Essential Portfolio Considerations into 2012
“…the world is a lot poorer than it was in June. But back then people still thought the Bernanke team was engineering a ‘recovery.’ Now we know, recovery hopes were fantasies. This is not an economy that can recover. It has to die. Then, a new economy will take its place.”
The Developed World Shifts from “More” to “Better”
Bill Bonner, The Daily Reckoning, 10/3/11
November 2011 through April 2012 are especially critical for the markets and economy, and thus for portfolio construction. The following is an overview and key essential guidelines for portfolio profit and protection.
“Dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday, won’t be able to be fulfilled.”
Steffen Seibert, Spokesman for German Chancellor Angela Merkel, 10/17/11
- The Eurozone will come to the cliff at the end of “The Road” by the spring, 2012 because an extraordinary large amount of sovereign, and other debt will have to be rolled, haircut down, or repudiated, this coming spring.
“Financial markets are driving the world towards another great depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation.”
“The Road from Depression”
George Soros, project-syndicate.org, 9/29/11
- Several nations cannot avoid default in 2012 unless the mega-banks take a major haircut
- But major mega-bank haircuts could mean mega-bank collapses, with ripples around the world
- The USA must also address its hyper-debt-saturation condition in the next few months (the USA, with $15 trillion in unpayable debt, is arguably in a worse position than the Eurozone)
- But cutting spending by cutting borrowing threatens an even greater economic slowdown
- But not cutting spending, and implementing a broader QE 3 virtually guarantees increased inflation. Deepcaster believes the central banks will opt for more money and credit creation (far in excess of GDP growth), thus creating more inflation.
- But either course seriously threatens markets’ stability; yet there is no third way
- Mega-Banks around the world are threatened with a destruction largely of their own making. They have been allowed, in response to their own shrill demands, to create and then carry toxic assets on their books at mythical values, rather than mark-to-market values. And the largest of them carry some $600 trillions in notional value of derivatives on their books (www.bis.org, path: Statistics > Derivatives > Table 19).
Therefore, PIMCO CEO M. El-Erian is correct to warn about one (of many) possible consequence(s) of mega-banks carrying toxic assets on their books.
“These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors.”
PIMCO CEO Mohammed El-Erian, 10/8/11
But the ongoing Eurozone paper-over-reality charade cannot last, as the toxic assets are beginning to self-destruct. Witness the ongoing PIIGS debt crises in the Eurozone and the toxic collateralized mortgage securities market in the USA. Consider the following remarkable public acknowledgement.
“It is an Open Secret that numerous European Banks would not survive having to revalue the sovereign debt held on the banking books, at market levels…
The European Debt Crisis is worsening.”
Josef Ackerman, CEO Deuschebank, 9/4/11
- While households and businesses are generally reducing their debt and deleveraging, major central banks are in the process of creating/facilitating adding more debt to already unpayable debt. This is an invitation to disaster.
- And the real statistics (as opposed to the bogus official ones) show a worsening economic condition. In the U.S. for example, real unemployment is 23.1%, real CPI is 11.45%, and real GDP is a negative 2.83%! (according to Shadowstats.com**) Note that CPI is already at the hyperinflationary threshold level thanks to central bank money and credit creation.
- But now economic realities are beginning to force their way into even the official numbers. On Tuesday, October 18, the U.S. Producer Price Index came in at higher than expected. The inflation already long evident in Shadowstats.com’s real numbers is starting to rear its ugly head even in the official numbers.
- Thus the worsening economy will likely result in a de facto public Q.E. 3 at some point and that will be most inflationary.
Essential Portfolio Considerations
- Focus on acquisition of tangible assets in relatively inelastic demand. Agricultural products and producers are one central focus here (see recommendations in our portfolios at www.deepcaster.com)
- Real estate in prime (recession resistant) locations with high yield is another (new recommendations in Deepcaster’s November, 2011 Letter) excellent choice for profit and protection
- By contrast, energy prices and values tend to be sensitive to overall economic condition. They tend to be dampened in periods of economic weakness.
- Another essential component for portfolios is a high-yield portfolio. This should aim for a total return (gain plus yield) well in excess of real inflation which in the USA is 11.45%.
- Move assets from banks with large derivatives and/or Eurozone exposure to those with little or no such exposure. In the U.S. this could mean for example, moving assets to credit unions in order to be somewhat removed from exposure to mega-bank vulnerabilities.
- And, of course, buy physical gold and silver on the dips, and gold and silver shares at the right time. But stay alert for The Cartel price takedowns.
October 20, 2011
** Shadowstats.com calculates key statistics the way they were calculated in the 1980s and 1990s before official data manipulation began in earnest. Consider
Bogus Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual U.S. Consumer Price Inflation reported October 19, 2011
3.87% / 11.45% (annualized September, 2011 Rate)
U.S. Unemployment reported October 7, 2011
9.1% / 23.1%
U.S. GDP Annual Growth/Decline reported September 29, 2011
1.63% / -2.83%
U.S. M3 reported October 15, 2011 (Month of September, Y.O.Y.)
No Official Report / 2.66%
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