well for starters I was not referring to gold physically, but as a commodity and an investment vehicle. Now, I agree that the recent drop in gold price is a result of volatility in the market place, but you could also argue that gold was overvalued and long overdue for a market correction.

Now, I have to respectfully disagree with your assessment that the outlook on the US economy is anything but improving and growing, (marginally). The main drivers of the recession have largely been rectified; consumer debt, overvalued real estate prices and a glut of supply, and lack of financial oversight/over-leveraging. In my opinion the state of the real estate market has been the main driver of the recent recession and slow rate of recovery. Foreclosed properties are no longer drowning market prices and permits for new construction are constantly hitting year-over-year highs.

There will always be a new crises on the new horizon, but the US is much better situated to handle it. Unfortunately these same corrections lend themselves to a very long and tepid recovery, rather than a rapid turn around. Admittedly, China has its own unique challenges and the euro zone is a threat to the global economy.

I would love to hear more specifically what your points of contention are.

Respectfully,
Kendrick

 

Hi Kendrick,

I'm not sure if this is the best place in which to engage in a detailed discussion of the economy, but briefly, my points of contention are as follows:

I don't know what your sources of information are, but from everything that I have seen in recent months, from John Williams' indispensable Shadow Stats (which expose the outright lies of the Government-spun statistics), to personal observations of the rise in poverty, and continued, rapid hollowing out of the middle-class, it is inconceivable to me that the American economy is recovering in any meaningful sense.

Furthermore:

• Many municipalities and states are insolvent, as their liabilities far exceed their assets, and prospects for turning things around are near non-existent (consider that Philadelphia, the nation's fifth largest city, is effectively bankrupt!).

• The Federal Government is insolvent, and has amassed debts ($16t and counting) than can never be repaid.

• The Fed continues to (absurdly ) attempt to resolve the greatest debt crisis in history by creating unimaginable amounts of greater debt (currently to the tune of $85b/month, with no end in sight).

• Since the '08 crisis, the U.S. Government has been funneling enormous amounts of newly printed money to the very TBTF banks that were primarily responsible for the crisis. This has been done ostensibly in an effort to repair their damaged balanced sheets, but practically, it has allowed them to continue to grow and gamble on their own accounts, continuing the same awful dynamic (i.e. lack of accountability; unchecked moral hazard; profits privatized, while losses socialized via implicit Government backstops) that got us into the mess in the first place.

• Hundreds of trillions of dollars in toxic derivatives still remain on the balance sheets of major banks, and now the Fed as well. They could easily trigger a major financial collapse, and in any case, outrageously remain unregulated, and (of course) grossly misrepresented in terms of their value on balance sheets.

• Unemployment and inflation are far, far worse than represented by the Government through the mainstream media.

• I don't know where you get the idea that the consumer debt problem has been rectified, but I consider the assertion to by unsupportable. There is an enormous bubble in student loans. There is also a great deal of debt being created in ever more dangerous types of car loans. Most importantly, perhaps, is the Government's remarkable role in expanding debt. Excerpted from Zero Hedge: "For all of 2012, a whopping $130 billion of the $137 billion total [of consumer loans] has been in the form of government handouts. In other words, nearly 1% of 2012 GDP has been funded by Uncle Sam in the form of (dischargeable) loans which everyone else will be responsible for..."

• You say that "there will always be a new crisis on the horizon", which, while true in a broad sense, incorrectly implies that all crises are created equal. The '08 crisis was arguably the worst, or second-worst of the last century, and I see no way around another, even bigger crisis hitting in the next few years.

I could go on, but I'm sure that you (and others) will get the idea.

Regards,

Tony C.

 

tony, there is something else shaping up....... the chinese debt crisis around the corner........kind regards. achim

 

true, but if the chinese choose to reduce their debt by selling their US bonds holdings, the USA is finished. kind regards. achim

 

U.S. corporations and citizens will step in and buy Treasury bonds if the market is collapsing!? Only with (Government) guns to their heads, I'm afraid.

The FED is currently buying a huge percentage of 30yr T Bonds, further underscoring that their extend and pretend policies are certain to end badly.

 

Hi achim,

Thanks for your input. While you know more about China than I, it would come as no surprise to me should their economy develop big problems very soon. That is actually one of the reasons that I am so confident that a major, worldwide crisis is coming, and that it cannot be delayed much longer. The world's economies are so interconnected now, that a crisis in one country (or the Eurozone) can easily trigger a cascade of crises. Of course that is what happened in 2008, but that was merely a warm-up. The crisis that we are headed for will be epic, to use a word that (along with "awesome") has sadly been degraded by today's youth.

 

Tony, say your view is correct. What we should do for our portfolio (not only watch). Should we hold more real asset (gold, property, cash) and reduce financial aset (stock, corporate bond, mutual fund)? Or even take against market betting for long term value (option, short selling)?

 

theoretically if the world was headed to toward a doomsday scenario of consecutive 100 year recessions (in the span of 10?)... you would want to invest in gold while it is currently "depressed". Real estate can be very short on liquidity as an investment and another catastrophic recession would serve to destroy the gains it has made over the past year. A small portion of your portfolio should always be in cash, (personally, I keep 10%), not too much more as its a non appreciating asset.

Currencies, corporate bonds and mutual funds would all depreciate in such an event, as they would reflect market conditions. You could try shorting and options, if you knew more specifically where the crisis would originate from, (pull a Phil Falcone). I would highly recommend you DO NOT go this route, as you have no idea what kind of timeline your working with. Even if you are right, what happens if the market takes too long to correct and you get a call to cover? you could easily lose everything.

That said, as a Financial professional I view such a doomsday scenario as highly unlikely. The one piece of real advise I will give you, is never give your friends investment advice, because you never want to be responsible for their potential monetary loses, or in my case - insider trading.

 

I am of the strong opinion that gold should be a primary holding, though I would emphasize that it will likely prove to be a store of value, and extremely valuable insurance, as opposed to an "investment". I know that I am splitting hairs semantically, but when speaking of "investments", there is a tendency to think of the asset more in trading terms, and timing the market can always be tricky. Two associated points: gold is a screaming "buy" at the moment, as its paper price has been artificially suppressed. That's not to say that it couldn't go down a bit more prior to continuing its inexorable move higher, but this is, in my view, a very attractive entry point. Secondly, do not, under any circumstances, acquire "paper" gold. Do not buy funds, or any stocks that are essentially IOUs. Such an approach is extremely unsafe, and I expect that many investors will be hurt badly when they discover that their holdings turn out not, in fact, to be redeemable for bullion. Buy gold bullion, and store it safely outside of the banking system.

Beyond gold, as Kendrick suggests above, other real assets should be emphasized. Good, productive real estate, either income producing and/or farmland are both good options. I would stay out of the stock market completely until there is a major correction. At that point, thoughtful investments will probably make good sense. Cash on the sidelines is a good idea, however, do not hold much in any major U.S. bank. Also, consider what currency to hold. The dollar, while still widely considered to be something of a safe haven, is rapidly losing both its value, and its status as a reserve currency.

Unlike Kendrick, I am not an investment professional. However, I have been following the economy very closely since the tech bubble, as well as a small handful of professionals who have been remarkably prescient over the past decade and a half. I certainly do encourage you, and anyone else reading this, to seek advise and guidance from many sources. Having said that, the very best case scenario that I can envision is that those who run the economies of the U.S., Japan, Europe will somehow be able to continue the painful deleveraging in a semi-controlled manner for a few more years. It is far more likely, in my view, that they will lose control of the process, and a major crisis will unfold. The recent smackdown of the paper gold price is a sign that they are losing control already.

One final note for the moment. While I don't doubt that Kendrick is a genuine person and competent professional, bear in mind that investment advisors have great incentive to be so-called perma-bulls. How many real estate agents advised clients against buying property in 2006? They were either blind to the (obvious) bubble, or didn't care. Investing in stocks or bonds at the moment is, to quote one of the very best investment advisors in the business, Kyle Bass, like "picking up nickels in front of a steamroller".

 

For the record, I'm more M&A than weath management. I don't have have a dog in the flight, outside of my personal portfolio. I will point out that unlike a real estate agent, a talented analyst can profit on both bear and bull market conditions.

to be honest, the average person is much better off, (and will see a better return on their money), paying down/off their debts and loans than taking risks in the stock market.

 

I disagree with that statement. First China would be shooting itself in the foot and secondly China is not the end all be all of US debt. China holds approximatly $1.169 trillion in US debt right behind it is a plethora of individuals, GSEs, brokers and dealers, bank personal trusts, estates, savings bonds, corporate and non-corporate businesses which hold $1.102 trillion. Behind these folks are pension funds, Japan, mutual funds.

Thanks,
Nick

 

When China reduce their US debt significantly there would be financial market catastrophe. Yes there are other buyers and investor, but the signaling itself will send the price down and make it more expensive for US to raise new debt. A new bearish spiral down will be triggered.
As for China it will reduce the worth of their remaining US debt reserve and will negatively affect the domestic financial market (Yuan bond market and stock market) as their trust on China government strength will diminish.
Unless there is significant political tension event occur between US-China, The China government will be wise enough to maintain their US debt and continue to sell China manufacturing products to US.

 

Additionally, China and the US are moving towards a G2 empirically. This will be the hand that guides the G20 in the future with regard to trade, currency misalignments and the like.

 

Scary but highly probable thought.

 

I thought this was pulled from a watch thread so it could be discussed separately?