Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19
Palladium, Darling of the PGEs, Shifting into High Gear - 13th April 19
MMT is a spectacularly Dem idea - 13th April 19
The 'Silver Lines' of Opportunity - 13th April 19
Gold Stocks Bull Market Breakout Potential - 13th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Surviving the Credit Crisis Chaos

Companies / Credit Crisis 2008 Sep 17, 2008 - 02:36 AM GMT

By: Kurt_Kasun

Companies Best Financial Markets Analysis ArticleLast week when I wrote, “ Extraordinary Measures Today, a Financial Funeral Tomorrow ,” I didn't literally think that the funeral would actually occur ‘tomorrow'. Someone started the financial Armageddon clock when the ratings agencies downgraded AIG this evening and the Fed told AIG that they were on their own to raise capital. It was reported on CNBC that they have until Wednesday to secure $75 billion or risk being forced to declare bankruptcy--setting off the most nightmarish of scenarios.


Is this how it ends? I have a hard time believing the US government isn't holding some kind of a trump card (possibly a figurative ‘gun to the head' of Goldman, JP Morgan, others to ‘pony up'). Otherwise, all of the Herculean, extraordinary measures they have made up until now would be a waste of time (all of those weekends they could have been watching football like the rest of us). They will almost undoubtedly pull something out before permitting the entire world to descend into credit chaos. I think they have enough juice left to avert the financial catastrophe once again. But the smell of fear is nonetheless becoming more and more palpable. Many in the goldilocks crowd appear to be entering a state of shock. It is actually healthy to move out of denial and into panic. It means you at least have chance to survive.

But you have to react appropriately. Once you get your bearings and correctly position yourself, you can move from panic to equanimity. As I wrote in my last article , deflationary-type investments have been the winners since mid-July. They have certainly outperformed the Goldilocks gang this decade, but have lagged those who have been positioned for inflation, benefitting from a much weaker US dollar. Many of the inflation investors have seen their portfolios grow several-fold since 2002.

But many of the gains enjoyed by those who were “long inflation” quickly evaporated over the last few months, placing many of them on par with the performance of those who were “long deflation.” Deflation means portfolio death for those who are betting on inflation. Today, a Bloomberg article titled, “ Asia to `Monitor' U.S. Banking Crisis; Assess Impact ," quotes Tony Tan, deputy chairman of Government of Singapore Investment Corp., who said, "The world may face 'Japan-like' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis. If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably. A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue." This captures the deflationist view of the negative feedback loop that now seems inevitable.

"Team Obama" and "Team McCain" may have something to say about this outcome, however. Obama is already promising free money to people who pay no income tax! Billions of dollars! These checks are going to the people who have no concept of savings and who will definitely spend it. Once he figures out that the real consumption comes from people who earn more than $250,000/year, he will be giving this cohort rebates too. McCain will do the same. Do you think they are going to sit by and watch deflation doom their economy? They may fail, but they are at least going to try. And when they do, the inflation trade will be back on. The Fed will be forced to monetize the debt in this scenario as the US Government is forced to issue more bonds to compensate an exploding budget deficit. Dollars could become worthless. Or they could fail and deflation will win out.

We may remain in the grips of deflation through the remainder of the year. If problem of the financial markets bleed into the real economy as I expect, you can expect to see trillions of dollars mailed out to consumers in an effort to stave off Keynesian concerns over deflationary thrift as a new administration takes charge. McCain and Obama are both Keynesians at heart. Stimulus packages coming from Obama and Democrat Congress could be unlike anything this country has ever seen. They could call it “The Great New Deal Society.” Descendant of FDR and LBJ could show up on the White House lawn as the bills are signed into law.

You should expect for the markets to oscillate between inflation and deflation until the final reckoning occurs and be prepared to reposition accordingly. Those who are positioned one-way will likely see their portfolio shredded a little more each time the sword-sharpened pendulum perilously swings from one extreme to the other. Determining which ‘flation prevails (“who wins”) might depend on which team “has the ball last.” There is one possible “buy-and-hold” strategy designed to hold up in both scenarios. I discuss it in my commentary .

Excerpted from the 9/15/08 Global MegaTrends Portfolio's Newsletter:

To learn more about Kurt's Kasun's Global MegaTrends Portfolio, click here

By Kurt Kasun

A contributing writer to GreenFaucet.com , Kurt Kasun writes a high-end investment timing service, GlobalMacro, which is focused on identifying opportunities that produce returns in excess of market with reasonable risk. He is strategically located in Washington , D.C. , a key to maintaining contacts and relationships which help Kurt understand global policy and economic factors as they emerge. His investment approach has always been macro in nature largely due to his undergraduate studies at the U.S. Military Academy at West Point (B. S. National Security, Public Affairs, 1989) and his graduate studies at George Mason University (M.A. International Commerce and Policy, 2006).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Kurt Kasun Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules