Monday, January 12, 2009

Big picture crap

All those pundits and advisers who keep looking for the rebound in economic activity just around the corner are full of shit. This is not even close to a run-of-the-mill recession and it is dishonest to pretend that it might be. You cannot have Wall Street and the banking system of this country go bankrupt and not affect the real economy in a profound way.

Real estate is toast. You have to understand and believe this fact of reality that cannot be reversed by wishing for something otherwise if you are a homeowner. A five year top to bottom crash is the optimistic scenario (i.e. bottom in 2010-2011) and here's to hoping we don't drag it out for 15-20 years like Japan.

When real estate crashes, it takes the banking sector with it because they're the ones who made the loans and take the hit when foreclosures mount. This time around, Wall Street and Main Street also took the hit because they sold and bought, respectively, toxic derivative products (aka "safe can't lose bonds just don't read the prospectus or do any due diligence") leveraged against real estate. A real estate collapse is a deflationary event that pulls lots of assets and businesses with it. Additionally, the housing boom was the main anchor for our cyclical bull market "recovery" within the context of the secular bear market that began in 2000.

The point of mentioning all this is to comprehend just how big the adjustment our economy is going to need to make to regain its footing. Forget being patriotic or optimistic or whatever hokey bullshit you think you need to parrot based on MSNBC-type "news"/comments. We shipped most of our manufacturing offshore and then invested heavily in a real estate bubble after the internet bubble collapsed. The internet bubble wiped out 401(k)s and IRAs when it popped, but the current bubble is wiping out 401(k)s, IRAs, and is leaving a huge pile of debt behind for millions of Americans that still needs to be paid back.

That debt cannot or will not be paid back by millions of house owners due to job losses/other economic hardship or unwillingness to throw good money after bad, respectively. Walking away from mortgages is a new powerful trend that makes sense for consumers who have no equity in their homes and scares the shit out of banks. People who think this is a subprime problem haven't done their homework. That was only the first wave of three!

Add to this the commercial real estate crash (the ETF SRS is a great trading vehicle to profit from this crash), and banks are, excuse my French, totally fucked. You see, it is considered crass for an individual homeowner to walk away from a mortgage yet it is standard procedure for a business in trouble to default on its debt/obligations. Once retailers and restaurants start declaring bankruptcy in earnest this year (i.e., hundreds more than just Circuit City, Bed Bath & Beyond, Sharper Image, Linens N Things, Levitz Furniture, Bennigan's Steak & Ale, etc.) and get evicted/walk away from their commercial leases, who is waiting in the wings to lease the empty space left behind?

Bottom line, a crippled banking system is here and it's going to take more than 6 months into 2009 to fix it, since the losses to banks are ongoing and actually now accelerating! Without a strong banking system to make loans, even good companies cannot expand and some won't even be able to make payroll on a bad month. Additionally, unemployment is accelerating, not stabilizing, so there are fewer consumers with money to spend on goods and services.

Some charts illustrate that this is more than just a run-of-the-mill downturn:

And the UK, which is just as deep in the doo doo as we are, just cut their short-term government set rate to 1.5%, the lowest since 1694. The bottom line is that this is not a time to be speculating (i.e. investing) with your retirement money unless you know what you are doing. The same people who failed to warn you to take money out of stocks are the same people telling you to stay put now because the recovery from the crash they failed to see coming is just around the corner. Hmmmm.

I like gold because it is real and can't vanish. Yes, its day to day value can fluctuate, but it is the oldest form of currency (along with silver). The people running the printing presses don't think gold is money anymore but they hoard tons and tons and tons of it for some reason that I can't seem to figure out since it's no longer money or a store of value. Money is evaporating right now. Much of it is digital money that was created with no effort and this is the money that stands behind JP Morgan (bankrupt ten times over!), Goldman Sachs (bankrupt!), Citigroup (bankrupt!) and countless other paper tigers that are now on fire.

Once people realize that even the hard pieces of paper we know as real money are no longer worth anything more than a hollow promise, then you'll see the real gold rush begin. The next 1-2 week period should provide a PHENOMENAL opportunity to load up on gold and I will be adding to my holdings. I think the price will drop close to the $750/oz. range and this will be one of the greatest buying opportunities of the entire gold bull market. The secular gold bull market started in March, 2001 and has already yielded gains of 300% (versus negative 20% for the S&P 500 since this time).

Don't miss out on the biggest gains of all in this young secular gold bull market. Buy physical gold at low prices in a week or two and sell gold once the Dow to Gold ratio gets to one. I use APMEX and Gainesville Coins to buy physical gold coins and bars and have been impressed by their service. (Full disclosure: I don't get jack if you order from either of these two companies.)

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