A False Recovery Ahead?

People who read this blog regularly know that I am pretty transparent. You all know what I am bullish on and when. You all know when I’m right or wrong.  It’s just not my style to say that a disaster is coming from this debt crisis and not give actionable advice. My next major move is to buy real estate in distressed markets for a bounce that I think is coming. If I’m wrong, you’ll all know. But if I’m right, hopefully people will learn how to beat markets for themselves.

The Next 5 Years

I think gold and silver will rise dramatically. I think government bonds should be shorted. Generally real estate should be sold on the next bounce for existing homeowners and bought on this correction for new homeowners. Commodities should rise as the dollar depreciates. China is in a long-term bull market; all corrections should be bought. Borrow long-term fixed if you can and hedge against the government. If you generally follow this advice, I believe you will do just fine in this debt crisis. It is the people who have their money in savings accounts yielding 0.25% that will be in trouble.

High Costs for Missing Trends

Every single day I battle with myself to be as objective as humanly possible when it comes to the markets. I strongly believe the years ahead will bring great opportunities to those who correctly foresee certain cycles. Observing trends correctly is literally the difference between returning 200% and losing 50%. This is a very big difference. Imagine having a modest $200,000 for retirement. You can either watch your assets grow to $600,ooo if you are right or watch it wither to $100,000 if you are wrong. Boomers need to be self-sufficient because pensions are underfunded and our government is dead broke.

Yesterday I spoke about the debt crisis and why it is a virtual guarantee to hit the U.S. Because I have a pretty dire outlook for our debt situation, I think people wrongly assume certain things. They think that I am going short the U.S. and that I believe the unemployment rate will spike to 25%+. This is not true though. I am starting to sense that there will be a false economic recovery due to a powerful inflationary cycle. Foreigners with appreciating currencies will find U.S. assets very attractive in the short-term. No matter how bad the situation is in the U.S., people still view the U.S. as a land of opportunity. The extent of the debt crisis in America is still not appreciated. Until people recognize our problems, a false recovery can definitely take place.

A false recovery is basically one where home prices rise 10%, but gasoline prices rise 20%. Wages rise, but so do the costs of education and health care. In the short run, people can misread something like rising sales as evidence the economy is perking up. But sales are rising along with the price of assets because the dollar is being devalued. It is very hard for the average person to understand the insidious theft of wealth inflation brings. Certain assets will outpace the rise of inflation; others will underperform. The assets that will outperform are those that will benefit the most when the government defaults. This is one reason gold is rallying.

Watching the debt bubble grow is like watching the housing bubble grow. Housing created both the boom and bust in America. People came up with all different explanations for why the economy was robust, but it came all down to housing. The same thing is happening now. Our leaders will try to take credit for the supposed economic recovery when it is in fact debt that is driving the economy forward. The self-inflicted delusion can actually last years until the inevitable crisis emerges. People will become the most bullish on our economy right when our debt structure is about to burst. About this I am sure. In the meantime, I plan on profiting from the delusion while also protecting myself from tail risks with gold.

A False Recovery Ahead? is a post from: Expected Returns

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