Sunday, November 22, 2009

Raise Cash...Another Crisis is on the way

Good evening Folks!

First of all, I apologize for the lack of posts. The collapsing economy has forced me to focus on other work for the time being.

The next two weeks will be busy, but I hope to be back up and posting more often in December.

Folks, I consider this to be one of my most important posts. I am going to offer a warning and some advice.

I am EXTREMELY concerned about the things that I am seeing in the markets. The US dollar carry trade, soaring gold(up another $15 tonight), and the apparent imminent passing of health care reform are the last straws that are going to eventually break this market's back.

As a result, I have tweaked my investment strategy. I will explain my concerns in further detail later on in this post.

Here is my advice: Raise Cash!

If you are looking for a number, I would have enough physical cash at home to pay one months worth of bills. I would also advise having 6 months worth of available cash in a safe conservative bank or credit union.

If you do not have the money to do this and live paycheck to paycheck, I would suggest cutting back your 401k contributions to the minimum amount at which your company matches.

For example, if you contribute 10% to your 401k and your company matches dollar for dollar up to 4% then you should drop your contributions back to 4% until you raise enough cash.

I did this in my own 401K within the past month. 401k's are great because they cannot be touched if you go bankrupt. However, I'll be honest folks, if it wasn't for that, I would probably advise you to liquidate the whole damn thing.

I say this because taxes are going to soar down the road as a result of our bulging deficits. You would probably be better off taking the 50% hit on your 401k now because at the rate we are currently spending, the tax rate might be 70% or higher when you are retiring and getting ready to use it.

Remember, when we paid off our war debts in the '40's, the tax rates for the wealthy were as high as 90% as seen below:

"During the Great Depression and World War II, the top income tax rate rose from pre-war levels. In 1939, the top rate was 75% applied to incomes above $5,000,000 ($75 million 2007 dollars). During 1944 and 1945, the top rate was its all-time high at 94% applied to income above $200,000."

There is no reason why we won't see the same thing happen all over again if we ever plan to pay off our trillions in debts.

Our debt vs. GDP is completely out of control. It's beginning to make The Great Depression look like a walk in the park:

Quick Take:

This is not sustainable! The world is rapidly losing confidence in the US dollar as our debt load continues to soar. Gold is slowly decoupling from the dollar and continues to move higher regardless of what bucky does. This is a very troubling sign.

The New Carry Trade

Move over Yen! There's a new carry trade in town: It's the US dollar! This is what has been holding up the equity markets recently. If you haven't noticed, the market trades right in synch with the US dollar.

If bucky drops, the markets rise. If bucky rises, we tend to see moderate sell offs.

So how does the carry trade work? John Mauldin does a great job explaining it here.

Essentially, the Fed is trashing our currency with massive deficits while keeping interest rates at zero at the same time. This is the perfect setup for a currency carry trade which I will get into a little later in this post.

Take a look below at the current zero interest rate policy below:

Before I get more into the carry trade I wanted to explain why I am so fearful.

What really spooked me into my cash call was when I saw the IRX(13 week T-bill) drop below zero for a bit last week. This means at one point last week you actually paid to keep your money in treasuries! The last time we saw rates that low on the IRX was when the market crashed last fall.

This tells me that the big boys are really spooked. They would prefer to sit and actually lose money in treasuries versus investing in the equity market.

No back to the carry trade:

This is how the carry works: Investors borrow dollars at zero interest rates and then sell the dollar and buy an appreciating currency. After converting the money into a stronger currency like the Aussie dollar, they then run around and buy up assets around the globe that offer a higher yields then the zero yield they get sitting in treasuries.

This is a beautiful trade for now because you win twice. You make money based on the simple appreciation of the currency as the dollar continues to fall, PLUS, you also get a nice yield spread off the foreign bonds that you bought that offer yields of say 5% or so.

The problem here folks is everyone is piling into this trade. This is rapidly turning into a speculative mania. Congratulations Fed!: You just blew up another bubble that now has to burst just like every other one has.

So what are the risks here?

There are a few that really concern me. The first one is what if the the falling dollar gets disorderly and begins to plunge? The Fed would then be forced to act and protect the dollar by raising interest rates.

This would be disastrous for the economy, and anyone stuck in the dollar carry trade would get slaughtered because the dollar would soar as a result. Many of the carry traders use huge leverage so they could potentially get wiped out.

Higher interest rates would also be a disaster for the housing industry and the banks balance sheets that are filled with garbage loans. We would also see the market plunge because of the damage higher rates would do to the economy.

Another concern I have here(like Mauldin) is what if the dollar starts to rise on its own which then triggers a short squeeze on all of the investors on Wall St who have gone short the US dollar which is practically everyone at this point?

We all know when too many people get on one side of the boat it usually flips over. If this occurs, we will see the same cascading effect that I presented above.

The Bottom Line

I see no way out of this fiasco without a lot of pain. You may ask why I advise you to build cash positions if the dollar is in such dire straights?

My answer to this is for the immediate future, it will remain the currency that we use in this country. There are also some people out there who believe holding FRN's(Federal Reserve Notes) otherwise known as physical paper dollars is the way to go.

The reasoning behind this is the amount of actual dollars in circulation pales in comparison to the amount of debt we have in this country. Some believe that if the economy blows, actual dollars will be very valuable. I am not entirely sold on this idea but it's an interesting theory.

The market in the meantime could still move higher as long as the dollar carry trade is working. The chance that this can last for a sustained period of time without eventually crushing the dollar is very low IMO.

Also keep in mind: The Fed is rapidly running out of QE money and without government stimulus this market is toast because there is not enough liquidity in the economy to replace the Fed and its dollars.

This massive debt bubble is going to implode once the Fed pulls it's liquidity.

Ironically, if the economy begins to recover globally(and there are some signs of this in some countries), this could potentially be the trigger that pops the debt bubble because a recovering economy would force the Fed to pullout and raise rates as a result of the risk of inflation.

The market basically doesn't want a recovery right now. It loves high unemployment and a bad economy because it allows the Fed to keep rates at zero which is highly profitable for Wall St via the games that I described above.

Of course our crippled economy is an absolute nightmare for the rest of us as we lose our jobs and our homes as Rome continues to burn.

It is extremely sad for me to watch what has happened to this country.

The fraud has gotten so far out of control that I sometimes question if the criminals that created this disaster will ever get what they deserve.

I am going to watch the market closely this week. I will be placing some long term hold short positions on the S&P in the very near future because one thing is clear: THIS IS NOT SUSTAINABLE!

Please be careful with your investments. My call for cash of course is up to you. Things are really starting to look ugly out there. I haven't been this bearish since 2008 and you all know how bearish I can get!

Have a great Thanksgiving and be safe. I will put up a post when I can.

Disclosure: No new positions at the time this article was published.


Patrik said...

Great post! Thanks! It looks like a major inverse head & shoulder in 10 year interest rate. 6% target!!

Jeff said...

Thanks Patrik.

Gold now up another $24 to new highs. Unbelievable.

flipdippy said...

I was wondering why you hadn't posted anything after the 3 year went negative last week. It's hard to see an imminent crash again with the holiday week, and then we're probably due for a santa rally into 2010?

Still, great post. You do your best work when you're frothiest.

I still see no signs of unemployment abetting. One of Baltimore's tech success stories is going byebye - is for all intents shutting down as they look for people to take voluntary layoffs now (or involuntary layoffs soon after).

A few people I know who had great jobs at B&D are also going to be on the unemployment line soon.

All of them thought their hard work and stable companies made their jobs safe. Unfortunately that's not true.

The next few months will be interesting to say the least.

Anonymous said...

been checking frequently, good to see your back.

interesting and scary post.

i have been raising cash; out of the system cash since last year. i am depending on the cash/gold hedge; one up, other down.

question for you. is there A possible senario where gold and dollar DROP together? when would this possibly happen.

Jeff said...

HEy Flip

Thanks! Sorry it's been so quiet around here. Things where I work are chaitic as hell right now so I haven't had the time to write.

Didn't hear that about

My friends wife works for the city of Baltimore and the city just furloughed everyone 1 day a week throughout the rest of the year.

That sure won't help the retail sales in the city.

Things are seriously worsening.

Jeff said...


Anything can happen.

I doubt gold would drop if the dollar dropped. Infact, it would be quite bullish for goldbecause it may end up being the last form of currency standing.

The biggest risk for gold is a deflationary collapse where dollars become scarce. Even then, gold should hold up fairly well because it will be regarded as being safe.

The main reason gold dropped in the 1990's is because the FCB's were dumping their gold.

In today's unstable environment, the FCB's are huge buyers of gold. India's purchase from the IMF is a good example.

GL and glad to hear you are raising cash.

getyourselfconnected said...

it is not quantity of posts, but quality and this one was very good.

I agree, cash right now is a good move; something just has to give and soon.

I am mainly already in cash, besides my metal positions and a few small stock holdings.

Hope you get a break for the holiday from work.

Anonymous said...

Jeff - nice post. Im a little spooked. Out of curiosity, how long do you plan on staying in "raised cash" mode.

Put another way, how long til you can say another crisis isnt in the offing, a week, a month, 3 months?

Just wondering.

Jeff said...


Thanks a lot. I am trying to do more with each post now that I can't post as often.

Glad to see your financial house is in order. I have raised cash, but I think its time to raise even more.

Crazy times

getyourselfconnected said...

went over the last 6 months of trading tonight on the blog, not bad but not awe inspiring. To me return OF capital is always better than return ON capital!

Cannot speak for Jeff, but I have timed the next major crisis to commence on February 4th at 2:23pm EST, plan accordingly! (sarcasm applied, kidding!)

Jeff said...


I will be building cash and holding gold as long as the bailouts continue.

The government has replaced the economy and it can only do so for a short period of time.

I will most likely get out of cash when the Fed pulls out their liquidity and interest rates rise. Will this be 3 months, 6 months? I wish I could tell you.

The Fed has proven to be very effective when it comes to delaying the pain that is inevitable.

One thing I do know is you will know when its safee to come out and play because the market will roll over as violently as it has gone up since June.

The volumes are light right now because the big boys have made their profits for the year. their next concern will be to protect them after a 50% bounce. When the market looks like its going to roll back over the selling will be violent as the HFT's take profits.

This temporary stimulus has people out buying risky investments and they are insane for doing so.

Stocks for the most part have had their move. My next move out of cash will be short versus long. thinking about going short with about 7% of my portfolio via long dated SPY PUTS and the ETF SDS.

I may do it this week. Gonna see how things go.

flipdippy said...

Could be a good day to buy puts and other shorts while folks are out beating each other senseless over cheap chinese junk.

I'm not sure how Thanksgiving week fares traditionally, but the markets rallied huge last year - the SNP was up almost 100 pts that week.

James B said...

Jeff - great post.

So what do you think about all this housing "good news"? I'm calling BS on this - I presume this is fueled by the $8K credit and people snatching up foreclosures. The headlines are full of it right now...

Jeff said...



BS is how I see how I see it too. They are taking away future growth in the economy with all of this stimulus.

All its going to do is guarantee zero to slow growth in the future.

Robbing from Peter to pay Paul. Cheers


Jeff said...


Don't you miss all of that volatility?

It sure made the market exciting to watch. Today it takes a month to see a 100 point move on the S&P.

Wait until this market flatlines for years after it gets clobbered.

Its going to turn into a borefest.

getyourselfconnected said...

At this time of year I like to think about that old South Park episode with the crazy turkeys painted up like Braveheart. Have a goo one all!

Jeff said...


Happy Thanksgiving Everyone!

Enjoy your turkey day!

CT-Hilltopper said...

Happy Thanksgiving Everyone!!!!

I apologize for my absence. I have just been getting literally slammed at work, and have had no time to play on the internet. heh

I'm basically in cash and gold right now (and in a couple of other things in small amounts). I'm trying to cover my ass for whatever they throw at me.

Good luck to everyone. We're going to need it. Instead of pardoning the damn turkey, you'd thing "That One" could pardon us for time served and actually fix the damn economy now. Jeez!

FA in CA said...

I agree on cash for 1 thing, paying your bills. That's it.

Maybe just a tiny bit sitting should this whole carry trade come to fruition and the dollar rises.

Only thing I see, IMHO, is yes people are taking advantage of the low interest on the dollar and putting it into other asset classes.

The only difference I see is that when rates rise, should they ever, people aren't going to be climbing back into the dollar.

They'll be climbing more into gold, silver, commodities, currencies with the natural resources to back em'.

The dollar is done. Central Banks are long on gold. Debasement is going full steam ahead.

FA in CA

Russell said...

Dear Patrik

I have done some back of the envelope analysis on the effects of raising interest rates. I estimate that for each 0.25% increase it will cost the US Government $30 billion. A full 2% increase will therefore add $240 Billion to the debt servicing of the US Federal Government. Can you tell me what programs they would cut or what taxes they would raise.

I cannot see large interest rate increases only deliberate devaluation to monetarize the US debts away. In fact this is precisely what you should be doing as their fiscally conservative option has just past being an option.

I don't see anyway out of this mess for the USA.

Looking from Down Under I wish you guys all the best.

We on the other hand are going to have to deal with a Collapsing Chinese Economy in the next few years which should give us plenty to focus on between our barbeque and beaches.

Best of luck up there to all my American mates.

Jeff said...


Nice to see you!

I hear you when it comes to work. I am overwhelmed as well.

Cash and gold are great places to be for now. I can't wait until this crisis is over!

Jeff said...


You could very well be right and it will be a scary world if this is how it plays out.


I agree with you mate(as they say down under)!

Rates must rise or the dollar is toast. If they do rise the economy and the banks implode.

What a disaster!

We are certianly in deep doo doo. I see no way out is well.

GL down there.

Anonymous said...


Anonymous said...


check out the divergence graph between the DOW priced in dollars vs DOW priced in gold...

the last time this divergence was present, the DOW gave up 50% of its value.. i.e. crashed.

you mention that treasury indicator as well.. there are some warning signs out there.

jeff said...



Thanks for the heads up. I have been also noticing the oil divergence from a weakening dollar.

crazy times for sure.