Peering Over the Precipice: The Future of America's Credit-Driven Bubble Economy

Monday, Feb 11, 2008

Here in the States, the newspaper headlines are full of bad economic news: "Credit Collapse", "Housing Market Tailspin", "Credit Rating Agency Scandal", and "Three Trillion Dollar Federal Budget". Most recently, the Federal Reserve (our central bank, operated by a private banking cartel) made a panic move, cutting interest rates in two jumps in just eight days, a whopping 125 basis points (1.25%). A drop that great, and that fast, was unprecedented. This maneuvering did little to calm the markets. If anything, the Fed's actions confirmed the suspicion that the credit market is essentially broken and our economy is headed for dire straits. In recent weeks, two senior market analysts with long-standing mainstream credentials have voiced very strong warnings: Take the time to read both of these articles:

Barton Biggs's Tips for Rich: Expect War, Study Blitz, Mind Markets

Legendary Funds Manager Julian Robertson Predicts Utter Global Collapse Stemming From Bursting of Property Bubble

Tomorrow's headlines are likely to be even more dramatic: Implosion of the derivatives bubble, hedge fund redemption suspensions and spectacular fund failures, a commercial real estate bust that will rival the residential housing market collapse, municipal bond fund failures, bank runs, and numerous government-sponsored bailouts. (For the latter, read: funded by your tax dollars.)

The exact timing of all of these events is difficult to predict, but given the magnitude of the credit bubble, the housing bubble, the out of control Federal budget, and the casino-like atmosphere of the derivatives market that now measures hundreds of trillions of dollars, these headlines very likely will appear--if not in the next few months then in the the next few years. The unbridled excesses that were allowed to develop starting during the "Easy Al" Greenspan years are only making things worse. A loose credit environment for more than a decade created what comedian Eddie Murphy would call a "Big Dang Bubble." The old adage: "The bigger they are, the harder they fall" comes to mind. Be ready for the full implications of these news headlines when they appear.

The biggest banner headline for 2008 may very well be a derivatives trading meltdown. (I have been warning SurvivalBlog readers about derivatives since late 2005., but it has just been in the past four months that the risk has blossomed to huge proportions.) Derivatives are by far the largest financial market in the world, but ironically one of the least regulated and the least well-understood by outside observers. Mark my words: If the derivatives market falls apart, it will not just topple major corporations, but it will trigger an economic collapse that will topple some national governments. The types of derivatives that are presently the greatest cause for concern are Credit Default Swaps (CDS). This is a private form of insurance against a defaulting instrument. In some ways, these are typical derivatives, with parties and counterparties. The CDS system has grown up to huge proportions in just the past 10 years. The inherent problem with the CDS scheme is that it hums along nicely in good economic times, when there are just a few defaults. But the system is not stress-tolterant.for bad economic times. Certainly the CDS system cannot tolerate the failure of an entire industry. Imagine a situation where not just Countrywide Financial fails, but virtually all of the other major mortgage lenders fail. The CDS exposure would be astronomical. What sort of bailout package would Uncle Sugar have to establish to fix that mess? And how would it be funded? Certainly not with income tax revenue. (That would require both a 100% corporate rate and a 100% individual income tax rate for several years.) The answer is that it would be funded with dollars that are created out of thin air. Warm up the helicopters, Ben. If this happens, get ready for Zimbabwe-style hyperinflation.

Specific Guidance:

A.) Protect yourself from inflation by getting out of dollar-denominated investments and shift those funds into tangibles post haste! You may have noticed that Friday's closing numbers for gold ($923 per ounce) and silver ($17.18 per ounce ) are continuing their bull market advance, just as I predicted.

B.) Limit your exposure to hedge funds. Most investors don't understand hedge funds or there dealings. Let me put it to you in a nutshell: 1.) Hedge funds essentially borrow short and lend long. This works great in fairly normal economic times with stable interest rates, where hedge fund leverage often provides double digit returns to investors. A lot of people have made a lot of money with hedge funds in recent years. 2.) Where hedge funds run into trouble is when there is instability in the credit markets and interest rates fluctuate widely. Well guess what happened recently? In less than two weeks, Ben Bernanke and his band of fools went into full-scale panic mode and dropped interest rates by 1.25%. That is a massive, rapid, and unprecedented drop in rates. Some hedge funds are going to suffer for it, badly. 3.) Hedge funds are not insured by the FDIC. They are essentially"risk to the nth power." Yes, you can make a pile of money with hedge fund investing. You can also lose every penny. 4.) Hedge fund rules typically allow the fund managers to suspend redemptions, at will. If you, or anyone that you know, has more than 5% of their net worth in a hedge fund, I very strongly recommend that you get your sell order in, ASAP. Do not miss your next quarterly redemption window. It may be your only chance to salvage your investment!

C.) Be ready for the coming bank runs. These will make the recent run on all of the branches of the Northern Rock Bank in England seem puny, by comparison. The Northern Rock experience taught us a few important lessons: In a 21st Century bank run you can expect three things to happen immediately: 1.) All ATMs will be shut down, 2.) Debit card withdrawals will be severely limited or stopped completely, and 3.) Online banking will be shut down. These measures effectively funnel the "run" down to just face to face transactions at bank teller windows, to stem the tide. Bank managers must slow the outflow of cash, for without these measures, a bank could be "cleaned out" of most of its deposits within 24 hours. I've said this before: Be ready for bank runs, folks. Keep some greenback cash on hand. Don't keep all of your funds in one bank--even if your deposits are less than $100,000. Don't forget that it can take weeks or even months to get a check from the FDIC. Lastly, in the event of widespread bank runs, we can anticipate some draconian new rules limiting withdrawals, via executive order(s). Once bank runs begin in the US, even if your own bank is not yet affected, have direct payroll deposit stopped. Instead, ask your employer's payroll department to issue you a traditional paycheck.

D.) Get your key logistics squared away. Water filtering, food storage, and four season field gear are paramount concerns. You have been reading SurvivalBlog, so you know what you need to do. Quit dawdling. If you are short on some crucial logistics, then pick up the phone. I would appreciate it if you directed your business to our paid advertisers first. They are all reputable firms that are worthy of your patronage. As always, please mention SurvivalBlog when you contact them. Thanks.

E.) For those of you that are already well prepared, it is time to go through your last-minute checklists: Remember December of 1999? In my estimations the current precarious economic situation dictates the same level of preparedness as Y2K. Top off your fuel tanks and fill your wood shed. Rotate your stocks of items that have short shelf lives, such as as pharmaceuticals, gardening seeds (preferably at least 80% of them non-hybrid) and chemical light sticks.

F.) If you have been deferring any nagging dental work, elective surgery, or getting a new prescription for your eyeglasses, then do so as soon as possible.

G.) Pray. Pray hard. Pray often. In retrospect, perhaps I should have put that at the top of the list.

Inflation or Deflation?
I'm often asked if the next recession will be inflationary or deflationary. It is now obvious that Bernanke's Fed will attempt inflate their way out of this mess. They call him Helicopter Ben for a reason I am now predicting substantial consumer price inflation in the near future.

Conclusion. Be prepared to hunker down, folks. Pardon me for sounding a bit agitated in the preceding paragraphs, but today's economic headlines are difficult to ignore. And tomorrow's headlines might have a much more immediate impact on your life and livelihood.


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