4 Recommendations to Defend Against a Financial Armageddon 58 comments
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Another week of all-time record high commodity prices and a fresh record low US dollar has had the expected result in US equity markets: the stocks of the commodity producers and export manufacturing sectors have led the way to a week over week gain in the broad indexes, but traders are focused on the macro picture and remain nervous.
Capital markets are operating in a stagflationary environment, similar to the 1970’s. The combined impact of slowing or receding economies and rising costs is that equity prices, which are based on inflation-adjusted corporate revenue, cash flow and earnings growth, are under pressure. Should inflation worsen, interest rates will rise, with further damage to economic growth and corporate earnings and net cash flow.
The problem has been caused by the massive increase in debt, on the one hand, without a counter-balance increase in economically-based sustainable asset prices. Phony asset prices, which had been used to support the debt bubble, were discovered as banks tried to rein in credit that had been expanding at rates that were out of control. In the typical credit contraction cycle, the parties that suffer most are business corporations and real estate developers that are over-leveraged, which did not happen in this cycle. This time, it was the banks and brokers that were over-leveraged on the basis of these phony assets they carried on their books.
A proper write-down of those assets to economic reality means that many of the financial institutions have capital reserves below the ratios permitted by regulators. In fact, there are concerns that should all banks write off these dubious assets, the result would be insolvency, which is to say a complete elimination of equity, and worse.
So, the big picture is looking bleak, and it is not one that can be fixed overnight or even in a month or a quarter. This problem will probably take a few years to resolve.
As the credit contraction cycle works itself through the economy, cash and unencumbered assets will continue to be king. Periodically, there are injections of liquidity by central bankers and by sovereign wealth funds, but these are mostly based on new debt, which is like pouring fuel onto the fire, stealing from the children and grandchildren of the future, and the elderly and others who are presently or soon to be in need of social assistance, all done with the intent that vested interests among bankers can be protected today.
At the heart of today’s economic and capital market woes is the unnecessary Iraq War. Nobel laureate economist Joseph Stiglitz and his associate sum up the issues in their book, The Three Trillion Dollar War. Others are saying this war will cost five trillion. The architects of this war attempted to pay for it, not in the normal course with an increase in taxes, but by a lowering of taxes and a huge push to base economic growth, and revenue from taxation from real estate construction, largely fueled by speculators and others who did not have the savings or incomes to afford it, and so who turned to easy credit that was made available by bankers who securitized these dubious loans.
As long as there was a conspiracy among bankers to price these real estate assets on fiction, backed by so-called insurance programs that work only as long as the credit ring remains intact, the beneficiaries of a strong US dollar, and low interest rates, such as the bankers, telcos and regulated utilities were able to lead equity market indexes higher. But as the real estate market peaked and headed south, and higher inflation set in, the US dollar started to plunge. Capital markets remained stable only as long as bankers could continue to sell their fiction-based assets, and the available excess capital went into bonds.
That process started to come to a conclusion in June 2007, and the big capital pools started to switch from equities to the most risk-free bonds, the US Treasuries.
Now, even that safety valve has come to the end as the yields have collapsed on short-dated US Treasuries to the point where in just four weeks, the yield on 2-year T-Notes has plunged from 1.90% to 1.48% and on the 3-month T-Bills from 2.17% to 1.06%. The excessive negativity moniker among bloggers doesn't hold water. The fact is that traders are simply prepared to earn little to nothing if their capital base is preserved at this point, and the T-Bill rate proves just how negative is the market reality.
These yields are massively under the inflation rate, so wealth is rapidly being destroyed. As soon as the commodity price bubble bursts (and it will since record high oil and precious metal prices are economically unsustainable and will crack, just like real estate prices cracked in the summer of 2005), a huge deflationary wave will engulf the world.
Writing his syndicated column Global Issues Sunday, David Crane points to the red flags waving when the International Monetary Fund warns that governments need to “think the unthinkable.” He opines, “Indeed, we could be headed for the worst financial crisis since the 1929 stock market crash and the Great Depression of the 1930’s.” Negative I might be, but not nearly that much so.
Where I see the credit crunch has hit home the most – the banks and telcos – traders have been selling to raise cash. In fact over the past six and twelve months the price performance in these sectors is the worst across the broad market: down over 3, 6 and 12 months -18.7%, -29.2%, and -31.3% for Financials (XLF) and -24.6%, -32.0%, and -26.6% for Telcos (IYZ), respectively. How can anybody be positive with such a disaster?
A week ago I asked rhetorically, “As a trader you have to ask yourself if conditions are likely to change in the next three to six months to where Mom & Pop start getting ahead financially, start spending again, and start saving and buying equities. You want to ask how the Telcos (and other financial income sources) are going to pay out high returns on capital without it being a return of capital. In addition, you want to know how the Banks can recapitalize their balance sheets without traders somewhere in the world taking on huge debt. Debt inspired by greed, after all, is the cause of the problems today.”
I am asked every day what my recommendation would be to defend against a financial Armageddon, and I will sum it up here:
(1) Go temporarily to a combination of cash, in the form of US
Dollars held with the most secure financial institutions (preferably a
Swiss bank outside UBS (UBS) and Credit Suisse (CS), which are international
investment banks), and 3-month T-Bills, regardless of how low the yield
is. (The minimum account size for private banking with Swiss banks is
about $250,000 for those who are interested.) In the meantime, maintain
small loans at various financial institutions -- if the interest rate
is low -- because your continued payment of the principal and interest
will put you into the most valued client category when the global
financial crisis is ended and banks are seeking to issue new loans.
(2) Then wait for the crack in the precious metals market, which will
come as most of these record high commodity prices are futures
contracts based, which will fall apart when the credit ring snaps and
counter-parties are unable to pay off. I’m now looking at $780-$800
gold, possibly lower, for example, in the months ahead. Yes, gold
prices may go higher than Friday’s high of $1009 for $GOLD because the
market is adrenalin driven at the moment, but if you are not a
day-trader with your finger on the buy/sell button, it’s best you stay
away.
(3) When precious metal prices, after the peak, spike down on the
extreme sell-off days that I see upcoming, use that low price to buy
physical bullion bars and coins for safekeeping, preferably in a
private Swiss bank. For those who want the least exposure to the
current financial crisis, I would not hesitate to put 90% of the cash
into a variety of precious metals bullion holdings in safekeeping
because even during the Depression era of the 1930’s, physical gold was
the best performing asset class.
(4) After the global bankers appear to be resolving their crisis, and
real estate prices and equity market prices have sunk to ultra
long-term lows, which may take six months to two or three years to
unfold, I would begin a program of selectively selling the precious
metals and buying real property with rock-solid mortgages, probably in
Emerging Markets, plus the stocks of Cara 100 companies that managed to
survive the difficult economic period ahead. With that in mind, I would
start to narrow the Cara Global 100 down to one in each sector, like:
Exxon (XOM), Goldcorp (GG), ABB (ABB), Toyota (TM), Diageo (DEO), Glaxosmithkline (GSK), ICICI Bank (IBN), Google (GOOG), Nokia (NOK) and EXC, as examples. That
list would give a global balance of very strong companies, and I would
probably weight the holdings on average with the S&P Global 1200
sector weightings at the point of entry.
These are tough times. It will pay to keep cool. The publishing world today – both hardcopy and electronic – has stooped to a new low of vacillating from “cut and paste” to the shouting of idiots who managed to get themselves a piece of the entertainment media. There is very little rigorous analysis being done today. It’s mostly synthesis (i.e., storytelling) by people who really don’t know from nothing. The trouble is that transparency in the global financial system isn’t what those in control crack it up to be, and now that those persons are in deep financial trouble themselves, the public is being left even further in the dark.
As I wrote this week, the global liquidity crisis was brought on by bankers and the public ought to protect themselves by pulling their capital out of the market, which would send the system into crisis, forcing these bankers to sort out their various conflicts of interest and return us a legitimate capital market that is not controlled by debt market dependent financial services companies.
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This article has 58 comments:
IT’S NOW THE FED AGAINST THE SHORTS. THE FED WILL WIN.
THE FED WILL KEEP THE ISLAND AFLOAT.
THIS IS CAPITULATION!!!
DON'T BUY INTO ALL THAT NEGATIVE THOUGHT ABOVE!
I own a company right now with 24 million in assets which is trading for 14 million today. After writing off their unprofitable operations, they earned 800K after tax last quarter alone. With a real PE of 4 trading at 40% lower than book value, there is plenty of room to absorb an economic slowdown.
From a pure valuation standpoint, many companies are cheap right now. As more cash is injected into the system, that cash is likely to fall somewhere - and I doubt it will continue to be buying commodities unsustainably or a rush to lower 2-month treasury yields to under 1%.
Correct me where I fail in understanding...
Also, commodities prices are up, and credit markets are frozen. This tends to put pressure on profit margins, since credit costs more and so do raw materials.
Further, the next shoe hasn't dropped yet. It's raining shoes nowadays. If they are that cheap, and you have a conviction about it, then go for it. Buy more.
And I do wish you luck.
The market savaged Bear Sterns in a way that indicates its extreme nervousness. The Fed has expressed at least a short-term protection policy for banks, including investment banks, by allowing them to borrow at the Fed window.
The only thing I'd say is that people will probably start moving back into the market as soon as we see sense a bottom. Then you may see some rapid movement up. A recession is already priced in. Hell, a depression is priced into the financials.
go to zeitgeistmovie.com
it is a free to all and beautifully made powerful movie
How did it drive the prices of housing to all time highs and people to speculate and and creditors to give loans to people who could not afford them?
Speaking of draft dodgers… Isn’t Romney the guy whose imaginary-friend likes America the best, who thinks the war is such a great idea but (amazingly) NONE of his children managed to enlist in the glorious fight against evilnessnessness, and made his money running some slime based consulting business? Sounds like the perfect American leader for this century, another BS spewing scam artists. I do admit that he looks presidential, however. And, I’m sure your peasant class would have been proud to continue sacrificing their own children for his continued glorious war on evilnessnessness, just as they do for their current leaders. Good thing so many of your peasants actually buy into the “survival of the fittest” philosophy and appear to enjoy getting screwed. We laugh at them continuously.
Speaking of fantasy... Would one of the Ron Paul cultists please explain to me WHO ELSE (meaning: other than himself) would help him run your federal government; one of the largest organizations on the planet? As Ron Paul is a Republican (or, what we’d call the Christian Fascist Party) wouldn’t most of the people chosen to run his administration come from the current pack of con-artists running things right NOW?
We get to vote and to choose between parties.
Iraq causing the housing bubble, indeed.
Moveon.Cara
At the macro level, that is true, but at the micro level as we look around what about Goldman Sachs shorting the paper it was selling its clients, what about Bank of Montreal losing hundreds of millions gambling on natural gas contracts, CIBC taking on as a counterparty what one commentator likened to having your 100 foot yacht insured by a middle class neighbour, Societe Generale losing 5 or 6 billion because of an improperly supervised trader, and so on. There is clearly a need for a secular Protestant Reformation here.
B.S.!! - the heart of today's economic woes is a huge bubble in housing prices (due to lax monetary policy, owners' buying beyond their means, and greedy/lax lenders). It's that simple. Leave your politics out of it...you're incorrect on them anyway.
This is "just paper" ?Those Marines who left here from San Diego for their 4th & 5th tours last weekend aren't!
If you don't get the author's point on Iraq, you are the Joe Six-pack, the kind the "GOP" depends on, I can assure you.
The one thing I like to get others' opinions on is that one of the main factors that made the great depression the scary monster that it is is that the government did not step in to provide liquidity. The way I see things is that Bernanke did give it a try to see how "bad" the contraction expected would be and perhaps whether the system could adjust, that clearly failed and without the injections the threat of complete financial system collapse appeared eminent. There is alot at stake here and there are many scenarios but if we focus on 2 scenarios:
1-Let things deflate, let insolvent institutions go under. well that means A whole lot of wealth will be eroded. Wealth that will cost governments money. money they can easily print, but then we end up with a great depression followed by inflation?One of the most important things that will deflate here will be the american home , perhaps the only remaining source of wealth for the average american, causing massive demand on the government facilities to provide services.
2-Inject more debt into the system, keep things "rolling" and as the cycle of debt makes its way through, the average world citizen will feel the "recovery" and start feeling better. If you look at the bear cycles through out the last few decades, it looks like it keeps getting shorter because the government steps earlier.
I personally plan on riding the next wave up, then lighten up and either ride it down or wait for a support level to be reached. I think today we have seen the 11740 level hold up and it did last week too. if LEH does not report terrible news, we could see a mini rally for a few weeks.
www.nationalpriorities...
First off the war cost of $500B (which is actually on the low side, frankly) is inconsequencial when viewed relative to the economy, considering the Fed Res. is forking over $200B to inject liquidity over the next month, thats almost half the total cost of the war so far and there will be much more Gov. money than that comin in over the next year.
Second, what the author and this person above fail to realize the real cost of the war is not in dollars, its in human terms and more specifically, the cost will be so much more if individuals who have no idea what they are talking about continue to try to influence others with their mindless talk of the cost of the wars in dollars and cents. This type of reasoning, tryin to form policy based on popularity or MONEY, is what caused the Vietnam Conflict to fail and resulting in millions of people suffering AFTER the US pulled out. The ultimate cost of the wars in dollars is totally irrelevant and has no business being included in articles such as this, because A) it will pale in comparison to the economic cost the Fed will dole out after all is said and done with this crises. B) Funding the war had nothing to do with the mortgage bubble and C) becuase there is much more at stake than money.
Now can we get back to talking about the economy, housing and credit please?
The US consumer is in for a reality shock to their standard of living and relativeness to consumers in other countries. I've said that back in 2006, but my point is: society and the US consumer wanting to have, have, have and so taking on debt, debt, debt.
US government is also not so fiscal minded. In layman's terms, the wars (Iraq, Afghan, and minor ones) have a cost, funded mostly by the USA. Who funds it? ultimately the US citizens, through taxes, reduced services, etc. The companies/citizens benfitting have been those in the defense sector...already the US was declining and one theory says wars create economic activity.
On the wars alone, the USA gov't has hurt its citizens for the next generation (starting say 2003, after not pulling out), through:
- worse standard of living
- paper ripped in half called the "dollar"
- protectionism and somewhat confinement/"jail" (how can you leave if your currency worth has been cut by 50%)
- social security system... it just keeps getting debated; no one in gov't wants to fess up and take the hit / pay up the money to fund the benefits that the US gov't promised
Having said that about the US gov't, China is getting lucky.
- Instead of psychologically warped teenage mids in the USA taking a gun to their school or local shopping mall, in China it is the gov't who takes guns on its people (this is not a religious point - rather sit down, talk it out, and be reasonable).
- China, being a communistic country takes care of its people, correct?? WRONG! Where is the healthcare for all? Where is the social security system? Come on China, you have a large surplus, why not provide for your people? By the way, many are at or near retirement age, oh why not keep the money in the country's coffers.
As for the Fed, and for companies who were greedy/lax, let the market decide. Should we all take our savings (or get that last minute loan) and buy shares in any XYZ company; and expect the Fed to bail us out? No.
The US peoples' standard of living has been pulled from underneath them. Carroll Quigley wrote "The Tradegy and the Hope" about the rise and fall of civilizations (money,power,etc) over time. The stock market may or mat not reflect it always, but when you have less than your previous generation, and want to take that trip to Europe or Asia and see that vendors don;t even want your currency anymore, those are telling signs. Hey, but you had it good when you living on someone else's money whilst borrowing..eventualy someone comes knocking to collect.
History is full of empires that overextended themselves will expensive wars they couldn't finance, the U.S. is following that script. Our days as the pre-eminent world power are likely done - this financial meltdown is the start of a new world order.
The amount spent on the war in Iraq is fairly small relative to the US economy. Claiming that a war on the other side of the planet caused someone here to refinance their home three times is pretty nutty. Making the claim that the war caused someone to sign up for a house payment that was greater than their gross income is also nutty. Feeding irrational thoughts to the followers only causes the less thoughtful ones to cheer. There must be enough of them to please Mr. Cara.
1. "The economy will recover in "12 months"". The ultra-wealthy will survive. The middle class? Some will make it, others will not. Standard of living has been chopped.
2. Consumers keep borrowing. You think you can live on someone else's finances all your life? AT some point the lenders smarten up.
3. USA vs other countries. "Oh, the economy will recover" Just wait until you go for that business trip or vacation abroad -- not just the higher cost, but some places "no want stinking dollar" (yes, a foreign vendor said those words!)
4. USA as powerhouse, world leader, etc. Too many nations (both eastern and western) do not agree with your policies. What is the USA going to do
...bomb them? first they will hide out and make you spend and spread your resources to come get them
...boycott their products? there are enough other nations that were savers vs debt holders that will buy from those nations. By the way, that family in a shack in central India has no debt, but some USA citizen living on debt for their life...is just that, in debt and has demonstrated they are no able to earn enough to pay off that debt (or just kept on spending)
... withhold goods? give some examples. clothes, cars, computers? you can buy those from a China
... withhold services? question is if they need the services.
... withhold commodities? what does the usa have? usa is an importer overall.
The standard of living in the usa is on the decline. (but let's talk about the economy, supported by a government that keeps borrowing, or when it feels the needs, prints its own money ... i guess the individual citizen would like to do that to maintain their prior standard of living).
I wanted to drop you a brief note as it is unlikely I’ll make your send off Thursday. In several ways I was sorry to hear you have been called to duty, mostly because you will be missed by all. However, I can think of no better role model for your students and the others around you. While often thought but never stated nearly enough, you and all of those who serve do us all a great honor. I sincerely hope that you and all of your’ unit knows that. As you know some have misgivings as to why we have and are sending some of America’s finest into a conflict that is difficult at best to resolve. But never for a moment, allow this minority lead any of you to question the appreciation and pride we have for your sacrifice and actions.
You are all heroes in my book (and my families as well) and will be in my thoughts daily until everyone is home safely. May your tour be short and safe one.
To show that I’m not the only one that feels this way, the other night I was flipping TV channels on caught the last 10 minutes or so of Gene Simmons Family Jewels on A&E (I’m sure you have heard of the Kiss base player). He was walking his teenage daughter room by room through a VA hospital thanking the various patients/vets for their service and sacrifice. When asking by one vet what a rock star was doing there he replied “I’ve brought my daughter to see what a real heroes looks like”.
God’s speed
Then:
When will this happen, and why not posit that the world will be engulfed in a inflationary spiral?
Bernanke isn't called helicopter Ben for nothing. (he has written postion papers that state that rapid inflation is the way to avoid the Japanese style deflation). But I agree that the commodity super-cycle will end--but time frame is a critical component of your analysis.
Bull markets last around 17 years (aprox), and commodity supercycles last around 17 years plus or minus five years.
Mr. Cara, do you see a short term commodity spike, or a supercycle?
Your analysis is not clear on this point. And, where is you in depth analysis to back your claim that " a huge deflationary wave will engulf the world?" I can make an excellent argument that the opposite is the most likely outcome.
Oil has only increased in price since 2001 in Euro terms by a little over 200% yet in USD terms by 500%, and demand for oil has decreased in some reports by nearly 3%. What does the law of supply and demand tell us about this situationi?
I don't think people see the big picture, you know the old story forest for the trees.. The tree is the banking colapse the forest is the wortless reserve currency the USD. To back it up in 1933 1oz gold = US$20 and 2008 1oz gold = US$1000 a 5,000% reduction in value. For those who are just starting to see it have a look at the relationship between gold and oil and you see there is a direct correlation in price (more proof that gold is still real money).
What is really going on? Is it the war? Is it the lax and hopless monetary policy of the US? Is it the inept US governemnt, or the corrupt world bankers? Or all of the above? I think it is all these things egged on by eachother. The looser will be the urban poor, the winner is the guy that doesn't need government, but relies on themselves.
For the the author, #1 you said hold US dollars and in Swiss bank accounts no less. Is any one else out there asking as I am " Are you crazy?". What have you seen that I've missed to suggest that as a strategy. Buying gold sure, but with what, your wortless Federal Reserve Notes held in Switzerland?
My advice would be, to move your assets to something that will feed your family, like a farm you can't eat gold after all. Failing that, move to a country that is a producer like, Australia or Canada. (I prefer Australia with no winter to speak of). Now you need to act! I like electricity and beaches I moved to Australia, now what are you going to do?
Remember the post shown below. Thanks for the GOOD advice Tony.
It paid off.
Tony Soprano
Mar 17 06:48 AM
BUY TODAY!!! AND STAY LONG!!!
IT’S NOW THE FED AGAINST THE SHORTS. THE FED WILL WIN.
THE FED WILL KEEP THE ISLAND AFLOAT.
THIS IS CAPITULATION!!!
DON'T BUY INTO ALL THAT NEGATIVE THOUGHT ABOVE!
{"At the heart of today’s economic and capital market woes is the unnecessary Iraq War. Nobel laureate economist Joseph Stiglitz and his associate sum up the issues in their book, The Three Trillion Dollar War. Others are saying this war will cost five trillion. The architects of this war attempted to pay for it, not in the normal course with an increase in taxes, but by a lowering of taxes and a huge push to base economic growth, and revenue from taxation from real estate construction, largely fueled by speculators and others who did not have the savings or incomes to afford it, and so who turned to easy credit that was made available by bankers who securitized these dubious loans."}
oh, PLEASE !! The current depression is all Bush's fault ?
R O T F L M A O
. . . stupid democrats !
AND WHAT WOULD THE CO$T OF LETTING THE HOLY WARRIOR JIHADISTS MELT DOWN OUR LARGEST CITIES AND FINANCIAL CENTERS BE ? ? ?
the fact that Warren Buffett supports the democrats proves that wealth is no shield aganist senile dementia, huh?
As far as the economy is concerned I don't understand why people did not see it coming. Government takes your money and never gives it back. You have 28% of the adult US population who are Baby Boomers ready to retire. Thats 76 million American. They are expecting Social security and Medicare. The money is not there.
They were considered assets while they worked. When they retire they are considered "liabilities". Now what does a business do with liabilities? It gets rid of them.
Boomers are marked for elimination. I mean if they have stocks in all these big corporations and start cashing them in then the big over priced and oversold corporations might feel the pinch. Can't have that.
They herded those people into the dot.com mania and busted it. Then they watched as the Boomers with any money left run to real estate and they busted that. Now where can they run? Where can they hide? Precious metals? Can they bust that? Not sure but their ace in the hole is to conficate the metals.
Yikes...what now? Go to the doctor and get drugged up and forget that anyone owes them anything. Yes the Baby Boomers have caused all this because they let government sell them on a dream that was never going to happen. They are being looted and have no power to stop it. Too bad the other generations have to go down with the boomers but we now live in an age where collateral damage is acceptable. But make no mistake about it, the war is not on terrorism.....the war is against the Baby Boomers.
.