"Kip's VRA financial newsletter is a MUST read for every saavy investor in this country. Disregard it at your own peril. His mantra is my mantra. Kip Herriage's newsletter is my financial Bible."

--Wayne Allyn Root
2008 Libertarian Vice Presidential candidate
Author, "The Conscience of a Libertarian"

Subscribe to our Blog!

* indicates required

Journal Archive
Twitter: @kherriage

Wednesday
Dec312008

Predictions for 2009

 

 “May you live in interesting times” … Ancient Chinese Curse

 

That’s right. This famous Chinese proverb was actually written as a curse, and I’d say that it totally and completely sums up this past year. 2008 just became the worst investment year since the Great Depression, with losses of 35-40% for most major indices. At least we can say that it wasn’t boring....and that it only lasted one year.

 

Like 2001, none of us will ever forget this past year. It started innocently enough, with the Dow Jones coming off of an all time high, and the economy in seemingly good shape. In retrospect, we now know that the recession began in November of ‘07, but at the time everything still felt pretty normal. After all, we had Bush, Bernanke and Paulson telling us that everything was in great shape…that the underlying economy was strong, that housing was going to hold up just fine, and that the derivatives problem was being exaggerated. Famous last words from our infamous leaders…

 

Let’s all agree to remember the following: the next time our instincts tell us one thing and the so-called leaders of the free world tell us just the opposite, lets go with our gut. Maybe Obama will be a different story, but I think I’ll wait for the proof first.

 

2009: A Bounce Back Year?

 

As we head into the New Year, most are saying that it has to be better than this one…and I agree. After all, another 40% drop will take us to Dow 5000 and none of us want to have to endure that. As I’ve been writing, earnings on the S&P 500 are expected to see a significant drop, and while I can make a case for Dow 5000, I can also make the case for a recovery in the markets, although it might be the second half of the year before it begins in earnest. Obama’s economic stimulus package(s) and infrastructure jobs program will inject over $2 trillion into the US economy, and similar stimulus packages are being planned around the globe. Frankly, I think they’d be better off just giving everyone a check for $50,000. Don’t laugh folks; this is an idea that is actually being kicked around. It would reinflate the economy immediately and because ALL of the money would wind up in the hands of the end-user…the consumer…it would likely be far more effective. At least for their stated purpose of preventing our bubble of an economy from bursting.

 

If you’ve been reading my comments for long, you know where I think this is all headed, regardless of what the government experiments with (and trust me, we are all just guinea pigs here). Because we have a consumer based economy (rather than a manufacturing based economy) with over 70% of our gross domestic product (GDP) coming from what we each decide to purchase, not much they do will help. Unemployment is ultimately headed to 12% plus, home prices still have 15-25% left on the downside, and our “system” has to complete the deleveraging process. We’ve seen savings rates in the US drop from 10% in the 80’s to negative 5% in 2008 and we are buried in debt. We have homes that are too big for our incomes, and we’ve spent lots of money that we don’t have, on things that we don’t need. The baby boom generation will be remembered as the greed generation, and unfortunately, a one year recession is just not a big enough penance to pay. Karma doesn’t work that way, and neither do the laws of free enterprise.

 

Recessions are normal, healthy, and happen for a very good reason. And, when they do happen, they act as a powerful cleansing agent. Recessions help to bring bloated asset prices down (on real estate, houses, businesses, and stocks, etc.) to such levels as to allow those who’ve acted responsibly over the years to benefit greatly via the bargains on the market. Because the government has decided to try to short-circuit the normality of this particular recession, they will only make the pain we’ll experience that much greater. It’s been said that you can’t fool Mother Nature…and the same principle applies to the universal laws of economics. Just ask Japan.

 

Japan has been trying the same economic policies since their recession began in the 80’s. They have continually bailed out their weak banks, they’ve supported industries that would have otherwise failed (via massive cash infusions), and they’ve kept interest rates at near zero the entire time (sound familiar?). And here’s what they have to show for it; real estate prices dropped for a record 17 years, the Nikkei Dow dropped 78% (just so far), and deflation has proven to be a monster worse than any of the ones Godzilla ever had to face. But for some reason, our monetary braintrusts believe that this time will be different. Either that or this has all been by design…the powers that be (see shadow government) planned all of this in order to transfer massive amounts of wealth to a select and informed few; to purge the system once and for all and hit the reset button, with the strongest surviving and the rest learning a lesson they will never forget. Before you scoff at this, lots of smart people say that this is just what happened with the crash of 1929 and the depression that followed. Regardless, the similarities are spooky and we should plan for the worst, in the event that it actually happens.

 

Lucky for us, the opportunity to create massive wealth and to build true legacies is far greater in times just like these. Much more so than in even a “normal” economy. The key is watching the smart money and moving our money with theirs…this will be our primary objective in 2009 and beyond.

 

So, Where’s the Smart Money Right Now?

Over the last 23 years I have seen the best and the worst of the so-called stock market guru’s. The vast majority of the experts that you see on TV may be smart, in fact they may be very smart, but when it comes to investing they underperform the stock market averages by a great deal. What CNBC conveniently forgets to tell us when they have these folks on air, is that 90% of all money managers (and the mutual funds or hedge funds that they manage) fail to beat the market on a yearly basis. That’s right; the vast majority charge those big management fees to investors and then proceed to lose to the overall market year end and year out.

It took me about five years as a financial advisor to figure this out, but once I did I started learning to perform my own due diligence, both on individual companies and on individual market strategists. I knew that I couldn’t learn it all, so I was determined to find out who the real gurus were. I wanted to learn as much as possible from them so that my clients could reap the rewards. Now, over two decades later I have a mastermind group that includes the worlds brightest. This helps me to determine what the short and long term market trends are, along with where the smart money is investing, and it’s a big reason why I’m able to outperform the market and anticipate what’s coming next .

One of the most important investing lessons I’ve learned is that you can’t tell the stock market what to do (as much as I want to). The market is smarter than everyone put together…it has a mind of its own…and if you decide to bet against the markets trends (minor or primary) you will lose…every time. For example, as much as I believe that we are in a long term bear market, and that we will see 6500 on the Dow before we see 11,000 (the current 200 day moving average), I will quickly change my mind if the market starts flashing a buy signal, either short term or long term. We could be at just that point in the Dow right now.

The chart below is on the Dow Jones Industrial Average. As you can see, the blue line represents the Dow itself, and the red and black lines represent the 50 day and the 200 day moving averages, or the DMA. Moving averages are very important to follow, as they dictate where significant support and resistance begin to influence either the market, or a particular stock. As this chart clearly shows, the Dow is very close to breaking through the 50 day moving average and thus the overhead resistance at about 8600. In fact, it did just that today with a close of 8668 (this chart is actually one day behind).  (charts are for vraletter.com subscribers only)

 

 

 

Does this mean that its smooth sailing ahead and that the stock market is headed higher? It quite possibly does, but we’ll need to see a continuation of the move before we can say for sure. If the move higher continues into the New Year on heavy volume (currently the volume is light due to the holiday season), then we will have confirmation that the markets “minor trend” has turned bullish, even though the primary trend (200 day moving average) is still bearish.

The chart below really makes the case for the importance of the 200 day moving average, or again, the primary trend. As you can see, for four years the Dow bounced off of the 50 and 200 DMA like clockwork, but at the end of 2007 it first broke the 50 and then finally, the 200 DMA. Once this happened, the bull market was over and the worst year since the Great Depression became reality.

 

 

 

 

Understanding and using these two moving averages is one of the first and most important elements of technical analysis, and is a very strong tool when combined with fundamental analysis (reading financial statements, analyzing price to earnings multiples, studying industry and seasonal trends, etc.)

There are Both Technical and Fundamental Reasons to be Bullish

If the break above the 50 DMA can hold, this would be a bullish indicator for the short term…but only from a technical point of view (the S&P 500 chart is identical as well). Now we need to look at the markets fundamentals. As I’ve been saying, you can't turn to a business television channel these days without hearing about the record amounts of cash that are on the sidelines. Institutional investors and individual investors went to cash and Treasuries out of fear… and you can bet that they will begin to move back into other investments out of greed, and out of fear that they will miss the move higher. Aha, here are the two emotions of investing again…fear and greed…and in this case the fear would even come from a different motivation; the fear of underperforming the competition. However, the move back into the equity markets, commodities, debt and real estate will not be immediate…not with the potential for more Bernie Madoffs out there, or with the (strong) potential for lots of additional bad news on the economy.

But since greed is such a powerful motivator, I think this cash hoard of over $5 trillion from money markets and treasuries will begin moving back into the markets more aggressively once they perceive the called smart money is returning. Combined with the Obama euphoria, and the historically seasonal bullishness of the stock market from November to April each year (when 90% of all gains take place) it’s still very possible that the minor trend for the stock market could turn bullish for some time, maybe even as I’ve been writing to Dow 10,500. So, even in the face of all of the bad economic news on the way, we could see a significant bear market rally. One that we don’t want to miss.

 

 

Finally, I look for continued volatility in 2009, so don’t be surprised to see intraday swings of 500 points…as a matter of fact you should expect it. So far everything that Obama has done the market has liked, so you have to ask yourself how long this honeymoon will last?

 

I see geopolitical risks as the wildcard that could catch everyone by surprise, and growing tension in the Middle East should have everyone alert to the risks. I also believe that there are more Bernie Madoffs out there in the hedge fund world, and that this kind of news could cause a stock market drop of 1000 points… out of nowhere.

 

I wish each of you great success, health and happiness in the coming year. The calamity from 2008 is providing all of us with massive opportunity…once in a lifetime kind of stuff…you just have to remember to look for it on a daily basis.

 

We’ll do that together in 2009.

All my best,

Kip Herriage

Editor, VRA

www.vraletter.com

www.wmitoday.com

 

 

 

 

Monday
Dec222008

$50 BILLION THAT WILL BE REMEMBERED

When the news broke about the $50 billion Ponzi Scheme that Bernie Madoff engineered over a twenty to thirty year period, I knew the story rang a bell. I went back through my records and found the original Barron’s article in 2001, and written by Erin Arvedlund. Included in her excellent research were quotes from several well known Wall Street veterans where they openly questioned Madoffs ability to consistently generate 15% plus returns, year after year, in good market or bad. All of the warning signs were there, and lots of bright people believed that this guy was running a huge scam. They were right, but no one seemed to care.

 

I contacted Erin a few days ago about the article and found her comments most interesting. “After I wrote the article, nothing happened. No one contacted me from the SEC or anything. I found that pretty strange….the story just died”.

 

As long time subscribers to the VRA know, I’ve been writing about the vast conflicts of interest on Wall Street for years. Having spent 15 years in that industry I witnessed similar things on a regular basis, yet its rare when anyone is really made to pay, or when real changes in the investment business actually take place. And we wonder why investors are pulling all of their money out of the stock market, many never to return,

 

Well folks, it looks like we’re finally going to get our first real perp walk. Too bad that it comes much too late and that it has nothing to do with what got our economy and markets into the mess they are in today.

We should be in the middle of the Obama Christmas bear market rally, but I believe that the news of Bernard Madoff's $50 billion fraud will hit us like nothing else -- not the fall of Lehman Brothers, not the death of Bear Stearns, and not the string of insolvency announcements of one household name after another.

Madoff will be the blow that reignites the worst economy and bear market since the Great Depression.

Madoff’s story… that he ran this gigantic fraud by himself… is 100% unbelievable. There’s simply no way that one man alone could not have done the work of inventing and cranking out thousands of statements every month, not to mention keeping track of the comings and goings of billions of dollars. Madoff has partners in crime and unless they have Inspector Clouseau running this investigation, we should know the full story soon.

So, the Wall Street Journal says to its readers, "Could your investment manager be another Bernard Madoff? If someone like Mr. Madoff can be accused of running a $50 billion Ponzi scheme, can investors anywhere sleep easy? Ordinarily, when you are picking an investment manager or financial planner, you're given some common-sense advice. Avoid managers who are unknown, or unregulated, or come without good referrals, or haven't been in the industry long. But none of this would have saved you from Mr. Madoff. 'This guy had oodles of referrals, at the highest levels,' notes Duane Thompson, a managing director at the Financial Planning Association in Washington. “He was former chairman of Nasdaq. He'd been in business since 1960.”

Fear, confusion, and mistrust have been increased by the absence of government supervision or regulation. The SEC admits “it did not do its job”. Really? Please tell us something that we don’t already know! And the media continues to call this “the biggest ponzi scheme of all time”, but we know that to be a lie as well. Social security (aka, social insecurity) is of course the biggest ponzi scheme ever. Madoff is not even in the same ballpark.

Still No Perp Walk

So far the government has thrown away approximately $10 trillion of taxpayer’s money to bail out Wall Street and the banking industry and we’ve yet to see a single perp walk. Think about this for a moment. Goldman Sachs and JP Morgan, along with several of Wall Streets most prestigious firms engineered the exact derivatives instruments that got us into this mess in the first place. Then, they pocketed hundreds of billions in profits along the way. I’ve been writing about derivatives for years, and these weapons of mass financial destruction finally succeeded in popping the bubble that was the US economy. The con was so great that it took the rest of the world with it.

The top executives from these failed companies (Bear Stearns, AIG, Lehman, etc) had NO skin in the game. Collectively they owned less than 1% of the outstanding shares in their firms… so they had absolutely nothing to lose. All they had to do was get legislation passed that would allow the investment and banking industries to use leverage of 40 to 1 (up from the already obscenely large norm of 10 to 1), and along with the creation of financial derivatives that had little to no backing they engineered record profits out of thin air…which in turn allowed them to be compensated with billions upon billions in obscene bonuses. All while Rome burned.

So, the real question is; how is it that none of these con artists are getting their perp walk?? Maybe that day will come but holding our breath will likely be an exercise in futility. Chalk it up as another “accident” under George Bush’s reign of fire.

Why This $50 Billion Matters

Following a 50% drop in the stock market, everything was in place for a big bear market rally. Obama got elected, the government bailout put a stop to the run on the banks, and they even managed to put off the bankruptcy of the Big 3 until sometime in 2009. With extreme levels of pessimism, over $3 trillion in money market funds, and t-bills paying a negative return to investors, we should be in the middle of a recovery to at least 10,000 on the Dow. That’s still a long way from 14,500, but it would also represent a 30% move from the lows of just one month ago.

Then…Bernie Madoff happened… and it’s most likely time to say goodbye to any possibility of an extended bear market rally. This ponzi scheme has big money investors all over the world aggressively pulling money from money managers and hedge funds, and the result will be massive pressure on US and global stock markets as we head into the New Year. No one trusts anyone, and the financial world will never be the same as a result. Before this bear market is all over I predict that 70% of all hedge funds will be out of business and with it, another $1 trillion pulled from equity investments. This money will continue its flight to safety which will keep interest rates on government bonds at record low yields…until this bubble bursts as well.

Unfortunately for the FED, this will increase the deflationary environment that we’re in, and prices on all types of assets will remain under great pressure. Oil and gas prices are being decimated, and along with it the 30-40% of the earnings of the S&P 500. Each year of this decade has seen the index rebalanced to favor energy companies, and the result will be devastating for corporate earnings and for the major indices. In 2009 I continue to look for earnings on the S&P 500 to come in under $40, which means that even at current prices, the S&P 500 is trading with a P/E of 22. The really bad news here is that this is the level where bear markets begin rather than where bull markets get underway, so my forecast for 2009 is only getting more pessimistic. With a more reasonable P/E of 15, the Dow would have to trade down to 6500, or a 23% drop from today’s close of 8519.

Assume that we reach a bottom in earnings at the end of 2009, and we see a 20% earnings recovery in 2010. This means that we could see a recovery to approximately 7500 on the Dow in 2010. Unfortunately, this is what I see as a best case scenario.

 

The problem with this bear market is that the worst of the economy is in front of us, rather than behind us. The bad news from unemployment will continue to hit us for at least a year, and I continue to believe it will reach 12% before it’s all over.

The next shoe to drop will be in commercial real estate, and it won’t be pretty. After the first of the year we’ll begin to get the news of major tenants leaving malls and commercial properties in droves, and on the order that we haven’t seen in our lifetimes. Along with this, massive consumer debt will result in insolvent credit card companies, insurance providers and of course, collateralized auto loans.

The big mystery for most economists is exactly how much the next big fiscal stimulus package from Obama will help the economy. We already know that it will exceed $1 trillion, and along with his economic infrastructure and rebuilding program, the so-called experts are divided on how much it will really benefit the overall economy. My guess is that it will disappoint greatly and be widely viewed as a failure, but hey, he’s got to try something…right?

I say “wrong”. We’ve become the bailout nation and look how it’s working so far…

Our system needs purging, and the balloon needs to be allowed to burst naturally. This will allow us to get this over with once and for all. Will it be painful? Yes, it absolutely will, at least for those that have made terrible decisions with their money for decades, if not an entire lifetime. This is how a free market system is supposed to work, and unless we allow the process to play itself out, we will repeat the same mistakes that Japan has made for the last two decades as they have attempted to prop up failed banks and a broken/corrupt corporate system.

So, how has their economy and stock market done over this time frame? It’s not pretty. Japan’s stock market is down 78% from its high of 38,000 to about 8000 today. They have also experienced massive deflation, as evidenced by a real estate market that has dropped every single year for close to two decades.

Yet, for some reason we’re determined to use the same playbook. As Albert Einstein said, “Insanity is doing the same thing over and over again expecting a different result”. Massive government bailouts, printing our currency into oblivion, and passing down $100 trillion in debt to our kids…and to their kids…now that’s the definition of insanity.

Do we really think that capitalism can be saved by socialism?

Kip Herriage

Wednesday
Dec172008

Huge Moves by the FED

The bear market rally continued today, this time thanks to never before seen moves by the US Federal Reserve. They not only dropped the Fed Funds rate by .50%, but also made it very clear in their forward looking comments that they would provide record amounts of liquidity to the markets going forward and that they would purchase "large quantities of agency debt and mortgage-backed securities," adding that "it stands ready to expand its purchases."

 

This is Fed speak for “get ready folks…you think we’ve thrown a lot of money at the problem so far? You ain’t seen nothing yet!”

 

The dollar sold off hard on the news and prompted another $20 move higher in gold and a similar move in silver. The message from the government is clear; they will do whatever we need to do to stop the economy from deflating, damn the long term consequences. This is especially true when it comes to interest rates on mortgages, and with this move today they are targeting an interest rate move to below 4% on 30 year mortgages. It will not happen overnight, but if they have their way, it will happen.

 

On the surface, this looks to be great news for the economy, and it certainly was for the stock market today as the Dow rose over 350 points. Investors should never fight the tape (primary direction of the stock market) or the FED, and with trillions of dollars being artificially inserted into the economy its clear that you will be in a bare-knuckled brawl with the governments balance sheet if you are betting on the stock market to go lower…at least for the next few weeks. As I’ve been writing, the Obama Christmas rally is here, and now we know for certain that the FED and Treasury are determined not to be remembered as Scrooge.

 

Yes, the fix is in! Absolutely no doubt about it. We’ve had bad news after bad news hit us right between the eyes yet the market continues to climb a wall of worry. This is one of the most important “tells” of investing. When the stock market continues to go higher in the face of the worst news possible, you know you’re playing in either a rigged game or you have one heck of a bull market. In this case its all about the game being rigged, but at the end of the day, does it really matter? The markets going higher….and that’s the bottom line…for now.

 

 

I look for the gains to continue from here…likely into the New Year and the inauguration. The move will not be straight up, but it should be good enough to continue with long positions for some time.

 

Over the next 2-6 weeks we’ll see:

· 4th quarter window dressing by money managers

· The January Effect will continue to kick in (end of year beaten up stocks rally…post tax selling)

· Second Tarp from Uncle Sam

· Artificial Housing Stimulus (mortgage rates dropping like a rock and the government buying mortgages directly)

· Auto Bailout

 

Also, there is over $3 trillion sitting in money market funds looking for a place to make money.

 

This move will likely not last past the inauguration, but it could potentially be an explosive move higher. In this market, you’ll take it however you can get it… before we go short again.

 

Kip Herriage

Editor, VRA

 

 

 

 

 

Wednesday
Dec102008

Snow!

It’s snowing here as I write this…actual flurries. We rarely get snow in Houston, so this is a fun time for us. The last time we had snow was Christmas eve, 2004. Prior to that it had been at least 10 years, so I’ll have to ask all of you that live in colder climates to bear with my reaction to the white stuff. We’ve been singing Bing Crosby’s “White Christmas” all evening around the Herriage household.

And hey, we had some fun on Wall Street today as well. Even though it was just a 70 point move higher, you’ve got to admit that it’s better than one of those down 500 days we’ve had so often over the last couple of months. And how about that move in gold today? I’ll take a $30 price increase here anytime.

The market rally should continue on the hopes and prayers that Obama’s $1 trillion infrastructure stimulus program will save the day. Don’t we all feel better?? All will once again be right with housing prices…employers will stop laying people off… and corporate profits, which are set to drop a whopping 50% year over year, will reverse course overnight and support stock prices at much higher levels. All we need are lots and lots of newly trained construction workers building roads and bridges that we all get to drive over. I don’t know the first thing about building a bridge, but I do know that it’s hard, tireless, mostly thankless work that NO ONE on Wall Street could ever do. I don’t think bridge builders get many $10 million Christmas bonuses, but after all, they haven’t taken their $100 billion investment firms into insolvency either.

The bottom line is that to understand investing is to understand psychology. Simply put, the stock market dropped by 50% and just got tired of going down…for now at least. We’re likely headed higher for a while, but it will be a very nervous rally for me. At any time the rug can be pulled out from under us, and when the next drop starts…likely in January…it will be fast and furious. This is no market for long term, buy and hold investors. Cheaper prices will be found in the future, but for now we’ll do our best to enjoy the break from all of the torrential selling.

On the first Friday of January we will get the December unemployment figures, and they will not be pretty. Januarys will be even worse, for obvious reasons. Unemployment rates will continue to rise as the recession gets more intense, which is what’s going to make this recovery such a very long ordeal.

I just read an interview in the Casey Report with a major commercial real estate player. His name is Andy Miller. Since he started his company, he's bought more than 30,000 apartment units, several million square feet of retail space, and large office projects all over the country. He also employs about 500 people.

Miller says, and this is very insightful for all of us, that many of his retail tenants are telling him that they're going to close their stores after Christmas. Christmas is the most profitable time of the year for retailers and if he’s right, they will sell everything they can by year end. Then, they will fire their staff and vacate their properties beginning January 1st.

It's not just retail properties closing down and firing employees. Miller says there's a crisis coming in all commercial real estate. He says it feels like a slow-motion car wreck. "Whether it's apartments, shopping centers, office buildings, industrial properties, hotels, senior housing – operating incomes are eroding.

This is the crisis in commercial real estate that I have been warning about, and with it will come millions of job cuts. First we will see the occupancy rate drop in offices, then malls cut jobs, then construction companies cut workers, and so on. Once this begins we should anticipate some of the worst unemployment numbers since the Great Depression.

This means that we will also have plenty of additional stimulus programs from the Federal government. As Miller says “This phenomenon will last until the public realizes how damaging the Fed's stimulus is...this train wreck is going to happen and the actions we are taking now with trillions and trillions of taxpayers money will only make our future that much more difficult.

This is the deleveraging process that I have been writing and warning about for so long. I wrote my first article on the dangers of our addiction to debt in 2003, and at the time I said that when the house of cards begins to crumble the deleveraging process would take anywhere from 3-5 years to unwind. I stand by this estimate, and assuming that we started the process in late 2007, we’ve got anywhere from 2-4 years to go.

In the meantime, enjoy the Obama Christmas rally…looks like this one has some legs.

Kip Herriage, Editor, VRA

www.kipherriage.com

 

Tuesday
Dec092008

Market and Precious Metals Update

As I forecast yesterday, the market had a fairly tough day today, ending down over 240 points. If the auto bailout does not take place…as the market is expecting…we could see a 500-1000 point drop in no time at all. I continue to believe that some type of emergency funding will get completed, but all bets are off for this bear market rally if it does not.

Look, I get the argument. The government (see taxpayers….you and me) has thrown away close to $9 trillion into insolvent banks, investment firms, credit card companies and other bankrupt financial institutions, so why not give another $100 billion or so to the Big Three? After all, this is chump change compared to what Wall Street has already received. In this light it’s actually hard to argue the point. We’ve become the bailout nation after all. And, with up to 10 million jobs that could be lost forever (directly and indirectly) if they were allowed to fail, our weakened economy simply could not stand the stress. No doubt about it, this would become the Great Depression II.

So, at this point we might as well give them the money…at least the Obama Christmas bear market rally would be allowed to continue.

At the end of the day, these chickens will come home to roost, and instinctively we all know where this is going to end. Going into 2009 we will have a combined national debt approaching $90 trillion, and the only way to pay the interest (forget about the principal) is to turn the printing presses on as fast as they will run. I read a study today that showed that in the history of all currencies, only 23% have avoided total collapse. In other words, they each wound up as toilet paper and completely worthless due to massive currency inflation….which was brought on by an overwhelming debt load. Sound familiar??

So, our first major bubble was the dot-com boom and bust of the 90’s. This was followed by our second major bubble in real estate, and we see how that’s ending. Now, the final bubble to pop will be in debt and currency. This is just a guess on my part, but I look for the US dollar, most foreign currencies, and all of this massive debt to begin leaking serious air in the first quarter of 2009. This will be the “tell”, for all you poker players, that the next big leg of the bear market is upon us. Once this starts, the FED will REALLY turn up the printing presses. Then, interest rates will begin to spike up sharply and the US dollar will resume its bear market.

Folks, if this scenario plays out, and I see very little chance that it will not, the bear market we’ve seen so far will pale by comparison. If someone has an alternate theory I’ve love to hear it…and I would love to be wrong.

In advance of this admittedly bleak scenario, I am completing research on 3 different investments that will enable us to make some truly extraordinary profits as the a) US dollar, b) US Government Issued Debt Instruments, and c) US commercial and residential real estate begin their multi-year bear markets.

The US dollar and government debt have been THE place to have your money during the recession so far, and when they reverse course, the gains that we will make will be seem almost obscene. The smart money is already beginning to circle like vultures, and once they start their descent, we will make our move as well.

Remember, there is always a way to make money, regardless of market conditions. Outside of the short term moves we’ve made using SDS and SSO, along with our core positions in precious metals, I know that many of you are getting tired of having your money sitting in cash. But the time will soon come to put it to serious work. And hey, in the meantime, you’ve been in the best investment possible, because cash truly has been king. You’ve profited not only from a huge move higher in the US dollar, but as deflation continues to make its way through the economy, your dollar now goes much further than it has in recent years as the prices on just about everything consumable drops by about 10% per month (outside of food prices maybe, but those have begun to drop quickly as well). You should consider yourself a very smart investor for these very reasons. Mensa club smart, no doubt about it…

 

Precious Metals Update

A recent quote from Citigroup says gold could rise above the $2,000 level as the world unravels according to an internal client note from the company.

In that note Citigroup said the following:

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of 2009 as central banks flood the world's monetary system with liquidity.


The bank said that the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

This gamble will likely end in one of two extreme ways: with either a resurgence of inflation, or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush to gold.

Remember, this came from Citigroup folks….as mainstream as they come. Make sure you have your precious metals positions in place…at least 20-40% of what you ultimately intend to own. I don’t know exactly when the explosive move will take place, but I have little doubt that it will happen.

Finally, I look for the bear market rally to resume this week, so use the buy list from yesterday. If the auto deal doesn’t get done, then the rally will become a stampede lower…somehow I don’t think the new Obama administration is going to let this happen.

Until next time,

Kip Herriage, Editor, VRA

www.vraletter.com

www.kipherriage.com