Please note: the case for why I believe the following is laid out thoroughly here, here, and then here.
Well, I think the financial crisis is about ready to really get started.
So far, every government response to the crisis has been to make it worse, along with taking on debt. Taking on debt during extreme deflation is a slow way to commit suicide.
The US Government will probably need to sell around 3 Trillion dollars of treasuries this fiscal year, because of all the debt the government has taken on trying to fix this.
That’s far more than has ever been attempted before, and they’re going to be trying to do it in a panicky environment where people don’t have cash to spare to buy treasuries.
When everyone figures out the numbers, all hell will break loose.
Europe is in a worse place than the USA. The chances are that the moment of truth will start in Europe, and drag down the USA with it.
If you are in stocks, get out NOW.
If you are thinking of buying something big or expensive, DON’T.
Don’t listen to anyone who claims that we have found the bottom for at least another year. In a year, I’ll probably say the same thing.
I don’t see any place to hide. Deflation kills everything but cash. Every government in the world is frantically doing its best to destroy cash, too, and their actions force other governments to join them in a race to the bottom or perish first.
The only way to fix this would be to force massive defaulting of debt. There is no way politicians are going to walk out onto the stage and announce procedures that will overnight kill 20% of companies out there and force millions into foreclosure, and guarantee 30% unemployment. The alternative is worse for all of us, but there is no upside for a politician for being known as the person who forced a hard crash to forestall a bigger crash that he claims was around the corner, and that he can’t prove will happen.
Wow. This is happening a lot quicker than I thought it would.
{ 8 comments… read them below or add one }
Adeel Ahmad 10.22.08 at 1:09 pm
I’m only in cash and gold… what do you think about gold? A deflationary crash will take down gold with it if I understand correctly.
ian 10.23.08 at 10:42 am
Thanks Ray. I wasn’t scared enough before.
Ray 10.23.08 at 11:01 am
Hi Adeel,
I think a deflationary crash is bad for gold. But, there will be inflation later, and buying gold when we switch from one to the other could make a lot of sense. That will be quite a way in the future I think.
There is money to be made if you are willing to day trade gold on a 24 hour exchange. That means something like /YG or Bullionvault. It’s usually fairly easy to guess which way gold will jump as various shocks hit the news.
If there is bad economic news, then gold will tend to jump up a bit. If there was a bad day on the market, expect gold to lose value about three days after that as people have to make margin calls. If there is a long run of bad news and bad days, the margin calls win.
Usually, really bad news comes over the weekend, which means that you can get in and take advantage of the market catching up on Monday, provided you can trade 24 hours a day.
I own fine gold in a vault in Switzerland. Not much, just a hedge in case I need to leave the country because of visa issues, and there is concurrent economic turmoil.
smart 10.23.08 at 1:35 pm
Now’s the time to buy. Companies are cheap and confidence will be restored after the election.
Ron 10.23.08 at 1:45 pm
Ray,
I’m intrigued by your statement - “I own fine gold in a vault in Switzerland.”
I’ve always wanted to invest in something like that but I never knew how - could you shed some light?
Uncle B 10.23.08 at 2:08 pm
The Great Depression is upon us! The American dollar will fall to a point where using it directly for personal sanitation will be cheaper than purchasing paper products meant for that use, pound for pound! Gold, no matter how fascinating is not nutritious! it cannot sustain life and therefore will fall away as a useless possession, along with diamonds, precious stones, paintings, jewelry and high - end real estate. A small garden plot with water nearby and a packet of seeds will be worth more than we can imagine right now. A good shovel, some basic survival know-how and GMO’ed to be bug proof seeds will be worth much more thatn gold when you are hungry! A “zero running cost, Zero upkeep” survival shelter with solar and wind power will keep your butt warm, and a good garden and some old fashioned pressure cooker preserves and dried foods will be necessary to get through what is coming! Put away at least six months of canned foods while you can get them! OPEC is tightening the noose on us, the people they consider heathen and even sinful! They will show no mercy! They HATE our way of life, us our children, our riches and most of all, our money! They have the power to destroy us and their religion asks it of them! We borrow from China to pay them for oil right now! Expect no quarter from them. We cannot pay our own bills, and our government has elected to bail the banks to the tune of $700 Billion dollars! Get a friend( or a local high school teacher) who is good at math, and that you trust very much, to show you how much that is , each, for every American citizen alive today! I can’t do it for you, it gives me the heaves and high blood pressure just to go this far with it! When you get an answer from someone you trust, sit quietly and realize that the people who did this to you are out of touch, with your reality, and their own! McCain, Bush and their goons are Uber-rich lunatics in control of the asylum! believe me!
Ray 10.23.08 at 9:31 pm
smart,
I find most arguments about where things are going boil down to timing. If the dollar doubles in value over the next two years and stocks are 20% cheaper than they should be now, what happens to the value of any stocks you buy now?
Assuming a deflationary crash, how well do you think those companies you buy will do?
Now, I still have a fair bit of hope that the USA can avoid a default. I am extremely unsure that it can stop deflation from occurring. In that scenario your stock buy is a fool’s errand.
If the US defaults, along with a bunch of other countries, what will that do to your stock holding? They might be worth a lot, in a currency that no longer has much value, after losing value as the dollar increases in value due to deflation. Not much of a prize in my opinion.
If you do want to buy stocks, then I suggest you aim to make LOTS of money, and calling this a bottom and buying here is in my opinion not the way to do that.
Ray 10.23.08 at 9:37 pm
Ron,
It’s far less fancy than it sounds.
I bought the gold on BullionVault.com. They hold it as a bailment (like, say, grain in a warehouse), so it belongs to you even if they do under somehow.
I honestly think that buying gold right now is a way to lose money, but it can make sense depending on your needs. I hold some purely as a store of value outside the country, because I am in the US on a work visa, and being in the US on a work visa during a recession doesn’t strike me as a safe situation to be in.