Sean’s Rant

I’m going to use the Hollywood version, because I was not actually on the Titanic, nor have I done any further research on it, but I have seen the Titanic movie a lot of times. 

So Imagine that the US, or even Global economy is the Titanic in this example. 

The Titanic took hours to sink. All evening, in the movie. It was very slow. Those at the Captains level weren’t seeing water until right before it sank. Those at the bottom knew something was wrong right away. Those in the bottom levels of the ship and those in the engine room were seeing water right away. They were screaming, running, and panicking but those at the top could not hear them. The passengers at the top of the ship may have had some idea that something might be wrong, but there was no visible proof that anything was wrong but rumors and maybe a view of some people leaping out from below. It took hours for the top level passengers to eventually see water and the chaos of the ship sinking and all evening before the ship finally sank. Before it sank all the wealthy people at the top got into the life-boats and most were fine, but the lower classes either drowned or froze because of the temperature of the water. 

The current situation of the Titanic sinking in the US economy has been happening since September 11, 2001 when the economy took a massive hit from the terrorist attacks and the effect it had on the country. The lowered interest rates, down to 1%, were a band aid for a shotgun wound. The shadow economy sprouted and it looked like there was growth. Really, there was little actual growth but very much shadow growth based on borrowing and false equity created by the low interest rate, cheap borrowing housing boom. All the while, the ship was leaking, and already sinking. The top levels were partying, and the bottom levels were doing OK still. Slowly, level by level, those passengers began to feel the effects of the leaking, there were foreclosures and those jumping out of the lower levels, while those at the top were relatively uninterrupted. This continued and we are now looking at the point where those at the top have finally started to see the water, and have started to get into the life-boats. 

So now the economy is sinking and is nearing the breaking point, where the ship splits and breaks in half. It is nearing that point, even though it may have seemes to already happened, just because there is flooding in the ship and people are fleeing, the ship is still there and semi-afloat. When it splits it will cause a massive rift in the markets and the economy, there will be increased losses of jobs, a realization of the massive amount of consumer debt that has been bulding and will not be resolved overnight. There will be those that will hang on to the ship on the rails, while the ship goes into the water, and some will jump before it sinks but some will go down with it. Either way, it is definitely sinking and the next things to look for:

-Continued drops in the levels of the market. 

-Continued reports of corporate losses and economic data which shows that the economy is contracting. 

-Continued tighening of credit standards.

-High Inflation from the recent actions that have been taken  by the FED. 

The actions that can be taken are and If I had $100,000 in cash and were looking for mind to longer term growth (I use 100k because it makes more sense from a trading perspective to split it like this) I would:

-$25,000 - Small amounts of stocks with great fundamentals – (Book Value and Price to Earnings) in a stair step manner to get some decent value purchases (Not all at once). The most I would recommend buying in one day would be 10%, and I would definitely recommend re-selling in a step fashion any previous purchases in case of a large one day gain due to the current volatility. 

-$50,000 – Commodities – Silver, Gold, Oil. The actual commodity, not companies. With inflation coming in the next 6-12 months from all the government interaction, commodities will for sure go up. 

-$15,000 – Strong Foreign Currency – Swiss Francs, Gold backed currencies. When inflation comes, the dollar will drop significantly versus the other currencies. This also leaves open any extra cash for purchasing additional investment opportunities.

-$10,000 – US Dollar Cash -The reason for this is to be able to buy anything that might come up that looks like a good investment and to hedge for any gains in the dollar. 

Ultimately, venture capital is the best way to go, for returns, but putting 100k into one venture would be quite risky and I would only recommend putting 10-25% of one’s portfolio in these type of investments. 

John Mack, the CEO of Morgan Stanley interviewed on CNBC earlier today said this market downturn is different and unprecedented in 3 ways:

-It is Global

-Credit has dried up

-Volatility is off the charts

He also said, yes, he thinks this will be a deep recession and is one of the few honest responses I have seen from a CEO recently. He seems to be one of the few willing to tell the truth about this.

Related posts:

1. Detaching regulatory capital requirements from Mark to Market
2. Mark To Market accounting Relaxed…has anything really changed?
3. China finally declares that the US should no longer be the reserve currency of the world
4. I’ve said it before and I’ll say it again. The decline still isn’t over and heres why I’m short the DJIA.