-- Posted Tuesday, 9 September 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, September 9, 2008
“Phenomenally accurate forecasts”
With this latest bailout, perhaps die-hard inflationists will begin to notice that higher grocery and fuel bills are small potatoes compared to the epic deflationary bust laying waste to the financial system. Americans may be throwing away $700 billion a year on foreign oil, but the economic impact of this waste pales in comparison to the de-leveraging of a global financial edifice aggregating into the hundreds of trillions of dollars. At least burning all of that fuel has kept the country moving, economically speaking. We’ll receive no such benefit as deflation continues to lop zeroes from the collective value of our homes (and therefore from Fanniefreddie’s supposedly rescued $5.2 trillion portfolio). Just the opposite, in fact. Trillions will simply vanish from the electronic ledgers, and it will be as though most of our wealth had been sent into oblivion by some malevolent computer virus.
As we have noted here before, deflation will not be dot-com mania in reverse, providing huge opportunities for bearish bettors; rather, it portends a deleveraging of assets that will be all but unexploitable, even by the savviest investors. How many speculators became billionaires by betting the “don’t pass” line on subprimes? As far as we’re aware, only one guy made a big enough score to rate a front-page feature in The Wall Street Journal. Considering how obvious it was, even several years ago, that the housing sector was headed for collapse, one might have expected quite a few more speculators to hit it big. In fact, the one guy made out so well because 99% of investors were on the wrong side of the bet. And they still are. The collapse of the banks has left bears precious little to sell short, at least little that promises the kind of leverage dot-com insiders enjoyed when they bought shares for pennies that they later sold to the public for hundreds or even thousands of times as much.
Crash Yet to Come
So forget about making a big score. Merely staying liquid will be tricky enough. And so will avoiding temptation. Some may recall our prediction that Aspen ski chalets will eventually change hands for back taxes. Ditto, condos on Central Park West. These are aspects of the real estate crash that have yet to surface statistically. But if you’re keeping your powder dry, don’t make the mistake of thinking that something that has fallen 50% in price is a bargain. Before you leap, you might want to ponder the chart above, of dot-com high-flier Yahoo!. Tack it to your wall if you have to, because we are predicting that home prices in places like New York, Chicago and Miami are going to trace out the same trajectory. That’s what happens when really crazy booms go bust.
So how can you protect your net worth? Precious metals have always seemed an obvious answer, given that the world is drowning in a sea of bogus money. But if holding gold and silver is such a no-brainer, why has bullion struggled to gain altitude these last few months, even with the global financial system verging on collapse? However things play out, we have little doubt that precious metals will outperform all other classes of investables in the coming years. But that doesn’t mean we see gold going to $2,000 an ounce, or silver to $100. Supposed instead that both were about to fall in value by 50%. Would you still want to hold them, even if you were confident that other classes of assets would fall even farther? The decision is one that hard-money advocates may be forced to make, since deflation by its very nature is likely to test all investment strategies to the breaking point.
Inflationists All Blather
Meanwhile, the inflationists can keep blathering about how the Fed is going to crank up the printing presses, even though that’s pretty much what the Fed has been attempting to do for more than a year. And with what success? Home prices have not stabilized, let alone appreciated, and even that reliable mine canary, yield spreads, no longer seem spooked by the prospect of inflation. It was the Fed’s intention all along to stop home prices from falling, and Bernanke & Co. were going to do “whatever it takes” to prevent deflation. We never doubted they would try. But what we did doubt – since the 1990s --was that the Fed, even acting in concert with other central banks, was big enough to counter a deflationary juggernaut with this many zeroes: $100,000,000,000,000.
And now we find that the Fed chairman, far from shoveling hundred dollar bills out of helicopters, has instead focused on shoring up the books of would-be lenders. How inflationary is that, with lenders skittish about lending, and mortgage borrowers even more skittish about taking on new debt as their homes sink in value? At this point, it is only by bailing out homeowners directly that the Fed could attempt to hyperinflate debt (and with it, savers) out of existence. To believe that this will occur is to expect a check in the mail from the government for the full amount of your mortgage. If you doubt this will happen, then you are a deflationist.
In the meantime, there is no evidence that Paulson, Bernanke and Bush have even considered this, so busy have they been rescuing their institutional-lender cronies. And to what avail? Can the lenders truly be rescued if 80 million homeowners are underwater on their mortgages within a year? The Fannie/Freddie dog-and-pony show may be enough to squeeze the bozos who bought stocks on Monday, but we seriously doubt that it will buck up beleaguered homeowners for even a day.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 9 September 2008 | Digg This Article | Source: GoldSeek.com
