Wednesday, July 1, 2009

Batten Down The Hatches

The biggest part of this stock market rally/economic "bounce" is now over. I don't know if we will have one more surge higher that lasts days/weeks or even months, but the initial target I cited for this rally S&P 500 (900-1000) has already been met and therefore the greatest part of prudence dictates preparing for what comes next...

400 foot Tsunami now on the horizon
Call this next phase the "recognition" phase, the panic phase or the liquidation phase - it's all the same thing. It's the point at which this economic decline accelerates into an unstoppable panic collapse. When I started this blog, the economic crisis had not yet started so there was an excuse not to believe my predictions; however, now the weight of evidence is all around us and no excuse remains. Do you honestly believe the Mainstream Media, Government bureaucrats and Wall Street hustlers when they tell you that the economy is getting better when they didn't even predict this crisis would occur in the first place? If so, ask yourself - what has changed? The same factors that precipitated last year's collapse are still in place - massive debt levels, unrelenting job losses, ongoing credit contraction, housing collapse. Now we can add to the list unprecedented government deficits, as public debt is desperately exchanged for private debt, hence shifting the burden from the financially weak to the financially strong and putting the system more at risk. There is over $50 trillion in private debt in existence, do you think the Government can possibly offset losses against all of that potentially bad debt? What if they succeed in doing so, what would that accomplish (other than obliterating the U.S. dollar) - will it create any new jobs or industries? The answer is clearly no - as there have been six million jobs lost so far since this depression started. All the government is doing at this point is maintaining the illusion of fiscal solvency, purely based on smoke and mirrors and not based on any sound economic fundamentals. This economy is Wile Coyote running in place in mid-air...

Irrational exuberance is back, as the the "reflation" trade is the most crowded trade on Wall Street. Everyone is looking down the left side of the tracks expecting hyperinflation when the deflation train will be coming from the other direction and catch everyone by surprise. Apparently these fools have no concept how the economy works. There is absolutely no sign of inflation anywhere, because the Fed is not printing cash, they are increasing credit, which assumes consumers are willing to borrow; however, all indications are that reserves are piling up at banks as lending standards have increased, shutting out the people who really need the money but are no longer solvent. Meanwhile, solvent consumers are starting to save and pay down their existing debts - i.e. the 40 year Monetary Policy ponzi scheme is officially over. The Nouveau Misian movement still doesn't get it and are openly embracing deflation. However, as I have said before, this is not going to be a gentle deflation, this will be a deflationary crash in which the value of assets and incomes fall hard while nominal debts remain intact. Some foolish observers have noted that if prices fall that will free up discretionary income, however, when prices fall fast (due to liquidation vs. productivity gains) then profit margins fall which means increased layoffs. So if I lose my job and my house loses half its value, then seeing low prices at Wal Mart is likely to be small comfort.

Prepare now or forever hold your peace
Those who fail to heed the signs of impending collapse and take immediate action will be "left behind", literally. Once the collapse begins there will be no time to move your financial assets to safer ground (short-term U.S. Government Treasuries), as it will come without warning and decimate ALL RISKY assets (stocks, corporate bonds, municipal bonds and likely even precious metals). Risk spreads will widen and stay wide, giving no one a chance to get out. There will be no buyers - only sellers, and markets will not function properly, leading to "discontinuous price discovery" aka. crashes. There will be extreme counter-party risk, meaning companies and individuals will be defaulting on their obligations causing further turmoil and illiquidity in markets.

Position your assets accordingly.