Today, we’ll cover some of the reasons the market could go much higher and also why we think the market will instead, end lower.  We live in interesting times and the confluence of possible events will be what determines where the markets go.  All we can do is guess which events will occur this year.

Currently, the stock market is priced reasonably.  It’s just below its long term Price To Earnings (P/E) Ratio of 16 at around 14.5.  This means that the stock market is priced below its long term average.

This fact has many professional money managers drooling at the possibilities for the year because if a Black Swan event doesn’t show up to take the markets down the markets will probably climb this wall of worry in dramatic fashion to have a great year.  Many people believe that the fears are overblown and will be dealt with.  That’s what’s always happened before, right?

Well, for as long as we’ve been alive perhaps, but no, that’s not how it always goes.  Every 80-100 years there’s really a very tumultuous change that occurs.

We talked last time about some of the things which could cause the market to crash.  There are actually many other s we could add to this list, but in this post, we’re going to focus on the markets themselves.

Investor sentiment at the moment is very bullish.  This is actually a negative indicator on the market in the short term because if everyone has already bought, there’s no one left to buy.  We’re not sitting at extreme bullishness right now, so there’s still a ways it could run, but the market is also overbought.  This appears to be a setup for the market to give back the impressive early year gains that it’s made sometime relatively soon.  What happens after that?  Again, it depends on those black swans.

Yes, P/E Ratios are reasonable, but they are not cheap.  Typically, a long term market cycle bottom will see P/E rations about half of where they are now.  The Dow should be paying high single digit dividends.  Neither of these is remotely true.  This tells us that the real bottom is not in yet.  (Of course, nothing says the real bottom has to come this year, it could come in 2013 or 2014.)

Another point to consider is that corporate earnings margins are at extreme highs.  This means that they they are making incredible profits on their sales.  The nature of business is that competitors will undercut these profits.  This is why corporate profit margins tend to rise and fall like waves on an ocean.  They’re very high right now.  This means they’re much more likely to fall than rise.  This would mean falling corporate profits which would spook the market and send prices lower.  It’s hard to predict this exactly, but it’s due to happen sometime fairly soon.

Looking back at the big picture…When the long term market cycle low is in, no one will own stocks.  Everyone you talk to about it will think that only a fool would buy a stock.  That’s what a market low looks like.  We’re not there yet.

So while we do believe that’s coming.  It’s much more difficult to say what exactly will happen in the next 11 months.  For instance, we could have the economy and markets show more weakness and then the Fed announces a huge QE program and the market takes off.  It could end up up for the year even with bad economic data.

In conclusion, it’s pretty difficult to predict what will happen specifically in the stock market over the next year, but it definitely feels like it will see some extreme downdrafts this year, and we’re going to pick it to end that way.

This is the sixth post in a series.  You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here.  Here are the rest of the posts:  3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, &  5) Stock Market Volatility. You can also watch the most recent series of Economic Update videos at:  1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global,  4)  Gold & Silver Pt 1,  5)  Gold & Silver Pt 2,  6) Gold & Silver Pt 3, 7)  World Economic Update., World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, &  13) US Economic Update 2.

2012 will see extreme volatility in the stock markets again.  Actually, we think they’ll be even more volatile than last year, but such a thing is really in the eye of the beholder.  If you were exposed to the huge losses and recoveries of last year, then you might feel like you just finished running a marathon and find yourself gasping for breath.  If you’re not exposed this year, you might barely notice the news mentioning upticks and downticks.

2012 has begun with a bang, up about 6%.  That right there would normally be enough for us to predict a big up year in the market since most years tend to follow after the January start.  And perhaps it will be, but I’m expecting those gains to be erased sometime fairly soon.  And then…Who knows?

But we can’t call this, The Year of the Black Swan, and not expect volatility, right?  In our next post, we’ll explain why we tend to think the stock market will end below where it began the year, but we’re not nearly as confident in that prediction as we are that the year will see huge moves in multiple directions.

Here’s some of the reasons why…

The trouble in Europe will surely come to a head this year.  This could be good for the stock market (if somehow the troubled debtor countries are bailed out in a way that seems sustainable to the markets.

Or it could be very, very bad for the stock markets if the European sovereign debt crisis goes up in flames through default and the onslaught of contagion.

In the meantime, it’s also possible that the game that’s been played out over the past 6 months continues on.  The European powers continue to kick the can down the road by providing enough bailout money to solve the problem this week/month, but not enough to do much past that.  This results in the market being very happy for a week or so, followed by depression…until the next short term solution is announced.  This means volatility.  We don’t think they can play that game too much longer, but who knows?  And that’s just Europe.

War in Iran could send oil prices into the stratosphere.  We’ll talk about this in a later post, but the US certainly seems to be gearing up for war.  This could seriously hurt the economy and scare the markets if it were to happen.

A hard landing in China would devastate the world economy.  Right now the world believes that China has escaped having to pay for all its mal-investment.  Markets would tumble if China’s economy was seen as weak.

Japan’s 20 year depression could come to a head.  Japan has been able to borrow money at super cheap rates to amass the largest debt/GDP ratio in the world.  They could do this because they saved money every year and bought Japanese government bonds AND because the country exported more than the imported, so the world had a need for the Yen.  Neither of these is true anymore.

The Fed could announce QE3.  This could make the stock markets take off to the upside in excitement because the mighty Fed is back in charge…because that’s worked so well the first two times??? Well, even if it’s without reason, so far that has been the market reaction and could certainly happen this year.  (And don’t forget the Central Banks of Europe, UK, Japan, & China doing the same.)  So these could cause big up moves in the market.

It’s a wild world out there and we expect that to be clear in the stock markets this year.  Those are just a few of the top of mind reasons why.

This is the fifth post in a series.  You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here.  Here are the rest of the posts:  1) Ben Bernanke’s Dollar Devaluation Plan, & 2) The Coming US Dollar Devaluation.  You can also watch the most recent series of Economic Update videos at:  1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global,  4)  Gold & Silver Pt 1,  5)  Gold & Silver Pt 2,  6) Gold & Silver Pt 3, 7)  World Economic Update., World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, &  13) US Economic Update 2.

One of our predictions was that holding USD cash would be a losing proposition in 2012 in real terms.  On Friday, we shared with you in detail Ben Bernanke’s plan if deflationary forces become too strong for him.

Today we’ll share this video for some second hand evidence that this is indeed the plan.

Why would the US Government and Ben Bernanke want to destroy the value of the savings of every American?

It’s because there’s no way that the US government can ever repay their debts.  These debts have become far too large to ever be paid back in today’s dollars.  However, if we make the $15 Trillion Plus Debt & the $50-100 Trillion promises to Social Security & Medicare small numbers because the value of each Dollar is so small, well then the debts can be paid back.  (Be prepared if you’re expecting one of those government checks in the future.  They are actively working to kill the value of their promise to you.)

Now, this theory above goes against what’s currently happening in the world.  Europe is dominating the news.  As the Euro comes under pressure, it gives new strength to the Dollar.  So it’s a very bold call to predict that the Dollar will lose value.  (And we’re certainly not predicting that it will lose value vis a vis the Euro because those are two falling knives and we don’t want to stick our hand under either.)

It is certainly possible that the problems in Europe, the UK, Japan, etc are so big that the USD strengthens in 2012 against most currencies and products and thus even though you’re not receiving any interest by holding it, it’s still one of the best places to be.

We definitely believe that the Dollar’s day of crash is coming.  But it might not be in 2012.  However, there’s a currency war going on and a giant debt to devalue and we’ve got our money on Helicopter Ben!

The other possible reason the USD could (will eventually) fall is that the rest of the world is tired of the US stewardship of its value.  More and more countries every day are announcing bilateral currency swap agreements.

What this means is that when Japan & China trade, they will no longer be using US dollars for their trade, but will instead use each other’s currencies.  Think about that for a moment.  The second and their largest countries in the world have announced that they’ve abandoned the use of the USD in their trade with each other!

If the trillions of USD that are floating around the world as sovereign holdings become as unnecessary as they already have become undesirable…they will all come flooding home where people will still take them.  How valuable do you think the USD that you hold will be if trillions of new ones show up in the USA sometime soon?

This is the fourth post in a series.  You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here.  Here are the rest of the posts:  1) Ben Bernanke’s Dollar Devaluation Plan.  You can also watch the most recent series of Economic Update videos at:  1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global,  4)  Gold & Silver Pt 1,  5)  Gold & Silver Pt 2,  6) Gold & Silver Pt 3, 7)  World Economic Update., World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, &  13) US Economic Update 2.

There’s actually a speech that several people have brought to my attention over the last couple months from 2002 where Ben Bernanke laid out his entire playbook for battling deflation.  It’s thought by some that this very speech is what got Bernanke the job of Federal Reserve Chairmen (who some would argue is the most powerful position in the world with its ability to manipulate the quantity and thus value of the world’s reserve currency, the US Dollar.

One of the things that’s striking about this speech is that most of his solutions are unprecedented.  He even admits that the consequences of these actions are unknown because they haven’t been used before.  He clearly states that he doesn’t believe these actions will be necessary, but lays them out anyways to show that the Fed has “big guns” left even if it gets interest rates all the way to zero and still hasn’t kick started the economy.  (Which is exactly what Austrian economists have long predicted would happen, but the Keynesians & Monetarists would have no part of listening to the Common Sense Kooks).

Before laying out all the points Bernanke made with commentary.  Let me give you the bottom line.  He laid out a ton of extreme measures that could potentially be used.  As of now, 11 years later, he’s used every one of them except the very last one…to destroy the value of the US Dollar.  So you can bet that this is exactly what his plan is if he feels like the US economy is getting worse.  And again, just last week he stated that that’s certainly a possibility.

So What is Ben Bernanke’s Step by Step Plan to Kill the US Dollar?

First of all, I want to point out that he sounds silly when you read the speech, which I highly suggest you do.  He starts out by saying that there’s some great debate over what causes inflation.  This ignores the fact that the Federal Reserve’s own education/information marketing used to clearly define inflation as the increase in the money supply (this was before they became massive devotees to that increase).  So after reading this first paragraph I began to ask myself, “Is he really stupid?”  I always assumed he was just a liar.  (Sorry if that word is harsh, I’m sure in his mind he has an excellent reason for “managing public perception with his not exactly true words” or some such, but that’s just a fancy way of saying lying.

But towards the end of the article, he explained how to stop deflation in no uncertain terms.  Since the opposite of deflation is pretty much inflation (you have to have one or the other in a fiat money world), then he told us in the same speech exactly how to cause the inflation necessary to break inflation.  So he’s not stupid and he knew the answer to the question he said economists are debating in his opening paragraph.  (His answer is in the 3^rd Paragraph under the heading “Curing Deflation” if you want to check it out in the link above.  But that’s not really the point of this article.

So we move on to the scary part…

Ok, I’m just going to list out his points and comment on them below each.  Remember, these may seem like no big deal now because he’s done them all already, but most of these things had never been done and were really out there and “speculative” as he called them.  We’ve gone way beyond normal Central Bank policy or economic theory in just a few short years.  Here we go…

“First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.”

Check, they’ve been doing this for a very long time.

“Second, the Fed should take most seriously–as of course it does–its responsibility to ensure financial stability in the economy.  And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.”

Ok, we’re a little more out there now, but as he says, they’ve done this before.

“Third, … when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates.”

They’ve certainly done that haven’t they?

At this point in the speech, he begins to talk about his big guns.  He basically says, well, if we’ve done all that and we have zero interest rates, and we still don’t have the growth and inflation that we want, we’ve got to get a bit more “speculative”, which is all very unlikely to happen anyways, of course!  Let’s see what he recommended back then and if he’s followed through with his mad hatter plan…

“The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.”

This was called Quantitative Easing or QE1 & QE2, which your undoubtedly familiar with!  Remember this in itself was unprecedented and unwise, but it gets worse…

“Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years.”

This was called Operation Twist and is what the Fed began doing in the Fall of 2011.

“Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).”

This was also part of QE and has again been codified in this past week’s Fed plans.  It’s now standard practice for the Fed to be buying Mortgage debt which have a high risk of never been paid back to them/us.

“However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.  Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.”

Again, the Fed has been doing this thus increasing the probability of a system wide collapse caused when the debt bubble bursts.

Bernanke then goes on to say that it’s a big world out there and the Fed could also be active in foreign markets.

“For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt.”

Ok, so now we have the government Swaps that the Fed announced 3 months ago.  Only it gets a lot worse than what he surmised back in 2002. These swaps were put into place so that Europe could flow that newly printed US Dollars straight to the bankrupt banks of Europe (which are in far worse shape than the US banks with four times as much debt (and much of it to countries like Greece who will never be able to repay them.)) So the Fed just printed a bunch of US Dollars that will never be repaid that went directly outside the US.

We’ve Reached the End Where Ben says it’s a Good thing to Devalue Your Money!

Although at first he does admit it’s not a good idea…

“Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available.”

Woops, those options are all used up!

“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation”.

Ok, he starts this most important paragraph by saying that even though he said devaluation is bad, it can still be good.  Remember, this is your money that he would be making 40% less valuable (meaning your food & gas bill among others would skyrocket overnight although surely your paycheck would NOT skyrocket!

A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.”

Notice a couple things here.  First, the devaluation didn’t come until the beginning of 1934, so the deflation was already fixing itself (from -10 to -5%) before they devalued.  But they had to meddle and be the hero by “doing something”. Thus devaluation caused ONE incredible year in the stock market!  Remember this always gets Bernanke excited.  But did it last?

No!  The late 30’s depression was worse than the early 30’s depression.  So what’s so spectacular about one good year of stock market returns?  Does anyone really care after suffering through many more years of depression and bad stock markets that for one year their stock portfolio went up while they meanwhile became overall much poorer by the actions of the government’s devaluation?  But Bernanke can’t see the big overall effect, he only sees the immediate consequence of a good stock market that year.  Forget the fact that it didn’t really solve anything and caused tremendous pain.  Although the pain of a 1934 devaluation would pale in comparison to the pain of a 2012 devaluation! In 1934 most people grew and raised their own food.  They were self sufficient.  Are you self sufficient today?  How long would you last if you couldn’t get food from the grocery store?  You might be fine, but how long do you think society as a whole would stay “normal” if a large percentage of the population was having trouble eating?

If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.”

So there you have it, Ben Bernanke believes that devaluing the US Dollar would be a great way to solve a US deflationary crises.  And again, just last week he said this is a possibility.

We hope you’re ready for this.

This is the third post in a series.  You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here.  You can also watch the most recent series of Economic Update videos at:  1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global,  4)  Gold & Silver Pt 1,  5)  Gold & Silver Pt 2,  6) Gold & Silver Pt 3, 7)  World Economic Update., World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, &  13) US Economic Update 2.

Some of these predictions will be pretty basic.  We’ll guess things like…Which direction will the stock market move over the course of 2012?  Other predictions will be of much larger things.  These are what we’re calling “Black Swan” events.  These are unlikely, and we do NOT believe that all of these things will happen.

Yet we do have reason to believe that there’s a fairly strong chance that at least some of these Black Swan events could happen.  And the economic ramifications would be far greater to each of us than knowing how many iPads Apple sold last quarter.

We have no particular reason to believe that most of these events will happen in the year 2012.  One or more of them certainly could (some will and some won’t).  But these are all events that it would be good for you to think through and ask yourself what ramifications the event would have and if you’re prepared for each.  Seek the Lord for guidance on how you should prepare yourself for this season in all ways (we happen to focus on the two main areas of your spiritual and financial life here.)

Caveats to come, let’s get straight to the predictions for markets in the coming year…

1)      Stock Markets will again be extremely volatile

2)      The US stock market will end in the year down (this is a bold guess, out on a limb)

3)      Most commodities will be lower, but will also be volatile

4)      Gold will be significantly higher in USD terms

5)      Silver will have even larger gains, but with far more volatility (riskier bet than gold)

6)      Oil will hit incredible highs during 2012 (see Iran prediction), although could end much lower based on the economy

7)      US Bond investors will see losses

8)      USD Cash will see losses (in real inflation adjusted terms, see Bernanke piece)

9)      Europe will have severe recession

10)  Sovereign Default in Europe (although US could bail out & become the bullseye?)

11)  Japan will see recession

12)  Japan will have to finally face the problem of their massive debt

13)  China will see much slower growth than they need

14)  The US will have real recession (although depending on money printing, they might get a positive GDP number.)

Now let’s predict the big events which will define the early 2010’s.  I believe economic events are absolutely coming to a head and thus we’ll primarily see what we’ll see in 2012 & 2013.  So this is more of a 2-3 year prediction than a one year guess.  Also, as I’ve said, I DO NOT believe that all these things will happen.  These are all things that I think have a realistic chance of happening and thus should be considered as you plan your asset allocation.

So here are the Black Swan Predictions…

1)      The USD is massively devalued (either by choice or because the world no longer wants the USD)… Pt 1 & Pt 2.

2)      Full Scale Currency Wars- (will certainly include massive money printing everywhere)

3)      Deflationary crash

4)      Hyperinflationary (could follow Bernanke’s decision in #1 above?)

5)      Barack Obama beats Mitt Romney in 2012 Election

6)      War with Iran

7)      Massive & Disruptive Act(s) of God (or Natural Disasters according to the new PC term…Could it be time for the big one in California?)

8)      Fed announces Nominal GDP Targeting (inflation + GDP growth)

9)      Derivative Implosion that takes down most of the banking system

10)  Euro Area collapses or is becomes something totally different (Defaults, etc)

11)  US Stock Market crashes below March 2009 lows

12)  Governments attack Gold (silver?) to devastate the value that many come to rely on.

13)  Governments conspiring to massively change world currencies

14)  The sons of God are filled with God’s Glory as His latter house (Haggai 2:1-9)

Well, that should keep me busy for a while!  As said previously, we have a nuanced position on each of these, so we wouldn’t run off and make any drastic moves based on what’s written here.  But now that we have established the position, we can spend some time on each prediction as we move forward.

Since it’s already written, we’ll probably address the #1 Black Swan first and share with you on Friday Ben Bernanke’s not so secret plan to destroy the value of your US Dollars!

This is the second post in a series.  You should read the initial thoughts on these forecasts here.  You can also watch the most recent series of Economic Update videos at:  1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global,  4)  Gold & Silver Pt 1,  5)  Gold & Silver Pt 2,  6) Gold & Silver Pt 3, 7)  World Economic Update., World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, &  13) US Economic Update 2.

Your February 2012 Kingdom Calling Newsletter

2012: The Year of the Black Swan

Wikipedia defines the term coined by Nassim Taleb this way… “The black swan theory or theory of black swan events is a metaphor that encapsulates the concept that The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.”

2012 appears to have some good investment opportunities.  Sure, a lot of people are negative on the economic outlook, but that’s always the case at the bottom of a cycle, right before/as the stock market booms.  Several of the people whom I admire for their abilities to speculate when to be in the market and when to be out of it, see great opportunity now to be in the stock market.

Lower than average stock prices mixed with Central Bank money printing as far as the eye can see should lead to big moves up in the market, right?

The sense that I have is that no matter how much that might seem to make sense, it’s just not going to work.  This is the year of the Black Swan…

I believe at least one and probably more than one event will occur this year that will shake this shaky economy to the core.  I believe that will lead to incredibly volatile markets.  And a year that we won’t forget.

This is not to say there are not sectors to be in that will not do incredibly well this year.  There are multiple areas that I believe will be anywhere from solid, to good, to great, to incredible. But you must have a careful strategy in place to whether all seasons.

Making predictions for what will happen between now and some certain point of time in the future is a silly endeavor no matter how entertaining it might be.  It gives me the chance to flex my muscles at my correct prognostications and wince at the incorrect guesses, but it doesn’t really have much correlation to successful investing.

A case in point.  I told you last month that I was only partially correct in saying that gold and silver would have strong years in 2011 because although gold ended up 10%, silver ended down 9%.  Well, silver’s up about 20% in just the first month of 2012.  So was I wrong?  Or did I just have bad luck on the turn of the calendar?

Again, it doesn’t really matter, but it does bring to mind that if I’m guessing anyways, I would prefer to make some bolder predictions that are much less likely to happen.  However remote the odds, these are predictions which I do consider more than just possible, and if correct would truly turn the economy upside down (not to mention all the affects it would surely have in the much more important areas of each one of our lives.)

So, I’m going to do that.  And I’ll go ahead and make some predictions for exactly what the markets will do by precisely the end of 2012.  But doing all this will take more words than I want to throw at you in one newsletter.

So I’m going to make use of the blog over the next month or more to make some predictions in bullet point fashion (tomorrow) and then to begin expounding on each of these ideas over every other day or so to give you a more full understanding of what I’m thinking.

You see, I don’t know exactly how things are going to go (stating the obvious here I know).  There are some very distinctly opposing possibilities that I see.  I have the advantage over many in knowing much of the general outcome of things.  And I do have some strong opinions based on strong reasoning of overall direction.  However, I don’t know specifically how we’re going to get there.  And to best steward our resources, these are very important questions to consider.  Gone are the days where you could be an old fashioned investor who simply buys solid stocks and bonds, hold plenty of cash, and do just fine.

This could be a very dangerous way to go because the reality is that the government & Fed have manipulated money and markets to the point that to survive you must be more than an old fashioned investor, but also a prudent speculator.  Not to try and hit a home run with amazingly lucky stock picks, but to protect what you have from the wrath of markets rebounding from unnatural influence.  If I’m correct in what I believe is most likely to happen, then you absolutely must allocate your capital outside of the traditionally “safe” areas of cash, fixed, bond, or equity indexed products.  Those have always been considered safe even though the interest earned on them now is small.  But if those holdings are not counter weighted by assets which behave differently in certain conditions, it’s conceivable that you could lose a substantial portion of your assets rather quickly.

Again, the ideas we’ll be discussing in these posts are not meant to help you place all your chips on a hand of poker and hope you pull the right cards.  But are instead meant to show you potential outcomes to consider assuring that you have a winning card or two in every hand no matter which way things go.

You can’t escape risk today.  Ben Bernanke and the Fed are making sure of this.  They have stated quite clearly that they will increase risk in the market (by increasing inflation) so that the citizens of the USA (and thus most of the world) will have to take risks they are uncomfortable with to try and keep up).  They’re creating negative real interest rates on purpose to force you to do things that you don’t otherwise want to do.  This is the grand plan to save our economy.  If this sounds incredibly reckless to you, you’re right, but you’re not in charge.  And they’re desperate.  You simply get to decide how to react.

Thus, in many of my predictions, I don’t have a strong conviction of what will happen over the next year.  Sometimes, I feel much more certain that something will happen, but putting a specific date on a particular result is crazy.  So although I’ll make predictions, they’ll be nuanced to show how outcomes could be different.

And I want to throw out some Black Swans that I think are very distinct possibilities over the next couple of years.  These are the things which you must really be alert to because they will have a much bigger impact on your life than whether or not the stock market goes up or down next year.

We’ll start posting these blog posts tomorrow.  If you would like these messages emailed to you or sent by RSS, you can sign up here if you don’t already receive the blog posts.  (FYI… It seems like Feedburner’s email service & some RSS feed readers get to you 24 hours after they’re posted to the blog.)  Or you can show up several times a week to the blog here and read them on the site.

Why is this the time of the Black Swan?

This year will see an increase in the economic difficulties, but this is not bad news!  We are blessed to be able to live in this time!  Whether or not we are able to steward our financial assets wisely by avoiding the many traps and taking advantage of the warped markets… This is the time the Lord has made.

I’ve often quoted these verses over the last few years…

“See to it that you do not refuse him who speaks. If they did not escape when they refused him who warned them on earth, how much less will we, if we turn away from him who warns us from heaven?  At that time his voice shook the earth, but now he has promised, “Once more I will shake not only the earth but also the heavens.”The words “once more” indicate the removing of what can be shaken—that is, created things—so that what cannot be shaken may remain.

Therefore, since we are receiving a kingdom that cannot be shaken, let us be thankful, and so worship God acceptably with reverence and awe,  for our “God is a consuming fire.” (Hebrews 12:25-29)

This is such a powerful truth for our day and should bring great comfort.  That indeed the Lord is shaking away those things from our life that we have grown accustomed to even though they might be holding us back from all that He has for us in His Abundant Life.

Yes, the earth and the heavens, the economy & the things of our very lives will be shaken.  But if we receive all this as the discipline of the Lord, He can bring us closer to Him than we’ve ever been!  And isn’t that worth everything?

Here’s a similar verse from Acts 2:25 which I came across this morning from Peter’s big Pentecost morning speech…

“For David says of Him, ‘I SAW THE LORD ALWAYS IN MY PRESENCE; FOR HE IS AT MY RIGHT HAND, SO THAT I WILL NOT BE SHAKEN.”

The Lord is our Rock.  He cannot be shaken.  What a beautiful time to press into Him!

One last note…I did get the Shepherd of the North post written (mentioned last month) as well as a commentary if you missed them.

Zakaria continues….

And yet over the same period prices have surged. So it’s clear that the market is flooded with speculators who see gold as an investment, not as a usable currency or product.

My Response: How is it clear that the market is flooded with speculators?  Please prove your point rather than stating a baseless opinion as fact.  The truth of the matter is that gold makes up a much smaller percentage of financial assets today than it has historically.  The reality of the matter is that hardly anyone owns gold.  And as we covered earlier in this series, the number of contracts held long (net) in the gold and silver futures paper markets are lower than they’ve been in years which proves this point is false.

What’s really changed in the last few years is access. It’s easier to buy gold over the internet than it is stocks or shares. In places like Abu Dhabi and some European cities, you can buy grams of gold at ATM-style dispensers.

My Response: He’s comparing today with a very small window of history.  If he would increase his worldview even a little (just a hundred years, it’s not necessary that he really open his eyes by examining history in terms of thousands of years although if he did do this, he would see that comparing today versus only the last 40 years is incredibly myopic and naive.

All over the world, there’s a new Gold Rush. You switch on the TV and commercials warn you that the end of the world is coming and that you need to put your money in gold. Glenn Beck says that if you haven’t switched your savings to gold, you’re nuts. And Donald Trump is now accepting gold bars instead of wire transfers for luxury condos.

My Response: Financial collapses do not mean the end of the world.  However, if Farid ignores the fact that the empire which controls the world reserve currency has seen a financial collapse every 60-100 years for the past five centuries, then it just might seem like the end of the world to him when this one too ends (which it is due to do according to history.)

This is bizarre. A lot of it is simply scaremongering. The truth is that for two and half decades, between 1980 and the mid 2000s – gold prices actually declined. Unlike many other commodities which actually have an end use – oil, minerals – gold is just a symbol, and as such its price rises have to do more with psychology and emotion than reason. So, when it falls out of fashion, the price could really collapse. The next time you watch Goldfinger or you hear of the antics of a Hugo Chavez or a Donald Trump, be a little wary.

My Response: Why did gold prices decline in 1980?  Don’t you think this should be an important consideration?  Let’s ignore the Government/Bullion bank price manipulation of the last few decades because it really doesn’t matter.  However, he brings up a very important question.  Why did prices begin to fall in 1980?  Rather than just announcing that they did, wouldn’t an intelligent person look into why they did and see if the same scenario exists today?  Prices began to fall in 1980 because Paul Volcker came to power and increased interest rates relentlessly to fight inflation.  This made him incredibly unpopular because it hurt economic growth.  But he had the will power to do it!

Does our Fed Chairman Bernanke have this same will power?  Let’s see, he just promised he would keep interest rates at practically zero for two more years.  Thus there is little to no “cost” to holding gold instead of a US debt security.  Historically, this means gold prices will soar.  So how is this similar to 1980?  As a matter of fact, the intellegencia of today is for the most part very much against raising rates as dramatically as would be necessary to pull back gold prices.  And if the Fed did do this, it would kill economic growth and send us into a deep depression (I’m certainly not saying they should not bite this bullet, I’m simply stating that they won’t.)  And even if they would, we can’t forget the fact that in 1980, the US was the world’s biggest creditor nation.  Today, the US is the world’s biggest debtor nation!  If the US increased interest rates to double digits as it did in the early 1980’s, the interest expense alone would consume the entire US tax revenue.  It is an impossibility for the US to afford this.  So how exactly would the US do this?  And how exactly is our current situation anything remotely like 1980?

Gold isn’t a stock with real earnings. It isn’t a bond with interest payments. It isn’t oil. It won’t help you drive a car; it won’t help you light a fire. Yes, you can wear it, but you can’t eat it. If doomsday really arrives, a can of baked beans might be worth a lot more than a brick of gold.

My Response: True, gold is money.  I guess he is suggesting holding things that are priced in a currency that is being printed at will without constraint which has only been considered to have value of it’s own for 40 years (this value has dropped dramatically over that time), rather than holding the one thing that has always been money.  If he wants to compare a period of time (as he did when he compared 1980 to the mid-2000’s, wouldn’t it be more accurate to consider the entire period of time that the US Dollar has been totally disconnected from the value of anything real (gold).  In that time, the value of the US Dollar has gone from being 1/35th an ounce of gold to being worth 1/1600th an ounce of gold.  In other words, the US Dollar has lost 98% of it’s value against the only real money that has been around for any length of time (other than silver).  I agree with him that it is important to stock up on food.  I highly recommend it.  But in “doomsday” scenario’s like he is mentioning gold and silver always resume their consistent historical place as money.  What’s more “bizarre”, to plan for an event that has ALWAYS REOCCURRED throughout history, or to believe that history will never repeat itself because of the inherent greatness and invincibility of the USA?

This is the 8th post in a series on silver and gold.  You can find all posts from this series at:  1) Gold & Silver on Sale, 2) Reasons to Buy Gold & Silver,  3) Gold & Silver: About to Take Off?,  4)  Why & How to Buy Silver & Gold?,  5) Gold Bubble?,   6) Gold Speculators or Savers?,   7) Gold Article Rebuttal, &  8)  Gold Rebuttal Pt 2.

…But it misses the point to say that we think the value of gold will go up.  We are not speculators.  We are not investors.  We, the board of this association, are entrusted with the duty of managing the affairs of the property and all related accounts.  This very importantly includes savings.  I would venture to say that gold mining  stocks are a much better speculation today than gold (and the same can be said for silver miners).  Were we speculators, we might buy these instead.  But we are not.

Instead, we are making this change in allocation in order to protect our savings.  If the economy recovers, the government gets its books in order, and the value of the Dollar rises….gold and silver could easily fall in price.  If this were to happen (as discussed at the annual meeting), we might temporarily lose a portion of the value of our gold and silver holdings when measured in US Dollars.  They would certainly not go to zero as gold and silver always have value, but the value could certainly fall from the current amount to something less than that.  However, we would still have the 85% in our savings accounts held in US Dollars.

On the other hand, if the value of the Dollar were to drop considerably and the 85% which we have in Savings were to begin to not be enough to comfortably cover our expenses, the value of our 15% gold and silver holdings would strengthen in such a measure as to make up some or most of the shortfall that we were experiencing.

There have only been 3 major studies on hyperinflation that I’m aware of.  Each approaches the topic from a different angle and comes up with a different approach to measuring the likelihood of a country seeing the value of their currency hyper inflate away to nothing.  Although each of these measures is different, according to all 3, the US has passed the point of no return and will see the value of its Dollar decimated.  Such events only happen to a world reserve currency about every 60-100 years (just long enough for the people remembered what went wrong the last time to have died off and for those who remain to repeat the mistakes).  However, the world is now due to see this phenomenon repeated.  This is in no way a proof to say that it will happen, but simply a reminder that it would be the height of hubris to think that it could never happen here (this is what all people in all time periods and places believe).  We therefore concede that it might possibly happen (especially when we consider the facts of the country’s current condition as partially alluded to above along with the fact that many of the world’s countries, on whose lending the US is dependent on, are repeatedly calling for this exact scenario to be carried out.)  If in this worst case scenario were to play out, almost every owner of SPS would be in dire straits and in no condition to answer a capital call.  Likewise, the 85% US Dollar cash currently in savings would be wiped out and worthless.  However, the value of the current 15% held in gold and silver should appreciate to such a point as to perhaps entirely replace the current level of savings held in the savings account.

We do not claim to know the future.  Any one of these scenarios is possible.  However, we take our responsibility as stewards of the resources of the association seriously and thus request that you take the steps necessary to allocate 15% of the association’s cash funds to the silver and gold fund mentioned to provide us the diversification of savings and hedge against the risk we currently hold by keeping our savings 100% in USD.

This is the 6th post in a series on silver and gold.  You can find all posts from this series at:  1) Gold & Silver on Sale, 2) Reasons to Buy Gold & Silver,  3) Gold & Silver: About to Take Off?,  4)  Why & How to Buy Silver & Gold?,  5) Gold Bubble?,   6) Gold Speculators or Savers?,   7) Gold Article Rebuttal, &  8)  Gold Rebuttal Pt 2.  Watch the previous economic update video series we did at: 1)  Europe Economic Update 1, 2) Europe Economic Update 2, 3) Europe Crises Explained, 4) World Economic Update, 5) US Economic Update,  6)  US Economic Update 2,  7)  US Economic Update 3,  8)  Hyperinflation Signs,  9)  Hyperinflation, Inflation, or Deflation?,  10)  Gold Update,  &  11)  Gold & Silver Update.

The wall of worry phase will probably continue for an extended period of time, however that will be determined by economic events transpiring throughout the world.  During this phase, every concern and doubt around the world will be overcome.  It’s popular in the financial press today to talk about the all time high valuations in gold (although silver is still significantly below it’s all time nominal high and nowhere near it’s all time high in real terms).  This ignores real, inflation adjusted terms,  the historic banking and sovereign debt issues faced throughout the world, and the fact that no fiat currency in the history of the world has ever lasted 50 years and the US Dollar is extremely long in the tooth at 40 years, among many other facts.  Here one interesting article along these lines… http://www.bloomberg.com/news/2011-09-15/gold-backed-dollar-signals-10-000-metal-price-chart-of-the-day.html

Those that say we’re in a gold “bubble” have no real understanding of what a bubble is.  In a bubble, people everywhere are not calling it a bubble.  Please instead are talking about the fact that you simply can’t lose money in this market because it always goes up.  In the late 90’s we were told that the internet had produced a new reality that made the old rules no longer apply and everyone owned internet stocks.  In the mid-2000’s, we were told that real estate always goes up and you can’t lose by owning property and you probably know several people who got into the house flipping business.

On the other hand, hardly anyone today owns gold and silver.  The percentage of financial assets today is tiny in comparison to both normal historical standards and particularly to market peaks.  This “bull market” will end in one of two ways.  There will either be a blow off mania phase where the price goes far beyond what most anyone considers possible today.  This would be the point to sell out.  It’s impossible to pick the top, but this event can be watched for.  If that is the case, the world will either have solved it’s massive debt and currency printing problems or will replace the current currencies with something new (perhaps a new one world currency) that they are able to convince the world is finally secure.

The other possibility is that the same thing that has happened every single other time in history happens again.  That fiat currency fails and is replaced by a gold or silver backed currency.  This always happens, so it would be foolish to not see this as a likely scenario.  If this happens, then there will be no bubble bursting, but instead a leveling out of value as gold &/or silver become the preferred currency of choice by everyone.

This is the 5th post in a series on silver and gold.  You can find all posts from this series at:  1) Gold & Silver on Sale, 2) Reasons to Buy Gold & Silver,  3) Gold & Silver: About to Take Off?,  4)  Why & How to Buy Silver & Gold?,  5) Gold Bubble?,   6) Gold Speculators or Savers?,   7) Gold Article Rebuttal, &  8)  Gold Rebuttal Pt 2.  Watch the previous economic update video series we did at: 1)  Europe Economic Update 1, 2) Europe Economic Update 2, 3) Europe Crises Explained, 4) World Economic Update, 5) US Economic Update,  6)  US Economic Update 2,  7)  US Economic Update 3,  8)  Hyperinflation Signs,  9)  Hyperinflation, Inflation, or Deflation?,  10)  Gold Update,  &  11)  Gold & Silver Update.

The reason it is advisable for the Association to hold gold and silver is because we currently have 100% of our money very aggressively stored in US Dollars.  The US Dollar is no longer backed by gold or anything else as constitutionally required and thus invites politicians to borrow and print to infinity.  In fact, they are doing precisely this and the US is currently the largest debtor nation in the history of the world with one of the largest current account deficits and no plans to change this predicament.

It is reckless to store all of our savings in a vehicle with such little reason to recommend it.  However, since the US Dollar is the unit of currency which we spend, we plan to keep most of our money in it.  To hedge against this risk, as decided at the annual Association meeting by a vote of 8-1, we authorized the management company to open an account at a discount broker to place 15% of our cash holdings into a fund determined to safely hold gold and silver in vaults in an international location which are regularly audited by third party auditors.  This fund has no other encumbrances such as the leading vehicles so often used today so often do.

We discussed this originally in March 2010, but unfortunately, did not act due to misunderstandings of correct protocol for such changes within the association.  I say unfortunately because our savings has depreciated by 82% against real money as measured by the fund we are now purchasing.

This is the 4th post in a series on silver and gold.  You can find all posts from this series at:  1) Gold & Silver on Sale, 2) Reasons to Buy Gold & Silver,  3) Gold & Silver: About to Take Off?,  4)  Why & How to Buy Silver & Gold?,  5) Gold Bubble?,   6) Gold Speculators or Savers?,   7) Gold Article Rebuttal, &  8)  Gold Rebuttal Pt 2.  Watch the previous economic update video series we did at: 1)  Europe Economic Update 1, 2) Europe Economic Update 2, 3) Europe Crises Explained, 4) World Economic Update, 5) US Economic Update,  6)  US Economic Update 2,  7)  US Economic Update 3,  8)  Hyperinflation Signs,  9)  Hyperinflation, Inflation, or Deflation?,  10)  Gold Update,  &  11)  Gold & Silver Update.