Spanish banking system is already close to collapse as has become clear over the past few weeks with the nationalization of Bankia. Those commentators who saw Greece as the next Lehman Brothers look vindicated with the December deal just staving off the inevitable denouement.

Negotiated exit

How much room do the eurozone authorities have for manoeuvre this time? It will come down to a ‘negotiated exit’ from the euro for Greece and some kind of ringfencing. How effective will that be? As effective as the ‘final’ solution for Greece?

That the US will not feel this contagion is also a triumph of hope over experience. We don’t know what caused the recent JP Morgan losses but it was Europe that did for MF Global. An overvalued dollar and weak eurozone export market will do nothing to help the US recovery or China’s faltering economy for that matter.

Then again if JP Morgan cannot keep its trading book in order in the current circumstances what is the hope for the rest of us?

True the immediate outlook for the oil price might well be a dip to $80 or lower as the world economy drops into another major slump. But central banks will crank up the money printing and restore the price in due course. The law of supply and demand will do the rest.

Peak Oil

There is simply too little oil that can be obtained cheaply in the world to supply the burgeoning demand from the emerging economies. All those new car drivers in India and China will not go back to walking or bicycles, though in a recession some will have to do so.

Should that not be music for the stock markets of the Oil States? You would not think it looking at the bourses right now. Their first quarter boom has well and truly bust and a return to seven-year lows cannot be ruled out if the global economy continues to deteriorate into a full-on economic slump.

However, that is surely going to be a major buying opportunity in Gulf equities. Stocks in the major, state-backed banks, for example will be selling for lifetime low prices. The best capitalized real estate companies will be at cyclical lows.

Local real estate will also be cheap. It still is after the bust of 2008-9. What if the Oil States continue their domestic investment programs – for want of better opportunities elsewhere if nothing else – and become stinkingly rich and overvalued like Switzerland? Where would you then want to own a home?

ArabianMoney

This is taking a longer view than most investors achieve in the Oil States but if you look at the incredibly wealthy local families it is the sort of investment that they made decades ago. Moreover the precedent of the past decade shows what can be done. Dubai has more than trebled its GDP in that time and more than doubled its population.

No prizes for guessing where the ArabianMoney investment newsletter thinks money ought to be invested to profit most in the next decade. This IMF report just flags up an opportunity that is obvious enough to us, although the devil is in the detail of deciding what to buy which is why our newsletter exists. The current issue considers the opportunity now in Dubai real estate (click here).

Is this the start of a giant derivatives’ meltdown or just a major headache for JP Morgan? Either way confidence in the only Wall Street firm to survive 2008-9 with its reputation and balance sheet in tact is in tatters. Surely if this could have been delayed it would have been for the Facebook IPO for which JP Morgan is a lead firm. Still the wider implications are much more worrying…

However, if you are considering the establishment of a silver position you still need to decide a precise time to buy, you have no option but to do that. So on those grounds only you do have to think about the immediate price outlook and make your best guess.

Technical analysis

Bob Kirtley of silver-prices.net notes: ‘Taking a quick look at the chart we can see that the 50 day moving average didn’t make the cross over of the 200 dma, that we were hoping for and so the pressure remains on silver prices. The drop below $30 that we have alluded to has now happened. We see this as at or close to a possible buying opportunity, however it could go as low as $26, so it could be worth the wait for slightly better prices.

‘Also note that the RSI has dipped below the ‘30′ level which is usually a sign that silver is oversold and that a bounce could be on the cards. This is not always the case and is not totally reliable, but it does suggest that the selling is overdone at this point.’

That is the technical view from the charts. ArabianMoney is very bullish on the long-term fundamentals for silver (click here). But we have always viewed a short-term sell-off along with just about everything else as a high probability. This seems to be where we sit today.

Equity option?

Like Bob Kirtley we also think that the mining sector equities could be a major opportunity in this sell-off and the ArabianMoney newsletter (subscribe here) has some neat ideas on how best to profit from this.

For as the printing of money by global central banks cranks up even further in the aftermath of a major correction then the only two currencies that they will be unable to print will be gold and silver. Quantitative easing is not alchemy!

This CNBC interview with Eric Sprott on silver is well worth listening to: