The economic headlines in the past couple of weeks have sounded like something out of a disaster novel that I once read wrote. The international financial and equities markets are spinning out of control, with seemingly wider and wider gyrations with each passing day. Since there are so many variables, the end result is difficult to firmly predict, but one thing is clear: It will be neither easy nor pleasant. My current prediction is that the governments of the English-speaking nations and Europe will co-conspire with the banksters to concoct the most grandiose Mother of All Bailouts (MOABs) yet. This will be even bigger than the MOAB that I predicted, early in 2008.
The multi-trillion dollar multinational MOAB will inject liquidity–in the form of magically-created Dollars, Pounds, and Euros–in such enormous quantities that it will calm the markets, at least for a while. But the by-product will be consumer price inflation that has never been witnessed in modern times except in the region north of the Limpopo river and south of the Zambezi river. In the long run, the fractional reserve banking and fiat currency regimes used today are doomed to failure. Both are lovely fictions that can only persist in expanding markets and when guided by the most altruistic managers. Any serious contraction of the underlying economy will inevitably bring both to a crashing halt. Perhaps, in the aftermath of te ongoing credit collapse, wiser heads will prevail, and private credit clearing circles will develop, instead of re-creating the same government-sanctioned fractional banking scheme that created the current crisis.
What Happened?
The last few years have been an anomaly. Led by Ben Bernanke and his predecessor “Easy Al” Greenspan, the Masters of the Universe that headed many of the central banks in the First World attempted to forestall a recession by artificially reducing interest rates, thereby creating bubbles in both real estate and equities valuations. All their meddling has made matters worse. They have formed mountains of debt that is classic malinvestment of the worst sort. This debt creation was like winding up an enormous clock spring. Debts were taken on by unworthy borrowers that never had a hope of repaying them, and then those same dodgy debts were re-packaged and re-sold to unwitting dupes–like pension funds in Denmark. This explains the umpteen foreclosed and abandoned tract homes that stretch from around the DC Beltway to the heartland of Ohio, to southern California. Inevitably all debt–whether good or bad–must be un-wound. And the more malinvestment there is, the uglier and protracted this unwinding process gets. Instead of a recession, we will probably witness the worst economic depression since the 1930s.
That is the big picture. Now for some predictions on the next 10 years with some possible implications for prepared families. Note: I don’t claim to be a prophet. These are just logical extrapolations of trends, based on previous swings of the macro scale market pendulum. So don’t gather up stones for the event that things don’t play out exactly as I predict:
Simultaneous Deflation, and Inflation
As I’ve previously posited, we are likely to see a wave of asset deflation at the same time that we have consumer price inflation. How is this possible? See the article that I posted back in February for an explanation. The bottom line is that leverage works both ways. The multiplier effect on fractional deposits works in reverse whenever bank deposits decrease.
Derivatives
I’ve been warning SurvivalBlog readers about derivatives, since late 2005. The multi-trillion dollar derivatives “casino” may soon be in crisis. Thursday Is D-Day: For Derivatives, as billions of dollars worth of contracts on defaulted Credit Default Swap (CDS) derivatives from Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual (WaMu) are settled. On Thursday, we’ll find out what a CDS derivative contract is worth in the real world! Something tells me that these once-touted “assets” are going to suffer quite a haircut.
Bank Failures and Bank Runs .
As I’ve said before, more bank failures seem inevitable. There may also be more bank runs–most likely invisible ones, where banks get cleaned out by their creditors via margin calls by large depositors via wire transfers, and by small depositors via electronic banking. There may not be a a line of customers in front of the banks doors. If you wait for that as an indicator, then you will probably be too late. I’ve written this before, but it bears repeating: Be sure to check your bank or S&L’s safety rating at least once a week. If it drops below a “C” rating, then transfer your funds to a safer bank, ASAP. And, needless to say, never keep more than the FDIC limit in any one institution. Thankfully, the FDIC just raised the deposit insurance limits substantially, as did their counterparts in much of Europe.
Hedge Funds
I’ve discussed hedge funds at length in SurvivalBlog articles for more than a year. Suffice it to say, the risk with hedge funds is huge. I expect large quarterly waves of hedge fund redemptions–and redemption suspensions in the next few months.
Real Estate
The real estate market–both residential and commercial–will very likely continue to decline in the US for several years. The market will be flooded with more and more foreclosed properties, in a downward spiral. One downside to consider is that the thousands of abandoned houses will become nests for criminals.
In my estimation, the only thing that will stop te decline in nominal dollar figure declines will be the eventual mass inflation of the US Dollar. Hence, it will appear that real estate prices have “stabilized”, and then “turned around” in a couple of years. By in real terms (adjusted for inflation), the genuine bottom of the market probably won’t be for another five years. By that time, American homeowners will have lost an average of 60% of the “coulda-woulda” value of their homes. I expect he declines to continue as long as the credit drought persist, and until the massive glut of inventory is purchased. For the next few years it will be a buyer’s market, and cash will be king. Anyone sitting on cash will be able to buy up assets at ridiculously low prices–as the economic pendulum swings beyond the point of logical price neutrality. Sit tight, watch the listings closely, and buy at the bottom. You can find distressed properties–including some good rural survival retreat properties–at Foreclosures.com. If you plan to do some “bottom fishing”, a subscription to this service is money well spent.
Unemployment and Dislocation
Large corporate layoffs are a fact of life in any recession. Be ready for them, by minimizing your debts. A family food reserve is insurance for unemployment just as well as it is for natural disasters. If the recession turns into a depression, we can expect some huge layoffs. This will mean lots of families will be moving–either to seek work elsewhere or because they can no longer meet their monthly house payments. This however, might create some opportunities. Storage companies, estate auction firms, relocation services, rental property managers, home security companies, locksmiths, relocation specialists, and contractors that specialize in home renovation might all prosper. (After all, someone has to refurbish all those abandoned houses for the bankers.)
Stocks
It has been said that “a rising tide lifts all ships.” Sadly, the inverse is true, as well. I expect substantial further declines in stock prices. Price-to-Earnings (P/E) ratios might drop to as low as 7-to-1. (Where many manufacturing stocks have traditionally bottomed in major recessions.) In my estimation most of the current P/E ratios are still much too high for these troubled times. When I last checked (after the recent 800+ point two-day drop in the DJIA), I found the following P/Es quoted, in a quick, quasi-random sampling of big names that jumped out at me:
Amazon — 42.56-to-1
Apple Computer — 17.43-to-1
Caterpillar Inc. — 7.78-to-1
Coca-Cola — 19.95-to-1
eBay — 43.31-to-1
Google — 22.73-to-1
Lockheed Martin — 13.06-to-1
Microsoft — 12.44-to-1
QQQ (which is like buying the entire NASDAQ) — 19.79-to-1
Real Networks — 81.73-to-1
Unilever — 14.24-to-1
Xerox — 13.17-to-1
Do the math. It isn’t a pretty prospect, but many stock prices have a lot farther to fall. My advice is to sell on the market rallies, and buy tangibles with the proceeds.
Cars and Trucks
Again, like real estate, you’ll have the opportunity to buy at the bottom of the market, perhaps in five of six years. Have you ever wanted to own a classic car? This may be your chance, especially if it is a gas-guzzling big block classic car. I predict that in 2015 you’ll be able to buy a fully-restored late-1960s Muscle Car for perhaps 1/8th of its current price. (Well, in dollars adjusted for inflation, that is.) But of course to make that a practical tangible investment, you should instead get a classic military vehicle, such as a Dodge Power Wagon. (Or, for our european readers with a retreat in North Karelia, make that a Unimog DOKA.)
Cash Will Be King, and then Cash Will Be Trash
Once inflation starts to kick in, it will be absolutely essential for you to parlay all of your remaining dollar-denominated investments into durable and liquid tangibles. Do do before the dollar evaporates. If you haven’t done so already, now would be a good time to start.