Financial genius that you are, you sold the tech boom at the top in 2000, presciently moved the proceeds into real estate, and then rode the speeding freight train to a brilliantly timed exit in 2007.  Never one to waste time gloating about your successes, you leaped fearlessly into commodities, doubling your money in energy stocks and crude oil before selling everything at the top last July.  Good thing your timing was perfect, too, since that bull market turned overnight into the most precipitous and destructive bust since the tech-stock bubble.  

But your next move, into Treasury paper, was your most impressive yet, since it displayed not mere genius, but something even more rare in today’s investment world: humility. All but certain that U.S. bonds would drastically underperform the investments you’d made up to that point, you plunged 100% into Treasurys anyway, and with urgent haste. For this was no time to be greedy. The financial system looked ripe for collapse, and for the first time in three generations, you reasoned, it was time to put safety before profits. Once again, your timing and acumen proved to be unbeatable -- as well they needed to have been, since the most stunning and profitable rally in the history of Treasury Bonds would be over (we now surmise) just six weeks after it began.

Of course, the track record above is a pure fabrication. For who could have been so smart, so prescient and so implausibly nimble? Even the redoubtable Jimmy Rogers is lucky if he got through it without catastrophic losses, since he was famously invested in commodities up to his eyeballs before they collapsed – not to mention, extremely bearish on the dollar just in time to be impaled by the short-squeeze that drove it into a parabolic spike between July and November.

Safety First

Since the late 1990s, our shrill, steadfast warnings about deflation have never failed to emphasize that it would present toxic challenges even for the wisest and most worldly financiers. That the financial system’s inevitable collapse would activate an investment mine field spanning Europe, Asia, the Middle East and America was not difficult to foresee.  We saw this not as an opportunity for making big bucks in a windfall, but for exercising a degree of caution that has been absent from the financial scene for at least three generations.  Under the circumstances, even financial geniuses were likely to be tasked, as they clearly have been, to hold onto even a fraction of their peak net worth. However, it was not until recently that we began to understand why this would be so. For not only is there no single investment asset that has come through the carnage unscathed, most of the obvious ones appear to be working as safe havens only for the relative blink of an eye.

Treasury paper, for instance.  As we write these words, it could not be more obvious that this safe haven of the moment is headed for a collapse. How could it be otherwise, considering that Treasury debt is to be redeemed in “money” that itself is just more debt? We’ll let our colleague William Buckler, editor of The Privateer, explain: “The U.S. Federal Reserve Note [i.e., the paper money we carry in our wallets] as issued into external circulation is on the balance sheet of the Fed as a liability – a debt. Anybody who accepts it has de facto given credit to the issuer of the note – has made a loan to the Fed.  Americans, of course, have no choice, because they must accept the Fed Note [as legal tender]….Now the Fed is proposing to issue its own bonds and notes which will pay a rate of interest. The interest will be paid in Fed Notes, non-interest paying debt paper which the Fed [has said it will create in unlimited quantities, if necessary, to fight deflation].  To repay a debt with another debt is fraud, That is what the Fed is proposing to do.”

It Will Be Too Late

Just so.  And that begs the question, for the canny investor, of where to leap next. Keep in mind that by the time the dim bulbs at CNBC and at the New York Times come to understand that Treasury paper has become an outright swindle, it will be too late to act. Yet one more investment bubble will have collapsed, causing even more trillions of dollars in illusory wealth to vanish forever from the economy.

So where to secure one’s nest egg?  Let us note, first of all, that the best answer we can imagine is not the one suggested by a very astute friend of ours with whom we lunched last Friday.  Our friend has long been a bear’s bear, and this has made him one of the most successful stockbrokers in the business. His clients have profited hugely in recent months because he had them heavily weighted in Treasury Bonds and Notes. No longer, though. He recently cashed out of these supposedly ultra safe securities -- a decision with which we agree completely -- and has been very hastily reallocating the proceeds in municipal bonds.

Muni Bond Risk

His reasoning is that such bonds are a good value at the moment, having been hammered excessively by investors fleeing into Treasury paper.  Crucial to his strategy is the notion that the U.S. Government will ultimately stand behind municipal bonds if the cities that issued them go bankrupt.  While we would not dispute that possibility, we don’t see it as a plus for investors, for one reason: If the Federal Government were to have to redeem the debt of cities and towns across America, it could only do so with hyperinflated dollars that by then would be worthless to the bondholders.

Which brings us to the one asset that we think is most likely to see investors through these extraordinarily difficult times: gold. Not that gold bugs have escaped the deflationary noose so far. Far from it. Mining stocks have been getting killed, and bullion quotes have oscillated violently in a $300 range. By now, most gold bugs must be wondering why, with the central banks of the world virtually flooding the financial system with bogus currency, gold has not soared far above the record, $1,050 high recorded last March, before the global monetary blowout truly began.

The reasons for bullion’s so-far failure to discount the coming repudiation of fiat money are not complicated, although they would not have been intuitively obvious even as recently as six months ago. For one, there was the short-squeeze on dollar debt. Although we raised the prospect of this years ago based on our trading-floor experience, it was considered a loony-bin scenario until very recently, when it became apparent to a vocal few that the dollar could not possibly be rising so steeply because of mere flight-to-safety concerns. For gold bugs, the short squeeze rally evinced by a fundamentally worthless dollar turned logic on its head. The hard money crowd had been rightly preparing for the dollar’s collapse since the early 1970s, when Nixon closed the gold window, and here was the buck, inexplicably rising as though paper were indeed more valuable than bullion.      

Another key reason gold has not soared is that deflation has yet to run its course. Tens of trillions of dollars worth of capital have been vanishing from the system, and until the deleveraging subsides, increasingly scarce dollars will be used to pay down debt, not to parlay into precious metals.

Inflation Coming, But Not in Time

We expect that to change, but not in time to rescue debtors with a flood of cheapened money. We have told you for years to tune out the inflationists because they do not know their butt from a hole in the ground. That is still true. The inflation/stagflation they have been blathering about, and which materialized only fleetingly in the form of a speculative blowoff in commodities, was just a head-fake, a seduction whose purpose was to screw any investor who thought he could outsmart the first deflation ever to occur in the midst, paradoxically, of a global credit explosion.

It goes without saying that you should also tune out the self-aggrandizing charlatans who are saying the housing market and the economy will bottom “sometime next year.”  These are the same unmitigated bozos who were insisting just six months ago that the economy would avoid a recession. Deflation will run its course no matter what the puny central banks attempt to throw at it next. It will take years to play out, and the price declines we have seen so far in the housing market are not even halfway to their bottom. As for gold, we will reiterate something we said here earlier: Even if it should fall to $200 an ounce, it is all but guaranteed to be do better, much as it has been, compared to nearly every other investment asset you could conceivably have chosen.

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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. Trading in futures and options contract can be extremely risky, and it is possible to lose your shirt before you even realize what has hit you. For that reason, you should consult with your broker as to your suitability to such trading before you attempt it.  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 Monday, 22 December 2008 | Digg This Article