In Visualizing Emotional Collapse: From Euphoria to Despondency we provided our readers with a chart of the investor cycle of emotions. After the collapse of market euphoria, like we experienced in real estate or the general state of the economy around 2007/2008, comes anxiety, denial and our current state of emotion – fear – which leads to depression.
In a June 7th email to subscribers of the Daily Wealth Newsletter, Porter Stansberry has provided the latest update to his aptly titled End of America series. In it, he warns that with the Federal Reserve preparing to remove stimulus in the form of Treasury bond purchases by the end of this month, we are entering an unprecedented period in American history – and along with it, the next phase of the investor emotional cycle: PANIC.
In the next few weeks, our country will enter a period without precedence in our experience.
On June 30, the Federal Reserve has pledged to cease buying U.S. Treasury bonds. This is the second time since the financial crisis it has intervened in the Treasury market in a major way. The program of buying new Treasury issues has been dubbed “quantitative easing II” (QE2).
We’d wager not one in 1,000 Americans has any idea (or at least any real understanding) of what has been going on in the market for U.S. Treasury bonds since the financial crisis. For the last nine months, the Fed has been printing up new dollars and buying huge amounts of newly issued debt from the U.S. Treasury – $600 billion of bonds. And these purchases followed a $1.75 trillion program of quantitative easing that ran from March 2009 to March 2010.
It is no exaggeration to say that a printing press has kept our economy going for the last two years. But what will happen when the printing stops?
While we honestly don’t know, we’re going to speculate that, in the short term, the U.S. dollar will rally and commodities will suffer a serious correction. We will see a dramatic slowdown in the rate of monetary inflation. People will think prices will stop going up. Economic activity will begin to decline. Fear will lead a lot of investors to “go to cash.” That means buying short-term U.S. Treasury bonds because they’re the most liquid, most frequently traded form of cash.
As this process unfolds, we expect to see another global panic. Especially if Bernanke’s decision to stop the presses coincides with a Republican political gambit – refusing to raise the debt ceiling, which could cause a default on U.S. Treasury bonds.
Whether the debt ceiling is raised or not, it’s only a matter of time before the Fed will have to turn on the presses again. And when “QE3” begins, it will send our creditors an unmistakable message:You will never be repaid in anything other than massively devalued paper.
That will be a horrible day for the value of our currency. It may even mean the end of the U.S. dollar as the world’s reserve currency.
Read Full Article: The Beginning of the Panic
If you’ve been paying attention to stock and commodity markets recently, you’ll have noticed that the markets have been dropping for several weeks. These financial markets are generally considered a forecasting mechanism for what investors expect to happen down the line. If this is the case, then investors, through asset sales, are indicating that they are either scared or uncertain about what’s coming next.
Most 401k, IRA holders and investors on Main Street probably don’t understand the implications of the Federal Reserve’s move to stop quantitative easing. But you can be assured that many of the top money managers and contrarian investors like Porter Stansberry do.
If the Fed stays true to its word and removes the crutch holding our economy upright, the entire thing may come crashing down. We’re talking about the spigot being turned off and hundreds of billions of dollars that are about to stop flowing to the US government.
The only possible result if such a thing were to occur is a stock and commodities market collapse. Obviously, those who are invested heavily in the stock markets and bought into the idea that the recovery can stand on its own two legs are going to be in for a rude awakening. When it hits the financial fan, there will be panic on Wall Street and Main Street. Remember that 1000 point “fat finger” drop in 2010? Imagine that but in the form of a sustained market collapse.
While it’s impossible to predict how far markets can fall, as Mr. Stansberry noted, in all likelihood Ben Bernanke’s helicopters will take flight shortly thereafter. QE 3 will be necessary to keep our economy from falling into a deflationary depression worse than what we experienced in the 1930’s. This means that further stimulus will happen, especially considering that Mr. Bernanke is a self-proclaimed student of the Great Depression and avoiding deflation has been his goal since the beginning of this crisis.
Once that announcement of QE3 hits the global market place – and it could be weeks or months before that happens – it will be undeniable evidence that all of the optimistic opium being peddled by global governments and mainstream media is a complete fabrication.
While the dollar may see a near-term recovery resulting from panic in financial markets and capital seeking safety in Treasury assets, it will be short-lived. This next phase of the crisis can happen very quickly, and will leave the world stunned at how serious things really are.
While history may not repeat exactly, we can look to the 2008 collapse in stock, commodities and precious metals as a possible guide of near term activity. Gold dropped nearly 30% between April and December of 2008, but it recovered and went to new highs just two years later. The same with food prices.
We would not be at all surprised to see the prices of just about every asset out there decline in terms of US dollars – that includes gold and silver. While we wouldn’t necessarily recommend selling precious metals at this time (unless you are a short-term paper trader), we can envision a period in the near future where prices correct and could potentially drop 20% or more from here. If you understand the long-term economic trend in play, however, you’ll probably be happy about any drop in precious metals, energy or food prices right now. What such a decline does is give you another opportunity to stock up on assets and preparedness supplies that will gain value over the long-term as the US dollar continues to weaken and confidence in the US government’s ability to manage this crisis deteriorates.
Bottom Line: Get ready for the next phase of this crisis if the Federal Reserve does, in fact, stop quantitative easing. We can attempt to make predictions and forecasts, but with so many variables at play on the financial, economic, monetary and geo-political fronts, it is impossible to guess with any level of certainty what will transpire. We urge our readers to remain vigilant, open minded, and flexible.