Another Crisis Looms Right Around the Corner 175 comments
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Folks, I consider this to be one of my most important posts. I am going to offer a warning and some advice.
I am extremely concerned about the things that I am seeing in the markets. The US dollar carry trade, soaring gold, and the apparent imminent passing of health care reform are the last straws that are going to eventually break this market's back.
As a result, I have tweaked my investment strategy. I will explain my concerns in further detail later on in this post.
Here is my advice: Raise Cash!
If you are looking for a number, I would have enough physical cash at home to pay one month's worth of bills. I would also advise having 6 months' worth of available cash in a safe conservative bank or credit union.
If you do not have the money to do this and live paycheck to paycheck, I would suggest cutting back your 401k contributions to the minimum amount at which your company matches.
For example, if you contribute 10% to your 401k and your company matches dollar for dollar up to 4% then you should drop your contributions back to 4% until you raise enough cash.
I did this in my own 401k within the past month. 401ks are great because they cannot be touched if you go bankrupt. However, I'll be honest folks, if it wasn't for that, I would probably advise you to liquidate the whole damn thing.
I say this because taxes are going to soar down the road as a result of our bulging deficits. You would probably be better off taking the 50% hit on your 401k now because at the rate we are currently spending, the tax rate might be 70% or higher when you are retiring and getting ready to use it.
Remember, when we paid off our war debts in the 40s, the tax rates for the wealthy were as high as 90% as seen below:
"During the Great Depression and World War II, the top income tax rate rose from pre-war levels. In 1939, the top rate was 75% applied to incomes above $5,000,000 ($75 million 2007 dollars). During 1944 and 1945, the top rate was its all-time high at 94% applied to income above $200,000."
There is no reason why we won't see the same thing happen all over again if we ever plan to pay off our trillions in debts.
Our debt vs. GDP is completely out of control. It's beginning to make The Great Depression look like a walk in the park:
click to enlarge
Quick Take:
This is not sustainable! The world is rapidly losing confidence in the US dollar as our debt load continues to soar. Gold is slowly decoupling from the dollar and continues to move higher regardless of what bucky does. This is a very troubling sign.
The New Carry Trade
Move over Yen! There's a new carry trade in town: It's the US dollar! This is what has been holding up the equity markets recently. If you haven't noticed, the market trades right in synch with the US dollar.
If bucky drops, the markets rise. If bucky rises, we tend to see moderate sell offs.
So how does the carry trade work? John Mauldin does a great job explaining it here.
Essentially, the Fed is trashing our currency with massive deficits while keeping interest rates at zero at the same time. This is the perfect setup for a currency carry trade which I will get into a little later in this post.
Take a look below at the current zero interest rate policy below:
Before I get more into the carry trade I wanted to explain why I am so fearful.
What really spooked me into my cash call was when I saw the IRX (13 week T-bill) drop below zero for a bit last week. This means at one point last week you actually paid to keep your money in treasuries! The last time we saw rates that low on the IRX was when the market crashed last fall.
This tells me that the big boys are really spooked. They would prefer to sit and actually lose money in treasuries versus investing in the equity market.
Now back to the carry trade:
This is how the carry works: Investors borrow dollars at zero interest rates and then sell the dollar and buy an appreciating currency. After converting the money into a stronger currency like the Aussie dollar, they then run around and buy up assets around the globe that offer a higher yields then the zero yield they get sitting in treasuries.
This is a beautiful trade for now because you win twice. You make money based on the simple appreciation of the currency as the dollar continues to fall, PLUS, you also get a nice yield spread off the foreign bonds that you bought that offer yields of say 5% or so.
The problem here folks is everyone is piling into this trade. This is rapidly turning into a speculative mania. Congratulations Fed!: You just blew up another bubble that now has to burst just like every other one has.
So what are the risks here?
There are a few that really concern me. The first one is what if the falling dollar gets disorderly and begins to plunge? The Fed would then be forced to act and protect the dollar by raising interest rates.
This would be disastrous for the economy, and anyone stuck in the dollar carry trade would get slaughtered because the dollar would soar as a result. Many of the carry traders use huge leverage so they could potentially get wiped out.
Higher interest rates would also be a disaster for the housing industry and the banks' balance sheets that are filled with garbage loans. We would also see the market plunge because of the damage higher rates would do to the economy.
Another concern I have here (like Mauldin) is what if the dollar starts to rise on its own which then triggers a short squeeze on all of the investors on Wall St who have gone short the US dollar which is practically everyone at this point?
We all know when too many people get on one side of the boat it usually flips over. If this occurs, we will see the same cascading effect that I presented above.
The Bottom Line
I see no way out of this fiasco without a lot of pain. You may ask why I advise you to build cash positions if the dollar is in such dire straits?
My answer to this is for the immediate future, it will remain the currency that we use in this country. There are also some people out there who believe holding FRNs (Federal Reserve Notes) otherwise known as physical paper dollars is the way to go.
The reasoning behind this is the amount of actual dollars in circulation pales in comparison to the amount of debt we have in this country. Some believe that if the economy blows, actual dollars will be very valuable. I am not entirely sold on this idea but it's an interesting theory.
The market in the meantime could still move higher as long as the dollar carry trade is working. The chance that this can last for a sustained period of time without eventually crushing the dollar is very low in my opinion.
Also keep in mind: The Fed is rapidly running out of QE money and without government stimulus this market is toast because there is not enough liquidity in the economy to replace the Fed and its dollars.
This massive debt bubble is going to implode once the Fed pulls its liquidity.
Ironically, if the economy begins to recover globally (and there are some signs of this in some countries), this could potentially be the trigger that pops the debt bubble because a recovering economy would force the Fed to pullout and raise rates as a result of the risk of inflation.
The market basically doesn't want a recovery right now. It loves high unemployment and a bad economy because it allows the Fed to keep rates at zero which is highly profitable for Wall St via the games that I described above.
Of course our crippled economy is an absolute nightmare for the rest of us as we lose our jobs and our homes as Rome continues to burn.
It is extremely sad for me to watch what has happened to this country.
The fraud has gotten so far out of control that I sometimes question if the criminals that created this disaster will ever get what they deserve.
I am going to watch the market closely this week. I will be placing some long term hold short positions on the S&P in the very near future because one thing is clear: This is not sustainable!
Please be careful with your investments. My call for cash of course is up to you. Things are really starting to look ugly out there. I haven't been this bearish since 2008 and you all know how bearish I can get!
Have a great Thanksgiving and be safe. I will put up a post when I can.
Disclosure: No new positions at the time this article was published.
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Both Norway and Australia do NOT print money.
Gold and silver (particularly silver - given the historical price disparity between the two - silver should be up somewhere in the neighborhood of $25-$30/oz) have been stores of value for thousands of years.
On Nov 24 10:29 AM athena wrote:
You are beginning to sound like Krammer on CNN. Get with it, get out of the War we are in and start investing in ourselves and to hell with the rest of the world. Thank you Frank Prestigiacomo, Private Investor
> Amen, brother.
Unsustainable govt stimulus? Every time it is supposed to end (house $8000 credit, unemployment benefits, etc.), they extend it and raise the ante. I t is not going to end with this current government. It will only end by some external force, probably Asia leaving the table. I think the tell was in that photo of obama bowing to his toes. This orgy the Feds and Wall Street are engaged in is out of control, and they cannot seem to stop themselves. Wall Street, because it is working for them, and Washington, because they do not know what is happening. A guy like Barney Frank is still one of the most powerful men in finance? FHA is the"new FNM".
seekingalpha.com/insta...
The author also believes that a run on the dollar will cause the Fed "to act and protect the dollar by raising interest rates." Everything that Chmn. Bernanke has written and spoken about militates against this idea. Chmn. Bernanke is willing to sacrifice the dollar to ensure that the bogeyman that haunts his dreams--deflation--does not come to pass. Indeed, with folks like Christina Roemer--she actually advocates for devaluation--advising Pres. Obama, it is doubtful that anything will be done to "protect the dollar." In short, I disagree with the author about piling into cash. If one is (a) truly scared of a run on the dollar and (b) does not trust that Bernanke & Co. will protect the dollar by raising rates, one should exit the dollar as quickly as possible.
If we have a bank holiday, you'll be very glad that you have something to eat for a few months.
I now have 3 weeks supplies stored, and my goal is to add up to a total 3 months worth eventually.
On Nov 24 11:32 AM yellowhoard wrote:
> At the very least, everyone should go to Sams Club or Costco and
> buy at least 100 pounds of dry beans and rice.
>
> If we have a bank holiday, you'll be very glad that you have something
> to eat for a few months.
In my honest opinion, the only reason we don't have a full blown revolt right now is because this fraud is just way too complicated for the average person to comprehend. I bet even some of our elected members of Congress have no clue. Unfortunately, the only ones who do fully comprehend this crisis are those who are perpetrating it and benefiting from it.... Wallstreet. While our standard of living is being slaughtered, stop and think about who's wallets are getting fatter. This is a blatent and massive disproportionate transfer of wealth from the middle class to the upper echelons of society....
And yet...most of us sit back and watch it happen.... not only because we don't understand the problem....but also because we put absolute faith in Obama....Tim and Ben. We trust that they are smart enough to know the problems and will put our best interests at heart to solve them. But isn't it possible that they do not know all the answers? They have put us on a single path with no alternatives. There's no backup plan....no Plan B. An enormous and risky bet has been placed on our behalf to kickstart this economy. Quantatitive easing, zero interest rate policy, trillion dollar deficits, government guarantees, capital injections in private sector, assumption of Freddy and Fanny, changing of accounting rules.... each of these.... absolutely monumental in their own right.... yet together, are not enough to pull our economy out of the abyss. In short... Obama, Tim and Ben underestimated the problem (actually, they probably misdiagnosed it). They thought that by overwhelming the economy with stimulus, they had a surefire solution. Boy, were they wrong. And like all big bets...losing will costly.
I agree with the author that we are facing a real possibily of a massive correction that can potentially drag the economies worldwide back into a severe recession or worse. Although I sense that the author feels this will be imminent, I have no idea. In fact, isn't this really just one big financial experiment? Could be days...weeks or months.
So answer yourself this: Do you let it ride and hopefully (with stimulus still in place, offsetting tremendous global imbalances) recoup another 30 to 60% in gains? Or do you play it safe, invest in gold and silver....and ride out the storm until our imbalances are corrected.
High risk....high reward, my friends. This is the essence of capitalism.
Pretty near everytime I go grocery shopping I buy stuff that will not spoil. This, also, is a hedge against inflation.
Solar panels and Portable Generator, Water/Air Purifiers.
2 of Important Items, if stay longer than Anticipated.
But, to tell you the Truth, We aren't going to do any of the Above. Push comes to shove, We will pay Mr. Obama a visit, just to say hello. An Old Man and his Old Lady :) :)
Anyway, you seem to have a lot of knowledge about how things might play out in a total "chaotic colapse" type situation. Do you have personal experience in this? In other words, did you live in a country where this happened? Just currious.
I remember back in 1999 my eccentric aunt pleaded with me to read a book (don't remember the title) to prepare me for the chaos that would come from Y2K. In the very first chapter it suggested that a prudent person get all their fishing gear supplies in good working order to be able to fish the lakes and streams for food when the store shelves were empty. I'm a pretty good fisherman but it didn't take me long to figure out that if 2.5mm people in the Dallas Fort Worth metroplex were hungry and fishing the surrounding lakes and streams I'd be SOL. I closed-up the book, had a drink and said to myself, if it happens that'll be too bad but there ain't a damn thing I can do about it.
On Nov 24 10:51 AM User 353732 wrote:
> The US Regime, based on your essay, has become a serial economic
> mass murderer.
> How does one cope?
> There are typically only two ways.
>
> 1. Flee to a secure, gated, community: this means seek safety in
> assets whose intrinsic worth is preserved while the crimes continue.
> Monetary metals, oil, rare earths, and later food, fibers and timber,
> nuclear technology are such assets. This is only possible for a few
> people with the financial , analytical and execution resources to
> find, afford and reside in the gated community.
>
> 2. Organize private self defense groups to watch for and hunt down
> the serial killer. This requires middle class social and political
> will and fortitude. In late 2009 there is little prospect that such
> self defense groups can be formed with any effectiveness or, if formed,
> will not be instantly intimidated and disbanded by the hired goons
> of the US Regime.
> In time, however, this second option will become potent. It is far
> superior to cowering in gated communities or in fortified compounds,
> which is the trope of a failed civil society. Far better that civil
> society be restored by private, joint, action than mourn its demise.
The reasoning behind this is the amount of actual dollars in circulation pales in comparison to the amount of debt we have in this country. Some believe that if the economy blows, actual dollars will be very valuable. I am not entirely sold on this idea but it's an interesting theory."
I too have been wondering if deleveraging and debt default could eventually cause the value of physical FRN's to decouple from the value of electronic "debt dollars." In your opinion who is arguing most persuasively for this outcome?
What will happen when cable is priced out of reach to the dirty masses, music and game software become to rich for the peons; will they attack with their super-sized drink cups in hand..... They will die in the streets of worse than rubber bullets, water canon sweeps and inconceivable ignorance.
Try 1910 in Mexico, or 1789 in France.