As we enter truly perilous times, it’s important to have the right thought process. One of the reasons I hesitate to give trading recommendations is because it doesn’t prepare you for the future. It doesn’t help you think on your feet. The only people who will prosper in the years ahead will be those who can make connections that aren’t obvious.

Learning is not about memorizing a whole bunch of facts and then regurgitating them back. Nothing will be internalized this way and true learning works a little differently. At first your knowledge of a subject is scattered as you immerse yourself in the basics. Connections aren’t obvious and things just don’t make sense. But then suddenly insights start coming and you build from that. And we’re lucky because the human brain is amazing: the bigger your foundation of knowledge, the easier it is to remember additional pieces of information. Basically knowledge accumulation works dynamically just like nearly everything else in the world.

When you see stocks rise along with unemployment, you must add that to your store of knowledge. You cannot write it off as a freak event. Then you need to make the connection that stocks are rising because of global capital flows that are prompted from currency risk. Understanding the movements in markets isn’t about studying forward P/E estimates or plugging in discount rates on an excel spreadsheet. This is the simpleton approach to investing that doesn’t give you a grasp of the worldwide economy.

The way I think is in patterns. I try to make connections. So for example, I can’t tell you off the top of my head what bond rates were in the early 1980′s. But I can tell you that U.S. government bonds have been in a bull market for over 30 years and that there is a very high likelihood that bonds will be in a bear market the next 20-30 years. I also can’t name every single revolution that has occurred in the world, but I do know that they tend to cluster together: 1989 saw the collapse of communism and 2011 brought riots and revolutions worldwide. This is the pattern of history and you just can’t grasp these concepts with a linear mode of thought.

They say statistics are misleading, but I believe this is because we have a flawed conception of statistics. Frequentists believe you need a very large sample size of data before you can come to a conclusion. If there are no prior examples of something happening, it is assigned a probability of exactly 0. This is positively stupid. The Bayesians have it right because they understand that just because something didn’t happen before, it doesn’t mean it can’t happen. And although our current situation may not have an exact precedent in history, there are similar enough precedents in history to draw from that allow us to come up with probabilities for “black swan”-type events. And if you are wondering, yes I am talking about the collapse in U.S. bonds and the introduction of a new monetary system.

Volatility will rise because we are talking about the actions of fickle human beings. Even people in Germany are taking their money out of the banking system and buying real estate. The banking system in the Western world will be in crisis and this will precipitate a magnificent rally in tangible assets. The only way you can understand the coming market volatility is by making connections that aren’t mainstream yet. When the dollar rallies, people will be utterly confused because it will come at a time when the U.S. economy is in the gutter. But European and Asian capital will be looking for a temporary safe haven, and the U.S. dollar will ironically provide that.

I am fairly certain that volatility is going to go through the roof later this year. I will be talking about it a bit more in my newsletter, which you can sign up for on the right sidebar if interested. Nonetheless, it is time to hedge because there are going to be massive moves in markets.

There is no doubt in my mind that this is the calm before the storm. Volatility has absolutely collapsed and the economy is showing some signs of life, leading pundits to believe that stocks are on an unstoppable push higher. There is a reason capital always gets wiped out in a debt crisis, and when extreme volatility finally does arrive, you will understand why.

Even though stocks are overdue for a correction, I won’t ever suggest going short because it’s a very asymmetric trade: your downside is unlimited and your upside is capped. These are not the kind of trades I like. If anything, go long volatility via puts and think of it as a hedge against your gold positions. This is a relatively conservative way to make a bet against an overvalued market.

Right now the market is being overstretched relative to its 200-day moving average. If you look at similar periods of over-extension, you will notice that the market soon experience a substantial correction.

If I had to hazard a guess, I would say that the market will move above 1400 before coming back down to earth. We may very well see a day soon when the market spikes higher, which in essence reflects short-sellers capitulating. This is when more aggressive traders should seriously look into buying long-dated puts.

The dollar is most likely going to rally sharply before it collapses, and this is going to be brutal for stocks. Long-term it is correct to be bullish on U.S. stocks; however, in the short-term it is a dangerous game to play.

It was said that Nero played the lyre while Rome burned. Well our leaders are doing the same thing; we should have emergency meetings every single day about the debt crisis, but we’re not. It’s the same old BS, and you can be sure that no change will occur unless it is forced upon us.

Does anyone out there really believe Obama, if reelected, is going to do a 180 and start being fiscally responsible? Does anyone actually believe that Romney is going to cut spending?  Like it or not, Ron Paul is our best shot at getting out of this crisis alive. If you don’t support him because you “heard” he was a racist, or you “think” eliminating the income tax wouldn’t work, or you “think” his support of gold is a little loony because Warren Buffett said so, then quite honestly, you’re a moron.

This is just one of those things you either believe or don’t believe. News that our debt-to-GDP ratio rose from 94% to 100% isn’t going to convince nonbelievers that a massive crisis is coming. No alarm bells will be rung when short-term rates rise to historically “normal” levels, even though this will bring annual interest payments on our debt closer to $1 trillion.  Most people will look for something like a stock market collapse to augur that a crisis is coming, but this is truly foolish.

The stock market collapse is behind us; in all likelihood Helicopter Ben will make sure equity markets are elevated. I am still waiting for the 90% decline in stocks that “has to” occur because that’s what happened during the Great Depression. But anyway, the bond market collapse is inevitable; there will come a day when there is no bid on our debt. This is going to send a lot of assets flying, including stocks.

In bull markets, the only question is: “what stocks should I buy”? However, this is a dangerous game, as people found out in 2008 when pretty much every stock fell. When the recession came, all the experts said you should get out of financials and into consumer staples. My whole thinking was, “why”? Yea you may have avoided the worst of the crash, but are you really going to pound your chest over losing less money than the next guy? I thought investing was about making money?

The somewhat more sophisticated investors split their options between stocks and bonds. This is an OK approach, but not the best approach for the years ahead. What you need to do is diversify, not within an asset class, but across asset classes.

Here’s a basic example of what I’m talking about, taken from the Financial Times wealth index for October. Behind the scenes, there is a major bull market developing in tangible assets. Does this mean that people are suddenly a lot richer than they were 3 years ago? No. It means the wealthy see what’s coming, and they are hedging accordingly. Top-shelf artwork serves more or less the same purpose as gold with less risk of confiscation. It is a very wise move as far as I’m concerned.

Diversify as much as humanly possible in preparation for the fireworks that are coming. It is not a matter of if, but when.

There seems to be some problem with the email list, so I’ll post today’s update here. Sorry, I’ll try to get the problem resolved.

Today gold finally broke out of its range and breached $1700, which I’ve noted is a critical level. The rally came on the heels of the announcement that the Fed will continue its accommodating monetary policy until at least 2015. Of course this was obvious to all of us, but sometimes the market needs reminders of the situation we’re in.

I would like to see a weekly and monthly close above $1700 before I am confident that the lows are in. If this occurs, we are setting up for a rally into the summer that will probably give us new highs.

Amidst all the media coverage that is undoubtedly coming gold’s way soon, silver will actually be the metal to watch. Since hitting a low of $26 a month ago, silver has rallied over 25%. Keep in mind that silver has yet to make new all-time highs. I believe silver can easily trade at $150-$200 in the years ahead as smaller investors rush to the metal to protect themselves from inflation.

I can’t express enough how the most critical times in recent world history are approaching. For those of us who have seen the writing on the wall, these will be exciting times. Everyone else will be shocked. Things like $3000 gold seemed ludicrous years ago; a couple of years from now it will be fact.

The people who were so vocal in claiming that the gold bubble popped in the last correction have already been silenced. Gold is in a powerful consolidation pattern that will bring with it a rally that will surprise everyone. I’ve said many times that the bearishness I saw in gold at $1530 was just about the worst I’ve ever seen, which is saying a lot. If gold can hold $1700, look for a dramatic rally that will catch most people off guard.

I remember when I started to get really bearish on the economy in 2007 that it was something I felt in my gut. Sure the data suggested something was wrong, but you could always use the powers of rationalization to ignore it. Well, this is the same sort of feeling I’m getting now; we are headed straight towards the worst crisis of the past century, including the Great Depression, and it is far too late to do anything about it.

The big money in the years ahead will be made in Asia, no doubt about it. The advice for years was “head West young man.” Well now it’s the opposite; if you’re young and talented, you better get the hell out of the U.S. Our government is passing laws in plain sight that are NO DIFFERENT from those passed by oppressive regimes. This isn’t theory, it is fact. If you make money in the U.S., expect to be harassed by a government desperate for revenue.

There is this sense that our institutions are fundamentally different. There’s the “American spirit” or the “American concept of freedom.” Well the same things were said of the Greeks and the Romans. In a matter of years, not generations, Rome went from the glory years to outright dictatorship where all private property rights were destroyed. In fact, in many ways Romans were freer than us. It was documented in the New Testament that the Apostle Paul’s Roman citizenship conferred to him considerable respect. But if you’re a citizen of the United States? Congratulations, you can now be detained indefinitely without trial because Obama said so! Congratulations, any income you earn is the government’s- even if it’s earned fishing in Iceland. Congratulations, you can be monitored if you are suspected of being a terrorist, which apparently a large swath of the American population is.

Freedom?

The smart money (aka the big money) is taking their capital out of the U.S., and this partially explains why the economy is not expanding even with low interest rates. Why would people borrow money and take on risk when the government is so aggressive with their taxation? Why would people expand their business when a massive debt crisis so obviously looms in our future? Why would people take risks when people like Jon Corzine get away with such heinous crimes? Without the rule of law, you have no risk-taking, and hence no economy.

Today the 10-year bond auctioned at below 2% for the first time in history, and I am convinced this is the bubble move that historically always leads to crashes. Everyone is shortening their maturities on our debt, which means when there is no bid, we will have to roll over an obscene amount of debt at higher and higher rates. This is a recipe for disaster for the government in the same way it was for banks. Liquidity crisis, debt crisis, insolvency crisis- whatever you want to call it, that’s where we’re headed.

I personally am redoubling my efforts to prepare for the crisis that is fast approaching. 2012 will be nuts, I am quite sure about that. Volatility will rise and we should see some serious inflation start to percolate. I will go over alternative methods of protecting yourself in my newsletter.