"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Ludwig Von Mises
The stock market hit new highs for the year yesterday as Wall Street cheered on America's new bull market and economic miracle. Streaming across the news was more excitement over the recent announcement of banks across the board paying back their TARP bail out money now that all the problems are behind us.
A poll this week showed the number of bears (people worried about the economy and stocks) at a 6 and 1/2 year low and close to the time record low that was set 21 years ago.
This means, once again, the Tuna is alone with worries about the economy.
When I began writing these articles in the Fall of 2007, my focus was on the coming disaster in the financial sector based on the troubles in the real estate market. I became curious during 2006 when trying to figure out how the people would pay for the homes that I was selling.
After a lot of reading I found out about how loans were packaged and terms like CDO's and Credit Default Swaps. I began writing about my concerns during that fall as a way of helping me remember and understand the topics I was reading about.
For 12 months readers could feel that there may be a problem but dismissed the notion using terms such as "chicken little" and "far too extreme."
Then in the fall of 2008 the financial markets collapsed. (Far worse than I imagined or forecasted.)
Since then my focus has been on the impact of the decisions made during that fall. Decisions that continue to be made today.
The government decided at that point that they would bail out everyone and that they would except no short term pain for the mistakes previously made.
Fannie, Freddie, Citi, Bank of America, Goldman Sacs, JP Morgan, AIG, and General Motors all were nationalized overnight. The notion that the money is being given back to the government today is laughable. All these companies are bankrupt and walk around today as zombies due to accounting gimmicks and the full backing of our tax dollars.
What happened during the fall of 2008 was that the government decided to put the full pressure of every loss moving forward on the back of the American public debt. The deficit this year which was initially projected to be $400 billion, topped $1.9 trillion including off balance sheet items such as TARP. It makes no difference whether you want to call something "off balance sheet" because the interest still needs to be paid on it every month.
Obama is already in the works to prepare a second stimulus package due to the complete failure of the first to create jobs. The Obamacare bill appears to be moving along nicely and other plans of destruction such as cap and tax appear to have legs as well.
I believe that by the end of next year or early 2011 the United States is going to face a crisis in funding its debt. This will change the complete landscape of the country we live in today.
The Federal Reserve will have to decide who it wants to save with its printing press. As the dollar begins to plunge, they will be limited on their ability to save everyone as they are today.
One of the least likely sectors I believe they will look to protect is commercial real estate, which is why I am preparing today to be a buyer in that market. Another market is residential real estate. People buying homes today will be slaughtered when the Fed is no longer able to function as the mortgage market. The "bottom" in the housing market you hear about has now become the selling opportunity of a lifetime for current homeowners.
The exact details of how it will play out are impossible to see because you cannot forecast how much damage Bernanke will ultimately achieve with his printing press. If he backs away as he should, then you will see stocks and real estate plunge as we enter the long overdue deflationary depression.
If he does as he has promised and turns the money printing on full steam then we will experience the worst case scenario.
Until then, enjoy the world we live in today because we are currently in the eye of the storm. What we experienced last year was just a warm up for what is on the way.
