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Catching a Falling Financial Knife

EXTEND & PRETEND: A Guide to the Stock Market Road Ahead

Stock-Markets / Stock Markets 2010 Jun 11, 2010 - 12:54 AM GMT

By: Gordon_T_Long


Diamond Rated - Best Financial Markets Analysis ArticleIt will likely surprise you but like a trolley car we are now locked into economic tracks that determine our financial destination. Unfortunately, it isn’t a place anyone would choose knowingly other than possibly the Bilderberg elite.

Financially and economically we are lurching along, rocking from side to side with the occasional unexpected jarring flash crash jolt. But unlike a trolley line, for some reason no one seems to know what the destination is. Many are asking but few are willing to tell.

This road is well travelled and documented if you were to take the time to study the maps and not rely on the happy face media spin doctors for directions. Since the route of the current global economic path is now locked in, we need to either accept the ride or hastily exit. I’m up from my seat and headed for the door. What are you going to do?

HISTORICAL FACT: A Financial Crisis is almost always followed by an Economic Crisis which is subsequently followed by a Political Crisis.

            FINANCIAL CRISIS      =>       ECONOMIC CRISIS       =>        POLITICAL CRISIS

          Banking Crisis                           Sovereign Debt Crisis                 Currency Crisis

When the financial crisis arrived in 2008, those who foresaw it in 2007 were not only prepared to capitalize on it, but ready to position for the economic crisis that they knew lay ahead. We are currently still in the midst of an economic crisis evidenced for some time by slowing global trade, unemployment, falling tax revenues and more recently, a sovereign debt crisis.

currency crisis

Have you prepared for the soon to emerge financial opportunities as the Stage 3 - Political Crisis unfolds?

I want to lay out the roadmap as simply and clearly as I can. Some no doubt will dispute it. What the nay-sayers need to fully understand however is that the roadmap, which this is part of, has served me remarkably well and resulted in a highly profitable decade. Maybe even more importantly, it has allowed me to sleep peacefully at night. The market drops for the most part have been ‘buying opportunities’ and market spikes have been excellent exit points.

Knowing the trend and destination has made all the difference.


The soon to unfold political crisis will be marked with beggar-thy-neighbor policies that foster political conflict, a currency crisis which dramatically impacts standards of living and a broad curtailment of entitlement programs that will devastate generations of retiring lower and middle income citizens. We are early in what the future may possibly label as the Age of Rage. Paradyn adjustments in expectations and sense of entitlement lay ahead for those living in the developed G7 democracies.

Let me show you why a Political – Currency Crisis is just as predetermined as the tracks of our trolley ride and will have serious consequences for your investment strategy.

For the full research report with a detailed expansion of the following roadmap: See TIPPING POINTS

road ahead


Though we are still in the midst of the full emergence of Stage II, Europe has recently overtaken the US in the rate of the expected, unfolding events.

There is no mistaking the fact that the US has a sovereign crisis as measured by many indicators such as: Debt to GDP, deficit percentage, balance of trade, state, city and local government financial imbalances, underfunded pension plans and excess unfunded entitlement programs. However, relative to Europe, the US is still lagging and therefore is not currently getting the media attention that it will soon receive.

What will mark the beginning of Stage III is a major shift in political policies. In Europe, early signs were witnessed with the European bailout of Greece and the  $1 Trillion Euro “TARP” like program. Both political decisions decisively diverged from the basis upon which the Maastricht Agreement was constitutionally approved. The level and urgency of the crisis forced this structural shift. Though this level of political shift has not yet occurred in the US, it soon will (the ‘Tea Party’ advocates would likely vehemently suggest we are well on our way).

The $61 Trillion unfunded entitlement problem associated with Medicare / Medicaid and Social Security is presently a monster on the door step now that baby boomers are beginning to retire at accelerating rates each month. No longer can the government obscure the true size of annual budget deficits through the use of payroll entitlement payments. State, city and local governments are increasingly in crisis as more and more can no longer fund what Americans have taken for granted as basic necessities such as police, fire, K-12 education and public works.  Without greatly increased and urgently needed tax revenues, these programs will be drastically cut. We read of 100,000 to 300,000 teachers being cut which less than 18 months ago would have been thought unimaginable in America. With 40 million Americans on food stamps, tax revenue deficits are making what is a monumental problem even more intractable. All of this and more will lead to political decisions that will lead to major social unrest and public policy initiatives which will be startling breaks from the past.

risk secular bear resumes

I fully expect to see a new $5 Trillion Quantitative Easing (QE) program marking the upcoming shift in the US to Stage III.

This will be what kicks off an accelerating increase in Velocity of Money that many inflations have been expecting. This has the potential to ignite a Minsky Melt-Up (Read: Extend & Pretend: Manufacturing a Minsky Melt-Up), though definitely not a certainty. The present rate of collapse in MZM, M1, M2  and M3 which supports the deflationists views, which I have held, is the ‘oil in the ointment’. The $5T QE program will be a desperate attempt aimed at reversing this

Massive monetization will eventually lead to a US currency crisis in the US by 2011- 2012.

business cycle

Europe will continue to accelerate with problems associated with currency pegs and Euro denominated lending finally coming home to roost for Central and Eastern Europe (CEE). The CEE as the ‘sub-prime” of Europe will be the final catalyst to tip the UK and France over the edge into a sovereign crisis and subsequent major political confrontations. The new government in the UK is already warning the British electorate on an almost daily basis of the gravity of the situation and the degree to which changes in social entitlement expectations will need to change in the near future. Like France they are afraid to be specific – yet!

The US is experiencing a major shift with government employment becoming the primary creator of jobs. The fundamental shift is most evident through a movement towards larger government with more regulation and control.


POLITICAL SHIFT- It will be about choices which this generation has never had to confront.

The political shift is not primarily a shift from right wing to left wing politics as many in the ‘party oriented’ media might suggest or debate.  It is rather a shift that the current generation in western developed nations haven’t witnessed - a shift in direction that is other than left or right and is more about a movement in Economic freedom versus Personal freedom. 

It would make this particular article too long to explain the above Nolan Diagrams to show how and why these changes will occur (I will do so in the next Extend & Pretend series article entitled: “A Matter of National Security” – sign-up). But suffice it to say that there will be clear tell-tales that will emerge.



You must be alert to and carefully watch for these tell-tale signals in the not too distant future.



Must hold government Debt Instruments (Bonds, Bills, Notes)    Banks              ‘LIQUIDITY’     

Must hold government Debt Instruments (Bonds, Bills, Notes)    Pensions         ‘SAFETY’          

Caps on Private Interest Rates – Ceilings                               Lenders            ‘USERY’

Capital and Exchange Controls                                             Investors         ‘SPECULATION’ [Escape]


Expect the unexpected going forward since markets hate uncertainty and nothing creates more uncertainty than political decision making and policy legislation. Markets will experience increasing levels of volatility with steeper rates of price movement both up and down. Flash Crashes and Flash Dashes will be common as millisecond advantages separate the dynamic hedging winners from losers.

Hard assets such as physical gold and silver have traditionally been the ideal vehicle for an environment of high inflation coupled with a currency crisis. I fully expect governments will strip these assets from holders either directly or through predatory taxation, fees or other trading limitations. They will be classified somewhere in the four categories discussed above. Alternatively, if it is not done in this fashion it will be controlled through intervention similar to national currencies in the forex arena. I personally suspect it is already being controlled in some fashion based on the March 25th whistleblower testimony by Andrew Maguire. It is a matter of national security in a beggar-thy-neighbor environment since gold and silver are the only real money in a fiat based system. Protect yourself accordingly.

The only protection from the future storms will be unencumbered, revenue producing assets. The trick is knowing which investments will sustain their ability to produce inflation adjusted free cash flow in the midst of a contracting economic environment. They may not be in the publicly traded or manipulated markets.

Thinking for yourself and thinking outside the box is paramount if you are to capitalize on this bumpy trolley ride.

For further background read: EXTEND & PRETEND - Manufacturing a Minsky Melt-Up.

political cartoon

Sign Up for the next release in the EXTEND & PRETEND series: Commentary

The previous EXTEND & PRETEND article: EXTEND & PRETEND: The Flash Crash Omen

Gordon T Long   Web: Tipping Points
Mr. Long is a former executive with IBM & Motorola, a principle in a high tech start-up and founder of a private Venture Capital fund. He is presently involved in Private Equity Placements Internationally in addition to proprietary trading that involves the development & application of Chaos Theory and Mandelbrot Generator algorithms.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Shelby Moore (author of "How Deflation is Inflation")
11 Jun 10, 05:26
Gold&Silver guaranteed to lose

If you want a background on my articles and comments at this site:

The more I think about this, the more I feel that buying gold & silver is futile:

Gordon Long wrote above:


"Hard assets such as physical gold and silver have traditionally been the ideal vehicle for an environment of high inflation coupled with a currency crisis. [b]I fully expect governments will strip these assets from holders either directly or through predatory taxation, fees or other trading limitations[/b]. They will be classified somewhere in the four categories discussed above. Alternatively, if it is not done in this fashion it will be controlled through intervention similar to national currencies in the forex arena. I personally suspect it is already being controlled in some fashion based on the March 25th whistleblower testimony by Andrew Maguire. It is a matter of national security in a beggar-thy-neighbor environment since gold and silver are the only real money in a fiat based system. Protect yourself accordingly.

The only protection from the future storms will be unencumbered, revenue producing assets. The trick is knowing which investments will sustain their ability to produce inflation adjusted free cash flow in the midst of a contracting economic environment."


I have written similar thoughts. Imagine the govt increases capital gains taxes to 50%, and base the gain on the fiat value appreciation. So you bought gold at $250 and now it is worth $1250, so you must pay a $500 tax. So you lose nearly 50% of your precious metal. With hyper-inflation, the % of the tax will approach exactly the % of your tax loss (e.g. you bought at $500 and gold is $50,000 when you sell, then you lose 50% of $49,500 = $24,750 = 49.5%).

Now you might be inclined to think that you get to keep 50.5% of your gains, but this is misleading. Remember that gold merely keeps up with inflation, and thus everything else has increased in price also, so you actually lose 49.5% of your purchasing power!!

This is why I think the TPTB are not afraid of us buying gold and silver. We will lose even the price of gold and silver went up.

The only people that will win with gold and silver, are those who are able to sell it without being taxed. And how likely do you think that will be? I want to hear your opinions?

Here is what I think...

I think at some point TPTB will introduce hyper-inflation and chaos, as a way to force the world towards new currency and political orders that are more centralized in their control. During this chaos, I think gold and silver will be barter-able for a very short period of time. After TPTB have established the new orders, I think gold and silver will only be salable in official channels and documentation will be needed to sell and full tax will be required.

This is why i think it will be very dangerous to hold too much metal, because it will be nearly impossible to trade it for something of equal value that is not taxed (and I am not advocating any tax evasion), if the quantity is too much. Bartering takes time, there are huge spreads, and it is not a liquid and ubiquitous market to trade in. In other words, a small amount of metal as insurance will work out, but a large amount of metal will just lead to large headache and a big tax loss.

Can anyone provide a reasonable alternative scenario that seems plausible?

Shelby Moore
11 Jun 10, 06:11
More on gold taxation

ADD to my prior comment: I can only see one possible way to escape this, and I am not advocating this, just discussing it as a hypothetical thought experiment. That is to sell your metal anonymously for cash before they institute regulations on all gold dealers, then rebuy again in your name with receipt in order to prove your higher buying price to lower your capital gains. Of course, you would still need to be able to show you obtained that cash without tax evasion. But this won't help you much (more than a few %) if you re-buy before the hyper-inflation is completed. Thus, I conclude that regulations on gold dealers will precede any hyper-inflation and that would be a sign that hyper-inflation is imminent.

Shelby Moore
11 Jun 10, 06:29
Only solution to taxation?


ADD#2: However, on further thought I realize if we go into hyper-inflation, then people will be scrambling to get gold & silver even on the blackmarket. If the govt has already announced high capital gains taxes and regulated dealers, this will just further incentivize a larger blackmarket. So it is actually not until the hyper-inflation has peaked, that the govt will be successful in trapping sellers in taxation.

So the "solution" is quite simple, make sure you sell into the hyper-inflation and not too late. But the problem with this is that then you still lose as hyper-inflation continues. Ouch!

So there is really only one solution, as Gordon Long says, before the hyper-inflation ends, you must sell out of precious metals and into some incoming generating investment that keeps pace with hyper-inflation. In other words, you don't plan to sell the investment and pay the horrible capital gains, but you want to continue to receive income or dividends that are pacing with the hyper-inflation. You will pay a higher tax rate on these incomes, so you actually need income that outpaces hyper-inflation and tax raises. That seems nearly impossible. So it seems like you can't do much better than just holding gold until taxes eventually fall, but by that time gold may have falled too. Whereas an income earning business just keeps generating income all the way through and the value of the company should rise and not fall when the gold price eventually does.

Btw, those who think they will escape taxation by having a different citizenship, I think are ignoring the shift coming to unified world order:

(see my comments at end of article)

Shelby Moore
11 Jun 10, 13:42
Is this legal?

What you all think of this?

Can't we start now?

Shelby Moore
11 Jun 10, 22:45
Sell gold yearly minimize taxes

Sell gold yearly minimize taxes

There is one other "solution" to precious metal taxation dilemma, but it doesn't apply to the very wealthy savers like us, it only applies to the masses, and if it did become adopted by the masses, then it might break the back of the socialism and thus help the very wealthy savers like us.

First please realize that gold & silver (including gold & silver ETFs) sold in less than 1 year, are taxed as income; whereas if held for more than one year, they are taxed as collectables with a capital gains rate of 28% in USA: (see page 32)

So one important implication is that those of you with no income, should be selling your gold & silver at least once per year (hopefully on near-term peaks) and re-purchasing, in order to make your tax 0% (assuming your gains each year are below your standard deduction). [b]This also has the advantage of locking in the current lower tax rates, as tax rates are sure to go up![/b]

Now apply this to the masses. They typically only have a very small savings account. Imagine if that was invested in gold & silver, and if it was automatically sold and re-purchased every year, then they would only be paying income tax rates on their gains. For people in very low tax brackets, this would be very beneficial (and no worse than taxes they pay on interest bearing savings and much higher rates of return than current negative real interest rates).

It is very likely that income tax rates will not increase drastically on the low income folks, as they are all bankrupt, unless the government decides to subsidize their tax payments. I can see VAT tax being created to make their tax rates increase, but that wouldn't apply to gold & silver sales and purchases (well it does in Europe, so that is also another possible risk, but there are ways around it, such as unallocated accounts).

Thus the spread on metal sales and purchases is VERY IMPORTANT. This is why I had the idea that an allocated gold savings account might be the best way to go, for as long as it was popular and growing (meaning the overall company never had to sell metal), then the spread could extremely low.

Note there is no capital gains tax on gold in India (for Indian citizens) currently:

Disclaimer: I am not giving tax advice, consult your own tax advisor. I am meaning discussing theories about hypothetical situations.

Shelby Moore
12 Jun 10, 04:17
Only Silver is worth fighting for

Final conclusion is...

Silver is probably the only investment (other than income earning business) worth anything right now:

Especially after tax and negative interest rate considerations are factored in:

Shelby Moore
13 Jun 10, 02:40
Silver doesn't need to evade taxes to win

Silver bugs might want to print this one out and hang it on their wall as a constant strategy reminder:

Frank Rider
04 Jul 10, 07:15
Bullion and tax

QUOTE "The only people that will win with gold and silver, are those who are able to sell it without being taxed. And how likely do you think that will be? I want to hear your opinions?"

'm not much into theory about these things Shelby but I do have some experience. Unless you want to liquidate hundreds of thousands of dollars worth of bullion you simply walk into any coin dealer in any country and drop it on the counter. 3 years ago I sold several kg of silver to a dealer here in Australia for $500/kg. I had bought it off another dealer for $250/kg a few years prior.

Both transactions were for cash, no receipts, no records because the bullion itself is your receipt. I can do the same for $20 000 worth of gold if I want, Then I would arrange it in advance to allow the dealer time to have the cash.

Now as far as tax is concerned you may want to pony up the capital gains, that's up to you, I only know what I did...

Shelby Moore
05 Jul 10, 04:29
gold dealers taxation

Frank, did you know that it was illegal to own bullion gold in USA from 1944 to 1974? Laws can change and do change when the need arises.

Although you can buy and sell gold anonymously within your own country with tracking, you can't do that when crossing a border with it. And actually the loophole for gold dealers in the anti-money laundering laws of the various nations, is up to a limit of about $50,000, and so the precedent is already there as necessary. As inflation drives price of gold to $10,000, then just 5 coins would mandate paperwork. And still the 5 coins probably won't buy much more than they do now as prices will have risen also.

06 Jul 10, 08:33
Not Universal

Actually, in China while you can anonymously buy bullion, you can not sell it without three pieces of paper. 1 is Identification, 2 the original purchase receipt, 3 the authenticity certificate issued buy the maker granted at purchase. Taxes could easily be added in systems like this.

Whilst in Australia, currently no such requirements are made, think back just a year ago when much buzz was about tungsten gold bars. Once this rears it's head again, these style of systems may also be brought to bear down under. From there, it's just one more step to tax. Shelby's idea is not too far fetched in my thinking.

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Catching a Falling Financial Knife