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Preserving Wealth during the Global Banking CrisisGary Dorsch "Accepting losses is the single most important investment device to insure safety of capital. It is also the action that most people know the least about, and are least likely to execute. The most important single thing I learned is that accepting losses promptly is the first key to success. It's a great mistake to think that what goes down must come back-up," warned Gerald Loeb, the Dean of Wall Street, in his epic book "The Battle for Investment Survival," last copyrighted in 1965. "In all cases, where actual losses are involved, I'm inclined to say that when a new investment has shrunk by 10%, it's time to stop, look, and listen. I think it usually ought to be sold-out, and the loss taken. I'm almost inclined to say, dogmatically, sell it out before trying again," Loeb advised his readers, concerning wagers in the stock market that turn sour, due to unexpected and unforeseen events. A once-in-a-century financial crisis has brought some of the world's largest banks to the brink of insolvency, and quasi-nationalization, choking-off credit to wide swaths of the private sector, and threatening to throw the world economy into its deepest and longest recession since the "Great Depression" of the 1930's. Global stock markets have been mauled by the fallout from the "credit crunch," losing roughly $32-trillion of market value from peak levels reached in October 2007. According to Mr Loeb, "Successful investing is a battle for financial survival. Investing is fundamentally, an effort to obtain a rental from others, for the temporary use of one's capital. One should attempt to conserve the purchasing power of money, through the purchase or retention of fixed interest and principal obligations, including cash and a government promise to pay, only during cycles of deflation, and various forms of equity holdings, only in cycles of inflation." During this once-in-a century financial crisis, the strategy of owning high-grade bonds and gold, proved to be "safe-havens" for preserving wealth. With the US stock market suffering its worst year since the 1930's, the Lehman Treasury bond index posted a gain of 14.6%, its best performance since 1995. Ten-year US-Treasury yields started the year at 4.03% and closed at 2.20%, after trading near 4.11% as recently as October. Gold ended +5% higher in US-dollar terms last year, and gained 30% against the Aussie dollar, 35% vs the British pound, and 10% vs the Euro.
Shell-shocked investors in the US-stock market were badly burned last year, and are now sitting on a record $3.85-trillion in money market funds. However, the Federal Reserve has driven the fed funds rate into a target range of zero to 0.25%, and has vowed to keep interest rates pegged near zero for a long period of time, probably through 2009 and beyond. Taxable yields on money funds have tumbled to a pitiful 0.40%, after annual operating expenses are deducted. The idle cash parked in US-money market funds is nearly equal in size to China's FX reserves and the SWF's of Kuwait and Saudi Arabia combined. Would holders of US-money market funds agree to buy long-dated Treasuries, in order to finance the deficit at historically low interest rates? Or should investors turn to high-grade corporate bonds, for companies with strong balance sheets, little debt coming due over the next few-years, and yielding 400-basis points or more than Treasuries. Barclay's High-Grade Corporate Bond Index, (US-symbol: LQD), has recouped most of its losses from the post-Lehman bankruptcy shakeout, including its $5.60 annual dividend payments. Still, buying corporate bonds is not without risk, especially if the Dow Jones Industrials tumble below the November low of 7,500, ushering in a "Great Depression," and increasing the odds of company defaults. Also, corporate notes might sink under the weight of $2-trillion of fresh Treasury debt this year.
The plunge in the US Treasury's 10-year yield to 2% was preceded by a stunning collapse of commodity markets, especially for base metals and energy. In the span of just six-months, the Dow Jones Index of 19-exchange traded commodities, swung from a annualized +40% gain in July, to a stunning -41% loss in December. Volatile swings in the commodity markets are often seen as leading indicators for producer prices, and ultimately, the consumer price index. The US-Consumer Price Index (CPI) fell 0.7% in December, the third-straight monthly decline, capping a year in which prices advanced only 0.1%, the weakest 12-month reading since December 1954. Gasoline fell 17.2% and accounted for almost 90% of the decrease in headline CPI. If commodity markets can't recover in a meaningful way in the months ahead, the CPI and producer prices (PPI) would begin to show outright signals of deflation seeping into the broad economy. If a long period of deflation and depression lies ahead, then a best case scenario one might expect is an "L" shaped economic recovery, after stock markets finally reach the elusive bottom. The lethal "credit crunch," engineered by the top-tier US-banks, has led to the massive destruction of 2.6-million US-jobs, which in turn, is fueling a downward spiral, where unemployment depresses consumer spending, retail sales, and business investment, which in turn, lead to further layoffs. As long as this vicious cycle remains unbroken, high-grade bonds would remain a safe-haven. On Dec 18th, Dallas Fed chief Richard Fisher said the US-central bank would take whatever steps necessary to avoid a depression. "We stand ready to grow our balance sheet even more should conditions warrant. At the current time, the biggest concern is deflation and the Fed can worry about inflation later. We have to do everything we can to lift the economy up and prevent deflation from taking hold." On Jan 15th, Chicago Fed chief Charles Evans said, "With the United States is in the midst of a serious recession, it could be useful to purchase significant quantities of longer-term securities such as agency debt, agency mortgage-backed securities and Treasury securities," he said. Thus, the Federal Reserve is expected to be the buyer of last resort for the upcoming supply of US-Treasury debt,by running its electronic printing press at billions of dollars per hour. There might be no alternative to fixing America's greatest financial crisis since the "Great Depression" of the 1930's, than to ask the Fed to monetize the upcoming supply of Treasury debt. The biggest risk for today's buyer of Treasury-notes is that the Fed might be successful in reviving inflation, but alert traders can gauge trends in the commodities markets, for the first signals of such a development. The gold market is more focused on the upcoming tidal wave of paper currency that central banks will churn out in the months ahead. Even the Swiss National Bank is vowing to devalue the Swiss franc against the Euro, with a massive money printing operation. To read the rest of this article, click on the hyperlink below: http://www.sirchartsalot.com/article.php?id=102 Jan 22, 2009 321gold Ltd |
