The Big Collapse

[Mike Kavanagh]

I have a somewhat solid grasp on money and the monetary systems. I've been researching economics about twice as long as I have been studying business. Well ever since the bailout anyways.

Supply of something goes up; Value go down. It's why gold is so valuable. It's why platinum is so valuable. It's why a McDouble isn't.

However I don't understand the concept of rapid devaluation of assets. Assets being investment vehicles like houses(Cash-flow positive) or gains from stocks(businesses). Unless there are other assets I'm missing, I think I've covered the broad spectrum...

I understand that the market determines the price and interest rates. I understand that right now it is heavily manipulated by the federal reserve. No bueno.

 

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[GlobalWealth]

Like houses being worthless, stocks being worthless, etc? Could you elaborate more on this?

Yes, just a deflation of asset values in relation to money. The idea is that fear is so rampant that people don't place any reasonable value on these assets thus causing a massive decrease in asset prices.

 

[GlobalWealth]

The reason why I don't think asset deflation will occur is because something would have to happen that caused a massive amount of dollars to disappear, and Washington pretty much believes that monetary contraction is a crime.

For the most part, you are correct. But there are times in history when the Fed has contracted the money supply, ie the Great Depression of the '30s. Leading up to the market crash of '29 the Fed was contracting money supply by selling their hoard of bonds on the open market. This led to a contraction in the money supply.

Now I am not normally a conspiracy theorist, but I do find it strange that the big money families lost almost zero money during the crash of '29 as they liquidated their stock positions over the previous 2 years. Post crash, those same families were buying stocks.

Ironically the Fed is owned by the world's largest banks which are owned and controlled by those same families.

 

[splok]

Ironically the Fed is owned by the world's largest banks which are owned and controlled by those same families.

Well, conspiracy or not, I think everyone can agree that in any collapse: many are destroyed, some weather the storm, and a few make fortunes. It seems like most of the impending doom talk centers around weather the storm as best as possible. But what are the wealthiest families doing right now to ensure that they don't merely endure but immensely profit from the situation? And can we take similar measures?

I suppose that conceptually, it's as simple as storing assets in forms that have durable value, wait for a collapse, then seizing the opportunity to buy vastly undervalued assets. The problems are knowing what has and doesn't have durable value, waiting on a collapse that may not come, and then knowing when assets are actually undervalued. Of course, being able to engineer those event makes the whole thing a much nicer prospect. Actually, the thought that someone might be able to engineer such things is, in some ways, preferable to the alternative, because even they wouldn't benefit from an utter collapse, only dramatic fluctuations.

 

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[Deleted14762]

I can only imagine the looks on faces of hedgies who short the dollar if it crashes

 

[CommonCents]

Always an interesting discussion. Money printing is one thing as a temp respite to allow economy to catch back up, but this time around, the money is not getting to main street. We have stagflation. Inflation in more of a classic sense happens when banks get confidence and there is demand by business to borrow money, then expanding money supply through fractional reserve banking, coupled with aggressive pro growth fed policy. This is not happening. Try getting a business loan these days. Almost all the new money created is just recycled into treasuries and pumping up the dow jones, giving a nice juice vig to the private big money fed banks on the backs of the taxpayers who are on the hook for the debt. Retirees on fixed income are screwed by minimal interest rates.

If the economy flags under the current terrible policy/regulation at the wrong time we'll get more asset deflation. The fed is pumping $85billion a month, how is that going to be tapered or shut off when the economy is being punished?

Stagflation is a stagnant economy (jobs) combined with inflation on the more hard assets/commodities we need. (food energy healthcare etc...) you know, pretty much all the stuff that is now EXCLUDED from inflation calcs courtesy of your government agencies They haven't yet figured out how to rig the all time high food stamp participation as well as they have w/ the unemployment rates.

Hyperinflation would be if a major loss in confidence in currency and money flocking into hard assets, metals/commodities etc.... In general, much less demand for paper assets and higher demand for hard assets. the stuff we need to live.

Income producing RE worries me a bit, since we have a jobless recovery. The operative word in income producing RE is "income". I'd calc my investment in RE at much lower rental rates in a continuing flagging jobless 'recovery'. I'd hate to own "income" producing property in many areas of detroit at any price in the last several years. Things don't need to be as bad as the worst areas to cause major havoc either. Look what happened during the last credit crunch, pretty much everywhere.

If the govt runs into trouble refinancing debt, and they can't get help from flagging overseas money seeking "safe haven" (its all relative, just do a little better than everyone else), look for a downdraft in the stock market to scare everyone back into bonds. (you know, the safe haven!)

They've even floated the idea that after a downdraft in equities, the govt will offer to refund a little of your losses in your retirement account, in exchange for swapping over to a "govt guaranteed" account! LOL. Watch for it.

 

[GlobalWealth]

And can we take similar measures?

I think we can. Unlike the wealthiest families we may not be able to buy 100m in real estate post collapse, but you can certainly emulate their actions on a smaller scale. Buy investment property and insanely low prices. Buy stocks of good companies when there is fear in the marketplace. Buy/start private businesses that serve a market need when everyone else is fearful.

I just bought an apartment this week in Europe for about eur1500/m2. The going rate here is about eur2500/m2. I plan to live there, but could easily rent it out for a 10% cash on cash return.

The Cyprus stock market is down 96% since its banking crisis a couple of months ago. 96%!!! You can smell the fear. But that doesn't mean there aren't Cypriot companies doing great work and making money. Just the investors are scared.

Portugal's property market is in the gutter. The economy has tanked. There are no buyers. You can buy apartments in Lisbon for half what they sold for just a couple of years ago. Fear.

The HKD (Hong Kong dollar) is fixed to the USD. But inflation is rampant in HK because of this. They will need to lower the fixed currency peg to the USD soon. So if you buy $50k usd in HKD and they revalue it by 10%, you make an immediate $5k usd in currency exchange. And HK cannot raise the currency peg or it will destroy the local economy. They can only go down.

Gold mining stocks like KGC and ABX are trading and ridiculously low valuations because of fear. They are like a leveraged play on gold prices. Gold goes up 10%, gold miners go up 20% (just an example). But when gold goes down 10%, gold miners go down 20%. They are volatile. But if you follow the trends, gold is in an upswing and thus gold miners are too, but they are lagging. Fear (*disclaimer - I am not making any stock recommendations for KGC, ABX or any other miner. do your own homework).

US municipal bonds are trading at discounts to NAV (net asset value) right now. Stockton and Detroit's bankruptcy has scared away the investors. They think municipals are now risky. But my research shows they are not. You can earn 6-7% tax free yield in a safe asset. Again, fear is driving the discounts.

The big boys are doing the same type things I mentioned above, just on a larger scale. That doesn't mean you cannot do it too though.

 

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[GlobalWealth]

They've even floated the idea that after a downdraft in equities, the govt will offer to refund a little of your losses in your retirement account, in exchange for swapping over to a "govt guaranteed" account! LOL. Watch for it.

I have a similar view with IRA/401k funds. Right now there is appr. $15T held in these accounts. The govt runs about a $1-1.5T annual deficit.

Legislation mandating 10% of all IRA/401k's be held in 'safe' US treasuries creates a huge buyer in the marketplace for bonds that didn't previously exist. This would create $1.5T in new treasury purchases, lower interest rates and thus the govt's interest expense and make everyone thing the world has been saved.

Watch for this. It will happen.

We are moving clients' IRA's offshore now at a record pace. People that understand this don't want to keep their retirement accounts in the US. Too risky.

 

[CommonCents]

The U.S. enjoys a unique position that gives it some relative advantage over other economic powers. (least worst). The problem is when we are least worst that still enjoys "safe haven" relative to other stores of wealth, (currently paper assets) it also enables us to continue our bad fiscal/monetary behavior.

Like giving a spendaholic a credit card limit increase only works so long even if he looks like a better credit risk relative to the pool of borrowers.

 

[LibertyForMe]

Exactly! That is the main reason why I think we are screwed. Forex trades currencies against each other, but has no way of judging the overall health of the system; it just plays off of the "least worse" (at least how I understand it).

The U.S. enjoys a unique position that gives it some relative advantage over other economic powers. (least worst). The problem is when we are least worst that still enjoys "safe haven" relative to other stores of wealth, (currently paper assets) it also enables us to continue our bad fiscal/monetary behavior.

 

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[splok]

I think we can.

Thanks for the insight and examples! Even though I've lived outside of the US for a while, it's too easy to forget to look for opportunity outside your own back yard, where ever that backyard happens to be.

 

[kurtyordy]

The HKD (Hong Kong dollar) is fixed to the USD. But inflation is rampant in HK because of this. They will need to lower the fixed currency peg to the USD soon. So if you buy $50k usd in HKD and they revalue it by 10%, you make an immediate $5k usd in currency exchange. And HK cannot raise the currency peg or it will destroy the local economy. They can only go down.

I know you are not advising this as a course of action to take, but if one was inclined and wanted to play this in forex, what you describe there is achieved by buying usd/hkd? correct?

 

[GlobalWealth]

I know you are not advising this as a course of action to take, but if one was inclined and wanted to play this in forex, what you describe there is achieved by buying usd/hkd? correct?

I don't have any experience whatsoever in forex trading. I am just talking about holding cash in HKD.

 

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[kurtyordy]

I don't have any experience whatsoever in forex trading. I am just talking about holding cash in HKD.

ok, that makes sense. So to say it a different way, the potential even you are describing above with the HKD would mean the HKD would lose value vs the dollar. Is that correct?

 

[GlobalWealth]

the potential even you are describing above with the HKD would mean the HKD would lose value vs the dollar. Is that correct?

Yes you are correct. And there is no downside as the HKD is fixed to the USD and HK cannot afford to gain value or inflation would be even worse.

 

[rkmalo1]

Not worried about guns and gold. To much of a shortage on either.
Brick of .22 cal ammo(500 rounds) goes for about $100 on the street, 45acp goes closer to $2 a round, as well as .223. No bueno.

My boss is one of the more bearish economists you'll see on CNBC. He has always told me his best investment advice is to buy a gold plated handgun and wait.

 

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[Jake]

My boss is one of the more bearish economists you'll see on CNBC. He has always told me his best investment advice is to buy a gold plated handgun and wait.

Agreed to a certain extent. Go solid

 

[Worldisyours]

They would rather destabilize the world than see this happen.

 

[CommonCents]

I still see stagflation. They get to print more and more money against a weakening/hollowed out economy. The printed money has only stayed in very few hands, large institutions that recycle the money into treasuries (quid pro quo with government) and bid up the stock market. The money is NOT getting to main street where the real growth and jobs are. Traditional inflation gets magnified by fractional reserve lending which isn't happening in the small/med biz market (the ones who create the jobs). Money is still tight for businesses that do have growth and need to borrow. Getting a small biz loan is still tough.

If the economy really does turn around and recover, then we'd see some real rapid inflation (demand from businesses that need capital and are willing to pay higher rates) by the fractional reserve lending. The hyperinflation happens following a loss of confidence in the currency, a collapse in value where people are scrambling to exchange currency for tangible goods.

The tech area is getting frothy, they are almost saying "its the new economy this time around, again". Look at all the techie IPOs that have come out and are in the pipeline. They are trying to exit before the music stops and there's no chairs left. The acquisition value of profitless companies that deliver 'eyeballs' are getting huge again. The "good" investments are the businesses that provide real efficiencies to boost productivity(jobless recovery), not the kind that are 'monetizing eyeballs'

 

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