Right in front of our eyes we are witnessing the most serious threat to our financial system in 70 years, and anyone that tells you that it’s almost over is either guessing or just hoping. I’ll go so far as to say that I believe CNBC will face a huge class action lawsuit in the coming days and weeks, and that they stand a very good chance of losing this landmark case. So, what’s the case? For those that watch the network you likely already know where I’m going with this. For those that don’t watch CNBC….don’t use this as an excuse to begin doing so now. So here’s the deal: Every day during this 40% decline CNBC has had their cheerleaders on TV pumping the markets up. Seemingly every single guest they bring on says something like “there are incredible values in the stock market”, or “those that are buying now will wind up with huge bargains”. I believe they are very, very wrong, and that they contributing to the massive losses that investors are chalking up. Sure, every now and then they will bring a guest on to talk about the potential for even deeper stock market losses, but they are outnumbered by at least 5 to 1.
So, where are we right now?
The good news is that this is not the 1930’s all over again. It is very unlikely that our banking system will collapse, or that there will be a run on the banks. The government has made it very clear that they will do whatever it takes to ensure this never happens, even if it means that we only wind up with just a few major banks. Unfortunately, this is just about the only good news.
The bad news got worse this past week as global stock markets hit new lots on Friday, with many dropping over 10% in just one day. It looked very much like the US market would follow when we opened up, but a 1000 point loss was averted when the FED injected over $150 billion in the opening hour. Amazingly, US banks borrowed another $450 billion from the government last week alone simply to remain solvent, and the worst has yet to even hit them.
How can it get worse than what we’ve already seen? Here’s how: So far the vast majority of the losses that banks have suffered have come from the US housing market, and of course the derivatives tied to same. So far both corporate debt and commercial real estate debt have managed to remain somewhat steady.
This is about to change….
This is simply not going to be just an average recession, and in fact we have only just begun to see the effects of it. Once the recession begins to catch up with corporate America, we will start to see the cracks in those loans as well as in commercial real estate. There is simply no way to avoid this. Unfortunately, the talking heads on CNBC choose not to discuss this possibility much, but once it becomes reality it will be interesting to see how they sugar coat it.
Going forward, as things begin to get really tough on not only the banking industry, but on the real economy as well, the FED will “really” begin to get aggressive with their printing presses, which is when we will see the US dollar resume its bear market. Recently there has been a “flight to safety” in the markets, which explains why the US $ and US Treasury bonds have been going up by leaps and bounds. This also explains why gold dropped to just under $700/ounce on Friday (as of this writing gold has spiked back up to $735/ounce).
We are witnessing a global deleveraging of never before seen proportion, which can only end one way. Eventually every fiat currency will begin to go down in value as each country does the only thing they know how to do….print more money!
Case in point: Michael Maloney is the hand picked hard money expert of Robert Kiyosaki and the author of “Guide to Investing in Gold and Silver” (he will also be presenting at the upcoming WMI m2 Wealth Conference in Marco Island, Florida, Nov. 21-24). In his excellent book, Maloney provides an excellent review of past currency crisis dating back to the 1500’s. One such case study is the German currency crisis of the 1920’s. Following World War I, Germany was deep in debt and owed war reparations that they could not pay. Once they had used all of their gold to pay France’s reparations, they had no other option but to begin printing money as fast as they could to make additional payments.
According to the front page of the New York Times, February 9, 1923, “Germany had 33 printing presses that were belching out 45 billion marks every day! By November it was 500 quadrillion a day (yes, that’s a real number).” The end result was a complete collapse of their currency, and an all time historic move in the price of gold and silver. The price of gold rose from 100 marks to 87 trillion marks/ounce, an 87 trillion percent increase in price!
Folks, this is why everyone that I trust is saying that the safest place to be right now is in cash and gold and silver. At some point the fear will shift from deflation to the coming monetary inflation, which will send gold well past $1000….then $2000….and likely even higher. Many of these trusted experts believe that silver will fair even better, and I am seeing forecasts of $50 to $100/ounce.
Regardless, this is no time to be a hero or to try and catch a falling knife. There will be a time in the not too distant future where we will be buying common stocks again, and I will have that buy list ready for you when the time comes. For now, continue to make smart decisions for yourself, for your family, and for your business. Very unfortunately, the worst is yet to come.
Kip
Tuesday, October 28, 2008 at 8:40PM by