3-8-10
 

Buy Wheelbarrows!

They would have you believe that everything is just peachy. This recovery is like all the others before it. Here are some recent quotes to ponder...beneath them are previous quotes from the same person.

Then:

"I believe that the general growth in large [financial] institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically -- I should say, fully -- hedged." - 2000

Now:
"The recession is over. It bottomed back in the middle of the year." February 10, 2010 - Alan Greenspan

Then:

"In the financial system we have today, with less risk concentrated in banks, the probability of systemic financial crises may be lower than in traditional bank-centered financial systems. May, 16, 2006

Now:
"That will never happen to this country." (when asked if the US will ever lose its AAA credit rating) - February 07, 2010 - Timothy Geithner, Treasury Secretary

Then:
With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve's responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions." November 15, 2005

Timeless:

"The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." 2002 - Chairman of the Federal Reserve, Ben Bernanke.

What they're NOT saying

Now, everybody says things that they wish they hadn't said. But, my in my experience what people say, whether flippant or not always contains an insight into how they think. The quote that stands out the most is that of Helicopter Ben Bernanke. I was wondering why my electric bill has been so high in recent months. I thought it was the weather, when in fact, it's that giant printing press in Washington, printing out billions and billions of dollars...at no cost. Really, no cost?

How about a deficit of $14.3 trillion? Look there is only one result that can describe a situation where you spend $3 for every $2 that you take in...bankruptcy!

But that will never happen here right? Not if you can print money to make up the difference. But, mark my words, if the printing presses don't stop soon, there will be a reckoning day that is going to make last year's financial crisis look like a nice Sunday walk.

The best measure of a country's health is how much of its debt others are willing to buy and hold. From that perspective, the US is one of the healthiest countries in the world, with Ireland at number 1. Ireland's external debt to GDP ratio is measured in the hundreds of percent, meaning that it owes much more than it produces. Maybe that is why it's a card-carrying member of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

The US on the other hand comes in at number 20, quite respectable really with an external debt to GDP ratio of 90%. Number one is Algeria at 1.2% - but who really cares about Algeria - after-all it's not like the world is clamoring for its debt. In truth, if no one wants your debt, your debt to GDP ratio will always be low. In the case of the US, everyone seemingly wants to buy treasuries even though they are only paying 3.5%. This my friends will be the first danger sign to beware of.

When long term US treasury rates begin to increase, and they will, absent non-government subsidized economic growth it will signal the likely beginning of the end for that exalted AAA rating that Geithner mentioned above. The US received its triple AAA rating in 1917. More recently both Moodys and Standard and Poors announced that the US is on the path to lose its rating again if it doesn't get its financial house in order.

Of course, these are the same agencies that rated mortgage back securities at AAA as well. If the US loses it's rating, the cost for borrowing will increase overnight, as will inflation. There will be an outflow of capital from the US into commodity-based currencies such as the Aussie Dollar, The Norwegian Krone and the Canadian Dollar. And, all hell will break loose in the gold and silver market. Those are the places you want to be positioned BEFORE this happens. And, if it doesn't happen, those are the places you want to be positioned anyway in order to protect your purchasing power. A portfolio of those five positions held equally since this time last year would have shown a gain of more than 30%.

I mentioned that there would be a signal or series of signals that would occur before the US lost it's rating or spiraled further into a financial morass. The first signal to look for is not in the US, but in Great Britain. There the situation is much worse with the British printing presses running faster than than Prince Charles on his way home to Camilla. Britain will be the frontline country that could precipitate a huge crisis.

Right now the focus is on the PIIGS, but they are being supported by stronger nations within the EURO. It's Britain, which refused to use the EURO that has most at stake since it has no backing from a bevy of Sovereign nations. Britain is first in line outside the Euro zone to lose its AAA rating. And, that will happen before the US loses its rating. If this scenario does indeed unfold, then it will be your signal to go even longer into the gold market.

Why Wait?

Sure, these things take time to play out. But, there is absolutely no evidence to the contrary that this scenario will NOT play out. So why wait. Start positioning yourself now to be in the right place at the right time when the fallout does happen. Here's how:

Make sure you are diversified in your currency holdings. Everbank (Everbank.com) has a selection of foreign currency CDs where you can park your cash. It even offers portfolios with commodity based currencies and gold.

You can buy foreign currency ETFs on the NYSE.

You can add to your holdings in gold stocks, but stick to the major players.

You can buy more bullion and store in an accessible location.

You can buy real estate overseas in places that will be lesser affected.

Or, you can buy some wheelbarrows and do nothing. Instead pay heed to the likes of Allen Greenspan, Tim Geithner and Ben Bernanke.... after all, they have been proven right more often than not eh?

Best regards,

Mark Patricks
 

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