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Three Great Investment Opportunities and One Grave Danger For Your Portfolio

Stock-Markets / Credit Crisis 2008 Feb 25, 2008 - 10:37 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleIn a last ditch attempt to prevent a broader financial collapse, eight major banks in six different countries — Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner — are coming to the rescue of one U.S. bond insurance company this week: Ambac.

These are the banks that have the most exposure to structured securities and other derivatives guaranteed by Ambac ... and the most to lose if Ambac goes down.

But as I explained last year in " The Great Ratings Debacle ," the entire premise of bond insurance is riddled with conflicts of interest:

The three top rating agencies — Fitch, Moody's and Standard & Poor's — collect large fees from the bond insurers for their ratings. They are the same rating agencies that rate the hundreds of thousands of bonds covered by the bond insurers, also collecting large fees for each rating. And they are the same companies that collect still more in consulting fees to help structure many of the bonds that the insurers cover.

No wonder they've waited so long to downgrade the sinking bond insurers! One single downgrade sets off an automatic chain reaction of downgrades, which could virtually destroy the business of hundreds of thousands of their best-paying customers.

My view: It's a house of cards built on a foundation of deceptions that no amount of capital can cover up.

The facts:

1. Bond insurers are on the hook to pay up when the bonds they insure go into default. So the more that the bonds default, the bigger the claims on the insurers. But with the credit crunch worsening at a rapid pace, no one has been able to come up with an accurate estimate of future default rates.

Result: The true liabilities of bond insurers like Ambac is incalculable, so the $2 to $3 billion in new capital that banks are putting up this week could be grossly inadequate.

2. Hundreds of thousands of collaterized debt obligations (CDOs) are guaranteed by bond insurers like Ambac. But they have been grossly overrated. And now they are collapsing in value. Pumping more capital into Ambac — or MBIA and FGIC — does nothing to change that.

3. And as we recently showed attendees at the World Money Show, this credit crisis is just one aspect of a monumental global shift now underway.

So to help you put everything in context — and to give you the tools you need to defend yourself — we're providing you this morning with something that we've never provided before: A triple-length issue with the transcript of our blockbuster World Money Show presentation ...

One Grave Danger and Three Great Opportunities
Edited Transcript of Presentations at the World Money Show with Martin D. Weiss, Mike Larson, Sean Brodrick and Jack Crooks

Martin Weiss: Before my father passed away, he and I talked a lot about the past and the future.

We talked about all the recessions we had experienced together — in 1957, 1960, 1965, 1969, 1981, 1990 — when the economy contracted ... but then snapped back.

We talked about the bond market collapse of 1979-1980 and the stock market crash of 1987 — when Wall Street panicked ... but then snapped back.

And we decided that the critical day of reckoning would come when these two kinds of crises — on Main Street and Wall Street — converge, when we have both a severe recession and a severe credit crisis striking at the same time, feeding off each other, creating a downward spiral that ultimately no government could stop.

Ladies and gentlemen, that day is today. Every major crisis we have been warning you about is converging in one time and place ...

  • The real estate crisis we warned you about in February 2005 is here.
  • The derivatives crisis we warned you about in November 2006 is here.
  • The bond insurance crisis we warned you about this past December is here.
  • The recession we forecast in September of last year is here.

Plus, we said that the Fed would fight back aggressively, and now that powerful force is also here. Just in the span of eight days last month, the Fed cut rates by a whopping 125 basis ... and, in response, Wall Street breathed a great sigh of relief.

But there is a growing minority of savvy investors who are beginning to say, "Hey, wait a minute! The Fed is so fired up, it's smoking. And where there's smoke, there's fire." In other words, they're asking:

"If the Fed is breaking all records to fight this crisis, does that mean this crisis is threatening to break all records in terms of the damage it could inflict?"

Plus, savvy investors are also beginning to say:

"Wait a minute! Inflation isn't getting better. It's getting worse.

"The worldwide demand for raw materials and scarce resources isn't contracting. It's growing.

"The prices of copper, wheat and gold aren't going down. They're going up.

"So, how in the heck can the Fed be cutting interest rates at a time like this?"

Ladies and gentlemen, we don't have just recession, and we don't have just inflation. We have both — an inflationary recession.

Let me ask the audience this question: If the fireworks we've seen so far — the housing bust, the mortgage meltdown, the credit crunch, the derivatives blow-up, the bond insurance debacle — began even while the economy was growing, what's going to happen when the economy is contracting?

Audience: Our standard of living will fall.

Martin: Yes. We've been living high on the hog based on debt for so many years. How can we possibly avoid a situation in which our average standard of living goes down?

Typically, that happens in one of two ways: Because our dollars are worth less. Or because we have fewer dollars.

But now, it's going to happen in both ways: Devalued dollars because prices go up ... and fewer dollars because income and profits go down.

Any other thoughts about what this means?

Audience: Martial law on the streets!

Martin: I hope you're wrong. And I'm really an optimist.

Audience: [Laughter]

Martin: It's true. I am an optimist because this crisis, although painful, is healthy — culturally, socially, politically and economically. I am an optimist because I believe that, ultimately, we are going to come out of this crisis a better nation. What other outcome do you see?

Audience: Deflation?

Martin: Maybe later. But based on the present evidence that we can see with our own eyes, not yet.

Audience: A shift from consumership to citizenship!

Martin: Well said. I agree.

Now, I have another question for the audience: If the Fed is printing money right now, what do you think they're going to do when things really get tough?

Audience: Cut interest rates.

Martin: So they drop rates to 2%, then 1%, then close to zero. Then what?

Audience: We'll get a socialist government!

Martin: I hope you're wrong. But let me bring you back to the present. We have a recession. And we have inflation. So, the most prudent strategy is to prepare for both . That's why I have invited three other speakers here today ...

  • Mike Larson will help you prepare for a recession.
  • Sean Brodrick will help you prepare for inflation.
  • And Jack Crooks will introduce you to a third opportunity that's not directly correlated with either recession or inflation.

Three Guiding Principles

But first, I want you to write down three guiding principles that should help drive nearly every decision you make.

The first is safety . You can never protect yourself from all the dangers all the time. Nor should you try. But you must protect yourself from most of the dangers most of the time.

The second is an open mind . Open your mind to different possible scenarios and recognize that some of those may be extreme scenarios.

The third guiding principle flows naturally from the second: Flexibility . In practice, that means avoiding investments that lock you in. It means that every investment strategy you pursue must also have an exit strategy and/or a hedge strategy that you can implement to protect yourself.

If it doesn't, it's not really an investment. It's a trap. Get out now while you still can.

Mike, you were the first to warn us of some these dangers. So I am going to give you the privilege of going first to help us avoid them. What do you see right now?

One Grave Danger The Spreading Credit Crisis
by Mike Larson

Mike Larson: A battle of the titans. You have the credit crunch flowing in a 1-2-3 progression of events:

(1) Lender losses going through the roof ...

(2) Lenders cutting back on the new credit they offer, and ...

(3) Spending falling on everything from retail to construction.

That's one titan. The other titan is the federal government. As you can imagine in an election year, the government isn't just sitting idly by and watching this happen. You're seeing an epic flood of liquidity — the dramatic interest rate cuts, an unprecedented intervention in the mortgage markets, and the government stimulus plan.

If you were here last year and the year before that, you heard me paint a rather gloomy outlook for the housing market — not something that made me very popular at neighborhood barbecues. But I think you'll agree that a lot of the things we talked about have, unfortunately, come to pass. Indeed, 2007 is a year that most people in real estate would like to forget:

  • Housing starts — down 25%, the biggest annual drop since 1980.
  • Existing home sales — down 13%, the biggest drop since 1982.
  • New home sales — down 26%, the biggest drop since the government started tracking them in 1963.
  • The median price of an existing home — down for the first time on an annual basis since realtors started tracking it in 1968, and quite possibly since the 1930s.
  • Home prices in top metropolitan areas — down almost 8% from a year ago, the biggest drop on record.

Now, a lot of borrowers are upside-down. The delinquency rate on home mortgages has jumped to the highest level since 1986. And the foreclosure rate has jumped to the highest level on record.

But what I think a lot of people are failing to appreciate is that the problem isn't just in residential mortgages . It's commercial mortgages. It's leveraged buy-outs and corporate takeover loans. It's credit cards and auto loans.

Let me share just a few facts with you:

In the 2006-2007 period, there was a record $1.4 trillion in corporate takeovers. But a lot of those were financed with junk bonds and leveraged loans. Now, you have banks stuck with a pipeline of $230 billion of this paper ... and the value of those bonds is falling fast.

You have deals, done only a few quarters ago, in which the bank loans are trading for 90 cents on the dollar, and you have bonds trading for 73, 64, even 61 cents on the dollar.

So, as much as we have heard about write-downs of residential mortgages, there is a whole new crop of bad loans that is starting to impact the banks:

More home equity loans are delinquent than at any time since 2005. More home equity lines of credit are delinquent than at any time since 1997. And more indirect auto loans are delinquent than at any time since 1991.

Obviously, if you were a bank shareholder, 2007 wasn't a good year. A lot of these problems would have cost you real money, so we hope you followed our advice and avoided that sector.

You might say, "I don't own Citigroup. So what do I care?" But think about the economic impact of all these losses: When banks lose money, they cut back on new credit. Or they stop lending entirely.

The evidence: The Federal Reserve regularly surveys top bank officials and asks them what they are doing with their lending standards: Tightening? Loosening?

Here are the results of their January survey:

  • More than 30% the lenders polled are tightening standards on commercial and industrial loans, the most since early 2002.
  • More than 80% of the lenders surveyed are tightening standards on commercial real estate loans. I repeat: Commercial! Not residential. That's the highest since the Fed began tracking it in 1990, when the banking system was in chaos in the wake of the S&L crisis.
  • Seven out of 10 lenders are making it harder to get subprime mortgages.
  • Eight in 10 are cracking down on what they call nontraditional loans, such as interest-only mortgages.
  • And consider this scary statistic: More than half are tightening standards on prime mortgages — bread-and-butter 30-year loans from people who actually make a down payment. That's the highest since the Fed began tracking this stat.

So to anyone who asks the question "Why is the Fed panicking and cutting rates so aggressively?" — there's your answer: The banks are rapidly tightening standards, and the Fed is trying to offset the potential damage.

Meanwhile, on the other side of this vast battlefield, the federal government is ratcheting up its response:

  • Beginning last summer, we saw the roll-out of a plan called FHA Secure, designed to refinance some subprime borrowers into a government-insured loan.
  • We saw the Paulson Plan, designed to freeze interest rates on certain subprime mortgages.
  • We saw another proposal, from Senator Dodd, to create a government-backed body to take crummy mortgage loans off the banks' hands and refinance those borrowers with government-backed mortgages.
  • We saw how the just-passed stimulus package increases the size of the loans that the FHA, Fannie Mae, and Freddie Mac can back or insure to $730,000 in high-cost areas. Not exactly a wise idea, given how much trouble these borrowers are in!

And rounding out the government's titanic efforts ...

  • You have the Fed dropping rates down to 3%, next to 2%, and possibly even lower.
  • You have "term option facilities," which the Fed has been conducting to pump more money into the banking system.
  • And you have President Bush signing the final stimulus plan with tax rebates for consumers, tax breaks for businesses, and another $150 billion for the U.S. economy.

Yet, despite all that, I see no effective way to combat the economic forces coming together today. As a nation, we have overborrowed and overextended ourselves. And as I have demonstrated, it's not just home mortgages. It's commercial loans, leveraged buy-outs, and almost every category of credit.

As a result, you have home values that are coming back to earth. You have commercial real estate deal volume that's drying up. And you have the giant wave of mergers and acquisitions that's been cut back dramatically. All this sows the seeds for the recession that we face in 2008.

Never forget this: When things are taken to the kinds of excesses we've seen, the ensuing crisis cannot end without a purging process. They have to write that bad debt down. They have to take their lumps. And the public must be reminded that "when you take on too much risk, you lose money."

That's what we are going to see now; and until we do, the crisis cannot end. It's painful. But ultimately, it sets the stage for a healthy recovery down the road.

For now, we recommend three simple steps:

First, although you may not like to use 4-letter words in polite company, there's a very important one you need to use today: SELL. This is a time for taking profits on the winners and dumping the losers. Don't make excuses for companies whose shares have been robbing you of your money.

Second, build cash. No, it isn't going to make you a lot of money. But if cash is what you've been holding instead of housing, real estate, construction, or finance, you've saved yourself a bundle. And we think there's more downside to come.

Third, hedge. And if you're more aggressive, go for downside profits. It's easier for individual investors to protect themselves from declines than ever before. You don't have to sell short. You don't have to use borrowed funds. You can buy an inverse ETF to hedge against exposure, and one of my favorites is the UltraShort Technology ProShares, symbol REW.

Martin: Thank you, Mike. In many of your stats, you say that the real estate bust or credit crunch is the worst since they began keeping records. What does that mean? The worst of all time? The worst since the Great Depression?

Mike: It's at least as bad as the 1980s when interest rates ran up to double-digits. And depending on how you measure it, it's the worst since the Depression.

Questions From the Audience

Audience: You talked about short-term interest rates. But what about long-term rates?

Mike: After the Fed cut rates, short-term rates came down, supposedly easing some of the pain on ARMs that are resetting. But long-term interest rates did not come down nearly as far. What's worse, in the last few weeks, long-term rates have turned sharply higher!

Reason: Bond investors are starting to question whether the Fed, in trying to solve a short-term problem, is actually creating a long-term one — inflation. So you've seen rates on 30-year fixed mortgages actually start jumping again.

Audience: We just saw the yield on 10-year Treasuries surge higher on the same day as the yield on short-term Treasuries fell. What does that mean?

Martin and Mike: It confirms precisely what we just said. The Fed can push short-term rates down. But the resulting inflation fears could drive long-term rates up.

Audience: With the dollar losing value, with commodities surging in value, isn't it possible that, despite everything, housing prices will turn higher just because of inflation?

Mike: That seems to be part of the government's long-term strategy — to restore some balance to the housing market. With their rate cuts, intervention in the mortgage market, and behind-the-scenes money creation, they're hoping they'll be able to give us "gradual deflation" in house prices ... plus just enough inflation in the rest of the economy.The problem is: What happens between now and then?

Martin: My view is that the pace of events in the markets is accelerating. So, no matter what the government does, it's going to become increasingly difficult to catch up.

Audience: If people are upside-down in their mortgage, and banks are going to wind up with properties that are almost impossible to sell, won't the banks become very reluctant to foreclose?

Mike: Maybe. But first off, regulators don't like banks to be in the property management business. They typically pressure banks to move those assets off their books. Second, in a deflationary environment for home prices, the banker will say: "I may only be getting 80 cents on the dollar right now. But later, I might get just 70 cents on the dollar." That's why you're seeing a lot of REO (real estate owned) property moving onto the market now.

Audience: Aren't the banks going to ease the terms on a lot of this stuff? Aren't they going to freeze rates, call moratoriums, do work-outs?

Martin: That's what politicians would like them to do. But the Fed survey Mike shared with you a moment ago shows that, with nearly all forms of new credit, they're doing exactly the opposite. They're tightening their standards.

Mike: There are certainly loan modifications going on, where banks are extending terms or rolling unpaid loan balances back into the principle and re-amortizing a loan. But, unfortunately, for a big segment of the population — people who borrowed too much for their homes, paid too much and can afford too little — there isn't much that can be done.

Great Opportunity #1 The Great Bull Market in Commodities by Sean Brodrick

Martin: We talked about money being pumped into the economy. But very little of that money is rushing back into the housing market right now. Instead, the new money pumped in by the government is going elsewhere. Sean, please help us with that.

Sean Brodrick: Sure, I'd be happy to. Mike used the phrase "epic flood of liquidity," which describes precisely what they're trying to do: Inflate their way out of this mess. They just passed the stimulus package, which means we spend more money. And then we borrow still more money from China to buy junk from China.

But you have to ask yourself: What are the Chinese buying? Answer: The Chinese are buying commodities . There is a big, raging bull market in commodities — and that's what I am looking to play right now.

Does anybody know what the best-performing commodity of the year is?

Audience: Wheat?

Sean: Yes! Wheat! The USDA had already forecast that wheat inventories would fall to a 25- or 30-year low.

Consider this: U.S. wheat exporters sold 15 million bushels per week in 7 of the last 11 weeks. And the USDA target is only one million bushels per week!

This is what countries around the world are doing all the time with the money we send them. They're coming back with that money, and they're buying our wheat, which they think is cheap. That's why wheat has been limit up day after day.

Is this the top of the wheat market? I don't think so. We just heard today that India, despite being the second-largest grower of wheat in the world, is going to import 68% more wheat this year. That's a lot of wheat. China's imports of wheat are also going up. And its imports of soybean are increasing 36% year over year.

China and India are eating our lunch. Plus, they're changing the way they eat, and they're eating more wheat.

And consider this: As a rule of thumb, it takes three pounds of grain to make one pound of meat. So when you have people in China eating a lot more meat, that tends to accelerate the equation right there.

The good news: There are now ETFs that track agricultural commodities, such as PowerShares DB Agriculture Fund (symbol DBA) and Elements Rogers Agricultural Total Return Fund (symbol RJA). I've recommended these to subscribers, and they're doing extremely well.

Here's my rule for the commodity markets this year: Buy the dips.

The world is changing the way it eats — and we are creating all this new money all the time, shipping it to them, inviting them to buy our stuff. But they don't want junk. They want hard commodities. Wheat is only one of them. Corn is another. Ditto for soybeans.

And agriculture isn't the only commodity bull market. Another is gold . Any pullback will probably be a buying opportunity, and my near-term target is $1,065.

You're thinking: "That's not far away." But I set that target when gold was a lot lower. So when we get there, we'll have to reassess.

Overall, gold and the dollar are on a seesaw of pain. If one goes up, the other tends to go down. Short term, the dollar could rally, and that would bring about a temporary setback in gold. Longer term, the U.S. dollar has major problems, and that should push gold much higher.

Meanwhile, mine production of gold has hit a 10-year low, and it's not going to improve this year.

Plus, we have demand coming online from those ETFs that purchase gold. The GLD ETF alone now holds more gold than many central banks. There's even a new gold ETF that will launch this year in India. With a population of one billion, you've got to think that will also help increase gold bullion demand.

So there you have it: A supply-demand squeeze in gold that's just rip-roaring along.

Now, on to oil: OPEC is letting word circulate that at its next meeting in March, it may cut production. It's going to defend $80 per barrel as a floor in the price of oil . And remember: There are a lot of companies that are very profitable when oil is at $80.

Sure, oil stocks may go down in the short term, but with OPEC willing to defend a floor, and with the demand we're seeing from China and India ramping up, you're looking at a long-term trend that's exciting for the bulls in the oil market.

Plus, it's also bullish for alternate energy sources, especially uranium .

I made a famously early call on uranium and it's not working out right now. But I was just in Vancouver talking to some very smart people, and they're looking at all the nuclear power plants being built in Asia. They're adding it up and they think that although the supply-demand crunch may have been delayed, it's still coming on strong.

So, yes, we have a short-term pullback in the spot price of uranium. And, yes, I think there are commodities that will outperform uranium this year. But the longer term trend in uranium is enormous.

Ladies and gentlemen, for all commodities, this is a big bull market! It's driven by demand from Asia and by the global flood of liquidity — two trends that will sustain the global bull market in commodities.

Audience: One commodity that has been in the dumps for a long time, lumber, suddenly jumped the limit. What do you think about lumber? And is there an ETF you can use to play the lumber market or something similar?

Sean: Lumber futures markets are some of the most infamously unfair futures in the world, and I would not recommend them to anyone. But if you want to invest for the long term in the timber ETF, that's your choice. It's the Claymore/Clear Global Timber Index ETF (symbol CUT).

Audience: What about palladium?

Sean: I track its better-looking sister — platinum. South Africa, which supplies most of the world's platinum, is suffering major energy outages. They cannot guarantee power to mines. And if you have a brown-out at a mine, somebody gets killed. That's why they have to shut down.

Palladium is used as a substitute for platinum, and I would expect that trend to continue, especially because the price of platinum is stratospheric. That looks bullish for palladium.

Audience: Canada is changing its tax structure for development of oil sands in provinces like Alberta. What impact will that have?

Sean: I was just up in Vancouver, and believe me, they're talking about that half of the time — how it has become less advantageous for the oil companies ... and how it's about to change back again.

Here's the scoop: The current conservative Canadian government, which was elected on a "no-tax" pledge, immediately raised taxes instead. So everyone is ticked off at them, and they're probably going to get thrown out pretty soon.

Meanwhile, the opposition politicians are talking about two things to help them regain power: They will either delay the tax increases on the trusts, pushing them back by about five years, or they will cut the increases in half.

Either way, it's an opportunity. Everyone has priced in the worst-case tax scenario. Now it looks like [Prime Minister Stephen] Harper and the conservatives will be thrown out, and the tax situation will change from bad to not-so-bad for the royalty trusts. But nothing is written in stone. We're talking about politicians, and politicians are like a bag of snakes.

Audience: There have been two words bandied about recently — deflation and decoupling . If we get deflation, with the U.S. economy becoming a big drag on the entire world, won't that drive commodities down? And if we get decoupling, will we see rising commodities despite a weak U.S. economy?

Sean: I don't think we've reached a consensus on decoupling or not. But I can tell you that of China's 11.5% GDP growth last year, only slightly over 2 percentage points came from exports. Its economy is powered by the burgeoning spending of its citizens and by the surging investment of its government.

And it's not just China. Over the next 10 years, emerging markets are expected to spend $21 TRILLION rebuilding their infrastructures. That's why commodities can go higher even if there are problems here in the US.

Great Opportunity #2 The Next Big Move in Foreign Currencies
by Jack Crooks

Jack Crooks: "Bag of snakes"? "Seesaw of pain"? Sean ought to start a quote book. And it segues very well to currency analysis: Currency analysis is like analyzing a bag of worms . You have a lot of really ugly paper out there, and you have to choose which one is the least ugly.

Because all of the major currencies in the world are backed by the full faith and credit of the bag of snakes. It's an interesting dynamic that you have to play when you trade currencies.

Right now, the credit crunch could change the dynamics in the currency markets in ways that most people aren't seeing yet.

The first is the Japanese yen, and the unwinding of the carry trade is a key driver.

Because interest rates were so low in Japan (down to a 1/2% or less), major funds around the world — plus Ivy League graduates who started so-called "quant" hedge funds — figured they could borrow at that low 1/2% and then put the money in, say, New Zealand at 7%. They turned around and said to their investors: "Wow, am I a hero or what?"

But the dirty little secret about hedge funds is that there aren't many good ideas in the world. So when one guy does it, they all pile in. Sure enough, we saw massive amounts of borrowing in Japan, which led to a massive yen carry trade. In other words, a mammoth short position in the Japanese yen to fund other investments.

But now, the game is unraveling. We are seeing a repudiation of debts among individuals, corporations and funds. And that means they have to get out of their investments, buy back the yen and repay the yen loans. That huge shift back into yen is what's driving its value up.

The Japanese yen is the risk thermometer of the world . And there's a lot of risk settling over the world — massive amounts of leverage still in this system that have to be unwound. And I would suggest that we have only seen the tip of the iceberg in the unwinding of global leverage.

Consider the growth in derivatives: Back in 1990, the notional (nominal) value of all derivatives was 20% of global GDP. That was already a lot.

But fast-forward to the end of 2006. At that point in time, it was 789% of global GDP, a massive amount of debts and bets in the world.

Jeremy Grantham, a smart guy who's seen a lot of these cycles, expects the global write-offs by banks to reach $1 trillion before this is over. I think he's in the ballpark. That means a much bigger rise in the Japanese yen.

Our next target is 100 yen to the dollar. And that's still well above the long-term high for the yen, at 85 to the dollar. (Remember: At 105, it takes 105 yen to buy one dollar. At 100, it only takes 100 yen to buy one dollar. The fewer yen it takes to buy a dollar, the more the yen is worth.)

One more important point: Because of the appreciation in the Chinese currency and because most global investors can't really trade it, the yen is a proxy for people seeking to invest in China and the broader Asian block. Meanwhile, sovereign wealth funds — those giant government investment corporations — are starting to shift a lot of their money to Asia.

But don't be surprised if you see a bounce in the dollar against the euro and the pound. You may have noticed the dollar isn't making new lows on very bad news in the U.S. economy. The recent jobs report, for example, was ugly, and everybody thought "there goes the dollar to a new low." But it didn't happen because the dollar is priced for a lot of bad news, while the euro and the pound are priced for continued good news.

Governments all around the world are trying to avert a massive credit crisis. But never forget: Governments cannot set currency rates; the market is just too big for them. That's why, regardless of how ugly an economy may look, a currency may actually appreciate because of global capital flows.

Another example: The current account deficit of the United States is improving now and has been for the last several quarters. But don't be fooled by that! The last two times we had an improvement in the current deficit was during the stock market crash of 1987 and the tech wreck of 2000. Plus, the last two times we saw the current account improve, we also went into a recession.

My view: Another recession and another stock market decline will be very bullish for the yen.

Audience: How can you be bullish on the yen and also near-term bullish on the U.S. dollar?

Martin: Rather than say "bullish" or "bearish" on a currency, maybe it's easier just to rank them. Right now, the Japanese yen gets the highest ranking in Jack's scenario, the British pound is near the bottom of his rankings, and the U.S. dollar is somewhere in between. So, if you're trading currencies, all that means is "buy the yen" and "sell the pound."

Audience: Is there an ETF that helps you do that?

Jack: Yes, the Japanese yen ETF, symbol FXY.

Audience: How can you invest in the Chinese yuan?

Jack: You could open an account with EverBank. They provide bank time deposits denominated in Chinese currency.

Audience: I'm getting dozens of offers from banks, some of them very weak banks, to lend me money for a year at ridiculously low interest rates. Why can't I borrow that money and put it into an EverBank deposit denominated in New Zealand dollars, paying me 7%?

Jack: No reason at all, provided you're not worried about intermediate setbacks and you don't need the money. New Zealand and Australia are part of that strong Asian block. They're paying a nice yield.

Great Opportunity #3 Protection and Profit From the Downside

Martin: Overall, this is a time to reduce risk. And to the degree that you're still exposed to risk, to buy protection. Fortunately, you can do that with inverse ETFs — not only on the broad market, but on individual sectors.

Like any other ETF, your goal is to buy it low and sell it high. Like any other ETF, you can buy it in any brokerage account.

So six months from now, don't come back and say: "I got caught. But I had no choice. I had no way to get out."

It's not true. You do have a way to get out. You do have a convenient vehicle for protecting yourself. There is no excuse for getting caught in what we see coming. You have every opportunity right now to protect yourself and to reap a substantial profit opportunity.

Here are two inverse ETFs that you can buy right now:

  • The first is symbol DOG, designed to go up 10% for every 10% decline in the Dow Jones Industrials.
  • The second is REW, designed to rise 20% with every 10% decline in the Dow Jones U.S. Technology Index, U.S. tech stocks.

In closing, let me say this: The flood of events that's taking place right now is undeniable. You can see it in your neighborhood, in the headlines.

We have the real estate market that's crashing. We have high-risk derivatives that are blowing up. We have a recession that's hitting hard. We have bond insurers that are collapsing. We have the Fed printing money, creating more and more pressure for inflation — and generating great new opportunities for investors.

So, if you haven't done so already, now is the time to climb to safer, higher ground and to build an ark of protection that would make Noah proud. And now is the time to make money.

Thank you very much for attending!

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06 Mar 08, 07:56
Australian House Prices

Could anyone help with some insight for the Australian housing market. Everyone here in Aus. is in denial of houses falling in price and most believe it isn't possible and talk of only a plateau! Most are saying China is our protection, we lack housing supply and that we don't have a bad subprime crisis.

We have the worst ratio of household income to house prices when compared to the US and UK and our interest rates having been increasing for the last year or so. Currently the market is 30% over valued in most areas. Inflation is at its highest point in six years, fuelled by soaring prices in rent, vegetables and financial services.

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