Monday, August 4, 2008

So Far, So Bad

The ongoing financial meltdown is working its way towards the acceleration phase. So far, it's been a lurching affair that has kept everyone complacent, including the Mainstream Media who are still debating whether or not we are even in recession!!! The acceleration phase will begin with widespread collective acknowledgement that the crisis is deepening and Government is absolutely incapable of stopping it - a realization that will lead quickly to wholesale panic.

The sequence of events I predicted here are unfolding exactly as I had expected, although some of the near term dates have been missed thanks to Bernanke's numerous Wall Street bailouts -we now have a perfect system of crony capitalism where risks are public (socialized) but the profits are private. It's a great system, if you are one of the .0001% of ultra wealthy Americans who benefit from it.

Notwithstanding Bernanke's desperate measures, the inevitable collapse is more or less right on schedule (+/-) a few weeks.

Here is an update of how things are going so far, along with some updated survival advice:

1) Stock market collapse: So far, the market (S&P 500) is down roughly 20% from the top and I believe another leg down should begin fairly shortly. This next leg down will be the wake up call that shakes the general public out of its drunken stupor once and for all...

In the coming years the stock market will lose 90%+ of its value. I base this prediction on the experience from the Great Depression, the devastating economic impact of credit deflation, and lastly based on Elliot Wave Analysis from EWI.

Position your stock market assets accordingly. If you are serious about surviving the coming Depression, you need to read Prechter's Conquer the Crash.

2) Credit market seizure: This process is well underway and due to accelerate any time now. The acceleration phase will be brutal and I expect hundreds of banks to fail within weeks of each other. Unknown to many, there are literally trillions of dollars of uninsured assets at banks throughout the country. This is primarily because people either have too much money at any given bank (>$100k), or because they own a money market account that is not insured (most money market accounts are not insured).

If you haven't already moved your money around to protect your deposits, then I recommend you do so, post haste. Once the doors close, it will be too late...

3) Fed panics and drops rates to near zero: Been there, done that. The Fed Funds rate is already at 2%, as a result of the largest and most rapid decline in interest rates in U.S. history. The Fed, despite numerous interventions, has run out of ways to prop up the debt-inflated financial markets. The worldwide financial markets are several orders of magnitude larger than the U.S. Federal Reserve, so the Fed is like the Dutch boy with 10 fingers in the dike. To date, the Fed has wasted $500 billion (half of all Fed assets) buying up bad mortages and other bad debts to prop up the banks. Make no mistake, these bailouts are not to benefit average citizens, they are intended to bailout the wealthy lenders who made risky loans. The average citizen who is upside down in his mortgage is best served by simply walking away from his house and handing the keys back to the same corrupt bank that lent the money in the first place.

If you have zero or negative equity in your home, then you need to walk out the door and never look back. You don't owe some corrupt bank a dime considering they just wanted your business up front with no concern as to how you would pay after-the-fact. Don't keep throwing good money after bad thinking the housing market is ever going to come back. The housing bubble we just went through was a once in a 100 years event. The housing market will eventually lose at least 50% or more in value and IF it rebounds it will be only because the Fed is eventually successful in generating massive inflation, which means in "real" (inflation adjusted) terms housing will just keep going down.

4) Commodity market collapse: As predicted, this is already well underway. Oil gave up the ghost last week and staged its largest decline in history. Gold is still lingering above $900 due to geopolitical concerns (Israel/Iran), but I have no doubt the deflationary spiral will pull gold down eventually as well. Gold will ultimately be THE asset to own, but first it needs to correct its massive rise from $250 - $1000 dollars. I expect this 'correction' to be a deep pullback that will make most gold bulls question their long-term gold strategy. Oil will go much higher longer-term due to the peak oil crisis and geopolitical instability, but short-term it could pull back well under $100 as demand falls due to the global depression.

5) Liquidity Trap: Credit deflation is already well underway. As expected the M2 money supply is declining rapidly and is on the verge of accelerating to the downside. Deflation along with bank failures will bring about an inevitable liquidity trap wherein no one is willing to lend and no one is willing to borrow. The lack of credit will decimate the real economy.

6) Bank Failures: Only 8 so far this year, but we are nearing an inflection point where there will be a nationwide bank run...

7) Mass Layoffs: The job market has been slowly caving in and is on the verge of a rapidly accelerating decline. Hold on to your current job as long as you can. This is about to turn into a real world version of "musical chairs" where jobs are the chairs and they keep disappearing by the thousands. If you don't have a job now going into this economic hurricane, chances are you are never going to get one...

8) Real Economy collapses: Due to factors 1-7 this is inevitable and already well underway. As mentioned many times, the Western economy is predicated on credit. Without credit, the economy is going to collapse like a cheap tent and stay collapsed. Many jobs that were a function of the debt inflated pseudo-economy are going to go away and never come back (i.e. Middle Management) .

9-11) Deflation turning to "Flat Tax" and Hyperinflation: As mentioned, deflation is now underway, and when M2 bottoms out, hyperinflation will take over as Bernanke churns out dollar bills. Exact timing impossible to predict, but I think the deflationary phase will be absolutely brutal, yet relatively brief (12-24 months). At the point at which deflation turns to inflation, you need to move your assets to gold and silver.

12) Crime and Anarchy: It's starting now with property crime, but will eventually turn into violent crime...