Warning Danger Ahead

on October 15, 2015 Blog, Money Sense with 0 comments
Financial Crisis Ahead Financial Crisis Ahead

 

Many of us have seen Carl Icahn’s video, Warning, Danger Ahead. He speaks truth however many still don’t listen.

By heart, I am an entrepreneur with an investment and trading acumen. I have been investing and trading for about a decade now and have seen some things but not as many as the very wise Wall Street magnates like Icahn. There is one striking thing that stands out the most to me and it is this: Bad news is now good news. It has become such a pet peeve that sometimes I feel like my face could explode! Who caused this? Its the public enemy number one, Federal Reserve. Economics and fundamentals are so far out the window it may be too late to lure it back. There is always hope.

Here’s somethings that I want to provide as warnings and fundamental truths. Know what I am saying, then go and do your research.

Debt

What has the financial world learned from the last great recession in 2008? Absolutely nothing! Instead, the irresponsible people took on more debt. Debt has never been higher and in many cases, almost double. World governments, companies, investors (margin debt), and individuals have piled on more debt since 2008 and before.

Why do they dare do it knowing that debt kills? It is because they have confidence that the Feds and world central banks will bail them out again. So it is a race to who can take on the most debt and make the most money making the income gap between the 1% and the rest wider and wider. Can central banks keep printing money or keep rates at zero forever? Absolutely not. Having zero rates is telling people that your currency is worthless and they can borrow without interest. Eventually, one country will see this opportunity and be contrarian and perhaps take over the lead as the next reserve currency. Perhaps it is China?

Financial Engineering

As Icahn said, corporations are taking full advantage of this low interest rate environment to financially engineer probably the most successive years of “growth” in the history of Wall Street. The man on the street has no idea. All they know is they can’t find good jobs or a job at all but yet the large corporations are doing well and so the economy must be doing well.

What has happened in the last 7 years is that companies has been piling on cheap debt and using the loans to acquire other companies so that they can show growth year after year. This financial engineering has made Wall Street appear like there wasn’t a recession to begin with and companies are still growing while it is said that 50 million Americans are on food stamps.

The question then becomes, how much more can companies take on debt and keep the acquisition pace up? The short answer is not forever. Even a person with no finance knowledge can tell you so. Neither can the Federal Reserve keep printing money. Countries will start to get frustrated that the US is getting away with a seemingly unlimited amount of free wealth generating. Eventually, most will say enough is enough and the concerted effort will begin to move away from the USD as the reserve currency. Being the reserve currency is the only reason why the USD has not cratered. See Sweden who’ QE is causing ripples now.

Inflation/Deflation

You always hear central banks talk about keeping inflation under control. Now the markets are talking deflation, a situation where prices go down. Ever wonder why there MUST be inflation? Why can’t prices go down which is good for consumers? The answer is because of fiat currency and debt. The governments need inflation so that they can pay off their debts for cheaper in the future.

The big question is after trillions of dollar printing by the Feds and the European central bank, why hasn’t inflation become an issue? You hear economists say that zero rates causes deflation but why? For me I keep it simple. This reason also seems most plausible to me and is taught in basic economics class. Instead you get complicated answers that confuse even more and economists dancing around the topic. This is the mass media delusion to keep the calm. My economics professor taught in Econ 101, if a helicopter flew above a city and dropped 1 billion dollars, the effect that this free money would have on goods would be a net zero. Why? Because everyone got richer and had more money, but the supply and demand of goods remained the same. Instead of costing $1 per widget, it would now cost maybe $1.30. This is called inflation where the supply remains the same but more money was “printed”.

The reason why the US could print an unprecedented amount of money and still not have hyper inflation is because the printed money did not go evenly to all people in the market. Instead, only the top 1%, investment banks, and large corporations had access to this cheap money. This is why you keep hearing notable people saying only the 1% gained from quantitative easing (QE) and the wealth gap just grew larger. The man on the street did not have access to this cheap money. Well, the US did this for a reason. If everyone had access to all this money, they would just go out and overpay for things like real estate again causing another property or asset bubble. However, if the “smart” money got access to this cash, it was believed that they would use it to grow businesses and create jobs. What has happened instead is the greatest theft in the history of human economics. “Smart” money has taken on debt and invested vast amounts of money into all kinds of assets from stocks, bonds, real estate, art causing a disconnect of asset prices to the real economy. So while the regular person is seeing a house and stocks get more expensive, they have yet to see incomes increase. The rich got richer, the poor got poorer.

The end of this experiment doesn’t look good. Either the financial system will obliterate or there will be a mass revolt if the public found out they got shafted. Or, another superpower might take a needle and prick the over inflated balloon and end the party.

How to Protect Yourself

– Be geo-diversified if possible. Have assets around the world and not just in US or Europe.
– Hold physical currency. Paper currency and solid currencies like gold or silver.
– Own real estate that are appropriately priced. Don’t own real estate in cities where prices are high or disconnected from the economy like Vancouver or Toronto. NYC real estate prices is high but so are the incomes of the criminals at Wall Street.
– Have at least 3 months of food and water supply. Don’t forget the fuel to cook the food! If a sudden currency crisis appears you have at least 3 months to wait for it to stabilize and figure out what to do next. Preparedness is not paranoia. Just think Katrina, Venezuela, Brazil, Greece.

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