Protect Yourself From Economic Crisis
June 13, 2012 by John Myers
The Occupy Wall Street leftists may have a lot less square footage to trespass on, given the way the global economy is imploding. Stock indexes around the world are down and commodity prices are in their worst slump since 2008. If the trend continues, the Dow Jones industrial average could be valued at half its current price in 24 months.
That will mean that Wall Street fat cats could soon look more like feral felines. That wouldn’t be a heartbreaker except for the fact that the destruction of Wall Street would bring suffering to tens of millions of Americans.
Global markets took it on the chin this month in the wake of unemployment numbers that underscore the weakest U.S. economic recovery in decades.
The Four Horsemen Of Deflation
Not once in the 30 years that I have been researching the markets have I witnessed the troubles that the world now faces: a stock market slide, falling gross domestic product, rising unemployment and waning confidence.
In just the past few weeks, Big Board U.S. stocks have erased most of the gains they made during the first five months of this year. Only because of a 287 point rally last Wednesday — its strongest single day performance this year — the Dow is now comfortably over 12,000. But the Dow Jones Industrial Average is not immune from Europe’s problems, and a break below 12,000 could soon push the index below 10,700. The next support for the Dow would be 9,000.
Big Board stocks have been responding to the likelihood of a double-dip recession. U.S. GDP has been slashed from 2.2 percent to 1.9 percent. The U.S. economy is not adding jobs. As stagnation has spread into manufacturing, consumer confidence is beginning to tank.
American payrolls increased by just 69,000 last month, far below the 150,000 that analysts had expected. The unemployment rate rose to 8.2 percent from 8.1 percent, while revised estimates show that fewer jobs were created in the past three months than originally expected. The Obama economic recovery has run out of steam.
Then there is Europe. Crises in Spain and Greece have sparked a bank run that has pushed yields on relatively risk-free assets like U.S. Treasuries and German Bunds to record lows. The two-year German Bund has even dipped into negative territory. Yields on the 10-year U.S. Treasury have fallen to 1.40 percent. Those are yields not seen since the Great Depression. (See Treasury chart further below.)
Nervous investors are throwing money into the U.S. and German government bonds knowing they’ll get back a negative return when adjusted for inflation. This is becoming a panic — and for good reason. Europe’s wholesale funding market is broken at a time when Spain’s banking system is teetering toward bankruptcy.
Worse Than 2008
My old friend and Personal Liberty Digest™ columnist Chip Wood signs off each Friday with this phrase: “Keep some power dry.” Unfortunately, the people who run the Federal government don’t read Wood’s columns.
When the economic calamity hit four years ago, governments around the world began injecting money into the economy. The Administration of President George W. Bush and a complacent Congress immediately shot $700 billion with the Troubled Asset Relief Program. That plus other bailouts left the United States with a Federal budget deficit of $1.17 trillion in fiscal 2012.
Last week the Congressional Budget Office (CBO) released a report showing that the national debt will soar over the coming years.
“The growing imbalance between revenues and spending, combined with spiralling interest payments, would swiftly push debt to higher and higher levels,” the CBO said in its 2012 Long-term Budget Outlook. “Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.”
The Federal government has not the means to inject another trillion dollars or more into the economy because they have burned all their powder. If Washington were to try another rescue like they mounted four years ago, the U.S. Treasury market would implode.
The result of that would be higher interest rates. The bulk of bidders at U.S. Treasury auctions these days are foreign powers, particularly China. However, if China and other nations begin to think the United States is another Argentina, they simply won’t throw good money after bad into U.S. Treasury bills, notes and bonds. The result is that America would have to go begging to get buyers of its debt. That would mean higher interest rates because if the marketing of U.S. debt securities slowed, the U.S. government would cease to operate.
Higher rates forced on Treasury auctions would send interest rates across the board higher. Higher rates for mortgages, car loans, credit cards, you name it. And that, my friends, would be a death knell for an economy that is struggling with interest rates at their lowest levels since the 1930s.
Crude Is Crashing
The price of oil is in its worst retreat since 2008. Crude fell 18 percent in May. In fact, oil prices traded down in 17 of the 22 trading days last month, the worst single monthly performance for oil since 1997. Given the poor prospects for the U.S. economy, China’s economic woes and the debt disaster in Europe, oil could give up 50 percent of its value. That would put crude around the $40 per barrel mark. This would throw petroleum stocks into a devastating bear market.
Keep Only Your Core Gold And Silver Holdings
Gold is off its highs, but it is one of the few real assets that has held its value. I wouldn’t recommend the purchase of additional gold just yet, because I think the bullion bull has stalled. But it is impossible to predict what crisis might erupt, including the collapse of the greenback. If you can put a few dollars away — something that is getting tougher to do these days — you should keep at least 20 percent of savings in physical bullion. More than 25 percent of your savings in gold is not wise, because I think it will correct further downward. Long term, however, gold will rise well above $2,000 because of the bleak prospects for the U.S. dollar.
What to do? I think anybody holding from a small nest egg to a fortune should get heavily into cash.
If you have $10,000 or less, and given the poor rate of bond returns, I think you should find a good safe and lock it up along with your gold and some survival silver. A safety deposit box is another alternative. Even if your bank fails, I think you will have access to your box.
If you have more than $10,000 saved in a safe or a bank safety deposit box. I recommend you buy three-month to six-month U.S. Treasury bills. Most banks will sell you U.S. Treasury securities. You can also buy U.S. Treasuries in paperless electronic form from TreasuryDirect. You can go online and research more about them and more about U.S. Treasuries by clicking here.
Don’t buy Treasury instruments that have maturity longer than six months. Interest rates cannot stay at these historic lows and once they rise, longer maturity debt instruments such as notes and bonds will lose a significant amount of their value.
Yours in good times and bad,
Editor, Myers Energy & Gold Report