Presentation #4

We live in a time of great global uncertainty and I’m 100% sure it’s downhill from here. I admit sometimes I just want to pick up everything and leave America because so many people, especially of my generation, just don’t get it, so nothing will change until it’s too late. We are giving away our freedoms without a fight and expect no repercussions. In the internet age we have unprecedented access to the wisdom of previous generations, but we choose to ignore it. Some may call this ignorance or apathy- I call it stupidity.

Without a doubt the crisis of 2008 was the opening act in this ongoing drama. We are getting bits and pieces of evidence that suggests the worst is yet to come, but very few are preparing accordingly. For now the buffoons who say the end has arrived for gold have taken center stage.

Learning From Experience

The best people to learn from are those who experienced a major crisis themselves. Unfortunately, there are not that many people alive from the Depression era . Our policy and overall national mood is being shaped by Boomers who have only known prosperity.Yes Boomers have accumulated wisdom over the years, but not the right type of wisdom for what lies ahead. In a sense Boomers are too optimistic. They could view the world linearly and get away with it because indeed the U.S. in their lifetime became wealthier in a steady fashion. We did conquer our enemies and “defeat” communism. So trust me, I understand why Boomers think this way, but without a doubt this general line of thinking is dead wrong.

History is a great teacher for those with an open mind. I think you’d be very hard-pressed to find someone who has thoroughly studied history and not come away with the sense that we are headed for disaster. Perhaps the only exception is Helicopter Ben Bernanke, but he is a special kind of naive. We are approaching a cycle of war and general strife that occurs in a big way every 100 years or so. We can choose to learn from the past and respect the power of cycles, or we can choose to think everything will be OK because our idiot leaders say so.

The ancients understood cycles much better than we do, and they tended to break cycles down to periods of 100 years (human lifespan), and 20 years (generations). Instead of thinking linearly, they understood that different generations had opposing views, and that this clash in ideology laid the foundations for shifts to the opposite extreme. Before major reform always comes a crisis. So this crisis is ironically the best thing that can happen to us in the long run.

The markets work more or less the same way: before a collapse there tends to be a spike rally, and vice versa. 10-year Treasuries are hitting new highs and this just implies the collapse in bonds is going to be insane. Today we saw gold and Treasuries rise in tandem, which has become a rare occurrence. Treasuries are in a no-man’s land where it’s not prudent to be long or short. The crisis in Europe needs to mature a bit before people take a good, hard look at the U.S. I’d  prefer to take my chances with gold because it is a safe-haven that is NOT hitting new highs.

Things are about to get very wild. But keep an open mind because the best trades will be ones that aren’t popular now.

Even the casual observer in economic matters knows that something is wrong. There is a grave misconception that the average person is surprised when a crisis hits. I think it’s more accurate to say that people are surprised by the magnitude of a crisis. Most people who bought real estate in the bubble years knew they were buying high, they just wanted to sell to a greater fool. The same goes for the internet bubble. No matter what we believe, humans do not act rationally in markets, because if they did, we would hardly see any volatility.

In a free-floating system without any anchors like gold, imbalances persist much longer than they should. The U.S. basically had a free ride and current account deficits actually spurred the economy. Foreign countries essentially recycled their dollars into dollar-denominated assets, which crudely lowered the cost of capital for Americans, which then allowed them to consume more than they should have. This entire system is based on the assumption that foreigners have an unlimited appetite for American assets. There is a school of thought that believes that as long as there are export-driven emerging economies willing to support our current account deficits, these imbalances can last. I tend to disagree, because capital largely resides in developed nations, and they can already move markets.

That being said, capital is already starting to flee Europe. Bank runs are occurring in Greece, and to an extent in Spain, and I see nothing in the horizon that will change these trends. Europe can only react to these capital outflows by a) reducing their consumption, b) devaluing their currency (breakup of the Euro), and c) decreasing their borrowing. All 3 of these things are devastating when your economy is already slowing and you need to stimulate.

The U.S. will be faced with this conundrum soon, but for now capital is finding its way into U.S. Treasuries, which is no surprise. Right now the name of the game is safety, not yield.

In the short run, capital will find its way to the dollar and U.S. Treasuries. I suspect gold is next. As yields go down, so will mortgage rates, so real estate in the U.S. should also get a boost. Real estate prices in the U.S., believe it or not, are cheap on a relative basis.

The crisis in the U.S. will look something like this. Foreign outflows of capital will force us to devalue our currency, because cutting spending is not really an option for our leaders. This will lead to a rise in bond yields and an immediate and substantial rise in our debt servicing costs. This will indicate that the end is near: right when we need to borrow the most, the global market will lose its appetite for our debt. Again, everyone knows we have a debt problem, but people are underestimating its magnitude.

You all have about a 2 year window to diversify out of the dollar. We are coming upon a turning point in history, and it is staring us in the face. Fortunes will be made and lost, and the sophomoric buffoons who run policy in our country will be humbled–again.

Reports are surfacing that Greece is going to exit the Euro imminently. We are now witnessing things that were deemed to be “impossible”, “politically unviable”, or slightly “conspiratorial.” As I said many times before, volatility is going to return the second half of this year. This is only the beginning.

Global markets should be pretty volatile, especially with short interest so high in places like Asia. The threat here is that civil unrest spreads throughout Europe, causing a run on banks (which is already beginning), and a domino effect where more countries leave the Euro. I’ve stated many times that the Euro is a fundamentally flawed currency that was not well-conceived from the start. Now we are seeing the unraveling.

There is the real potential for the dollar and Treasuries to spike here. Unlike most gold bulls, I’ve been consistently warning that the dollar and U.S. Treasuries would receive capital flows first once a Eurozone collapse took place. But it is only a short-term harbor for the storm that is coming straight to our shores within 5 years.

We are quickly approaching one of those times when the men are separated from the boys. Investment opportunities on the long and short side are opening up in a way I haven’t seen in years. I’ll be discussing this further in my newsletter and in future posts.

Las Vegas Property Investing