Friday, March 7, 2008


We are on the verge of the long awaited financial meltdown. Here is roughly how I see things playing out from here:

1) Stock market tanks (Timing: One day to 3 months, most likely 1-6 weeks): the market has been in denial for a long time, but time is running out ...

- The stock market is the key as it directly represents investor/consumer confidence - once it goes, everything else will collapse like dominoes

Strategy: Cash and/or Index puts

2) Credit market seizure (Timing: One day to 3 months, most likely 1-6 weeks in conjunction with stock market tanking): The credit crisis has been slowly spreading and panic has been contained. I expect things to come unglued very soon...

3) Fed Panics and Drops Rates to Near Zero (Timing: One day to 3 months, in conjunction with credit/stock market tanking)

Strategy: Avoid exotic derivatives (due to counter-party risk). Avoid long-term Treasuries, Corporates or Munis

4) Commodity Market collapse (Timing: One day to 3 months, most likely 1-6 weeks in conjunction with stock market tanking): The commodity market has been the last refuge for investors. I expect that last leg of the stool to be kicked out any day now

Strategy: Stay out of the way

5) Liquidity Trap (Timing: 6 months to 12 months, in conjunction with Fed panic)

6) Widespread Bank Failures (Timing: 1 month to 18 months). Once the credit market goes into seizure, the crisis will soon spread to the banks. People will be SHOCKED AND AMAZED at how fast banks will close...

Strategy: Hold $10k - $20k in hard cash. All other cash funds only in FDIC insured deposits (no more than $100k at any one bank)

7) Massive Layoffs (Timing: Now for next 2 years). Today's job report was worst in five years (100k jobs lost in private sector). It's all downhill from here...

8) Real Economy Collapses (Timing: 3 months for next several years).

9) Deflation takes hold (Timing: 3 months for next ~2 years). Asset prices and goods and services prices deflate

10) Government Gets Desperate (Timing: 1 - 2 years)

Strategy: BUY GOLD (bullion, coins, futures, CEF, GLD etc...)

11) Hyperinflation (Timing: 2 to 5 years - hard to predict)

Strategy: BUY MORE GOLD (bullion, coins, futures, CEF, GLD etc...)

12) Crime and Anarchy (Timing: Now for the foreseeable future): Crime rates are already starting to tick up...

Strategy: TBD...