How I See the Scenarios for the Financial Markets Playing Out
I do not have a crystal ball, and I am sure this will get an overflow of opinions from our Readers, but I am going to go ahead and try to give a couple of different scenarios/predictions of global economics.
First, I doubt any of these are going to be pretty as the longer our “smart people” delay the medicine, the more painful the cure will be. For example, as you know we have a balance sheet problem with Social Security. It’s not as if this issue hasn’t been known for the last two decades. It’s the demographics. Duh!
In fact, SS was “fixed” before, but apparently not well enough to escape the troubles it is in once again. Had this funding/spending problem been seriously addressed years ago, we would not be thinking about this today. Isn’t future problem solving what we hire people in Washington for? Now we are looking at a crisis that easily could have been avoided.
Kicking the Can up the Hill
But honestly, that is small peanuts compared to debts that global governments have been – and are still – taking on. At some point, confidence in the system will break down. If and when that happens, the transition won’t be graceful.
Looking over Santa Ana, Guatemala and Volcano Agua
This is already starting in Europe. Greece is lost and needs to be exited from the Euro. Sure they may be able to kick the can down the road – or more like up the hill – a while longer, but the math between assets and liabilities does not compute. That is unless, Germany, the Dutch and the Finns decide to take on Greece’s debts and in the end, not be paid. Doubtful.
One option floating about is to issue Euro Bonds, similar to U.S. Government Bonds. The problem with that is the member countries would have to give up sovereignty, making Euro-land the United Countries of Euro. That has about as much chance of happening as the French changing their national cuisine to rye bread and sauerkraut and the Spanish specializing in pasta and pizza.
And speaking of the Spanish, they are the 12th largest economy in the world, and their bank balance sheets are a mess, to be polite. How long can they simply move the pile of cash around the board using accounting tricks and bailouts before the investors realize the jig is up? Oh wait! With bond yields around 7.5% the bond market is forcing Spain’s hand. It gets to a point where a government can no longer service their debt, and Spain is near the end game. Are you hearing this America?
Is Europe presaging America?
Why do you think the Fed is keeping a lid on interest rates? Where would bond yields be if the Federal Reserve was not buying Treasuries? And what would the added interest cost be to the Federal Government/tax payers? In one word… HUGE!
But I am getting off track, and the purpose of this is not to frighten you with the-world-is-coming-to-an-end doomsday stuff. The question I have is how can we profit from this madness?
I cannot control the idiots in charge or the decisions they make. You may not like it that I am calling them “idiots,” but if they are so smart, why are we in this mess?
Possible profiting plans
Can the Fed save the economy? The better question is: Can you save yourself?
I am as frustrated as you are about what is going on and none of us can run our personal finances the way governments do, but we can profit from their blunders.
If the Euro slides – or worse – the funds will flow to the Dollar as has been demonstrated in the past. One trade is to go long the Dollar and short the Euro, but currency trading has too many risks for my tastes. If the Dollar rises, it will put pressure on U.S. exports making them more expensive worldwide, thus affecting profits and the U.S. equity markets will fall. So the trade for me is either get out of the way, let the markets fall, and have a large cash position to re-enter at a later date and/or short the Indices. Either way I profit.
This does not mean there won’t be huge rallies that can be taken advantage of, as the leaders tout this program or that plan and the markets react. But until the “wizards of smart” seriously address the underlining issues of debt, this would be more of the same rhetoric which further exasperates the problem.
Taking control of your destiny
And it’s not just Europe where things are getting interesting. Asian economies are slowing, and the Asian millionaires are firing bankers, taking control of their own destiny, something we have been espousing for years.
But what if I am wrong and the global governments, the ECB and Federal Reserve leaders find a solution where our lifestyles and entitlement programs can continue without changes, and Santa Claus and the Easter Bunny really do exist?
Then I am wrong, I will gladly be the first to admit it, and your next newsletter is free.
S&P 500 2000 – 8-2-2012
At some point in the future this over-indebtedness will correct itself, be it 3, 5, or 7 years from now. At that point there will be a generational buying opportunity in the financial markets, and I want to be a part of it. My best guess is that until then, we will have a market that moves up, down – and in the end sideways – similar to what has happened since 2000, but probably drifting lower over time.
A sideways market presents many opportunities for profit, and I plan on taking advantage of them.
This is my opinion and I am sticking to it.
About the Authors
Billy and Akaisha Kaderli retired two decades ago at the age of 38 and began traveling the world. As recognized retirement experts and internationally published authors on topics of finance and world travel, they have been interviewed about retirement issues by The Wall Street Journal, Kiplinger’s Personal Finance Magazine, The Motley Fool Rule Your Retirement newsletter, nationally syndicated radio talk shows and countless newspapers and TV shows nationally and worldwide. They wrote the popular books The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible.