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Saturday, November 1, 2008

Thesis Change.

I originally started this blog as a way to express and warn family and friends of the Stock Market explosion that I believed was (and did) occur. Originally it was just occasional email warnings, dating back to spring 2007. I personally believed this would occur starting in August 2006.

When I was crying the sky is falling, it was in an attempt to warn others and hopefully save them from substantial fiscal losses. Now that those losses have either been avoided (or unfortunately realized), I'm starting to mull over the point of this blog.

The world fiscal crisis is FAR from over, 2008 and 2009 will not be remembered fondly from an economic point of view. So now that the US Stock market (and other stock markets around the world) have suffered substantial losses, what next?

Well, the US government in an attempt to "spend their way out" of the downturn, will, unfortunately, seal the US to a horrible financial reality for years to come.

The message, to those who will listen, is the US Government is heading for a financial crisis of epic proportions. Why do I believe this?
1) Loose money will yield loss in faith in US Government fiscal policies
2) Loss of US government faith, will result in people avoiding US debt (bonds)
3) Avoiding US bonds will yield in higher interest rates
4) Higher interest rates means less money for the government and it's people to spend, since a larger % of income will be spent servicing debt
5) Higher interest rates (and likely taxes to service debt) will further cripple business and consumers.
6) As the US government needs foreign money to survive daily, the US dollar will devalue requiring more dollars "in exchange" for foreign currency, goods, and services. This will occur since the world will reguard the dollar no longer as world class, but declining class.

I'm a cheery fellow eh? Well I don't believe in avoiding reality, best to face it and deal with it.
Why hasn't the dollar collapsed in recent turmoil? Over the last 8 years, it has continually devalued. The recent dollar rise has nothing to do with the US being percieved as fiscally sound. It has to do with panic selling out of stock into US bonds. That panic move will end, and once it does there will be more "bonds for sale" than buyers. That is where the trouble will start.

What to do?

At this moment US short term bonds are best way to sit out of the turmoil. However, need to start to look to diversify out of bonds alone.
Natural resources, such as gold, oil, or other companies with "world appeal" for their products.
Buy the dips in cheap gold companies, cheap oil and energy companies.
When the market recovers, these stocks will recover. If the US dollar devalues (as it will, when is the question, due to fiscal irresponsibility) these companies can whether the storm.

If inflation takes hold in a "big way", the stock market may be a decent place to retain value as hyper-inflation of the stocks rise. This is a LONG way off, and a LONG shot if it ever happens.

So I will continue to summarize current events, changes in my opinion, but that's my new thesis.
The market may still tank, down to DOW 6,000. But at this point, I'm leaning for the long bleed down, not 2,000 points down. Unless hyper-inflation takes hold, then the market will rise quickly, but the dollar will devalue.

Thesis
August 2006-October 2008 - Stay out of the stock market, put money in US short term Bonds.
October 2008 - ???? - Put most money in US short term bonds, start to scale in "hedges" against possible US government issues in the next year with managing debt. Gold, Oil, or other international companies that will provide value in a devaluing dollar.

The dominoes will continue to fall, first sub-prime, then prime, banks, investment banks, mortgage insurers, insurance companies, finance companies (GMAC) and next up states, then the Federal government.

States are in deep trouble. They also run on debt, but their bonds aren't as in demand as federal bonds. States are taking in less money with higher expenses, such as unemployment.
Further state pension funds are falling short due to the economic collapse. Read more here.
All of this adds up to Federal Government will be the last in the chain of event to get smacked. And when it does, it will be too late to act, you need to be positioned ahead of time.

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