I've noticed a great new influx of readers and commenters lately, and that warms my heart. Thank you for being here.
However, you've jumped right into the middle of the action - with our recent 60% gain on TSLA and the wild market action following Brexit - and you may be feeling a little lost.
If that's the case, this article's for you.
Today, I've distilled my "Super Crash" philosophy and my most important reports and profit recommendations into a quick overview. As always, I focus on what's going up, what's going down, and how to profit.
What's Going On
We are headed for a Super Crash. Over the past 30 years, the world has gorged out on debt in a massive Debt Supercycle - today there is more than $200 trillion of total public and private debt outstanding in the world, with over $600 trillion in derivative contracts sitting on top of that, a veritable debt bomb crushing global balance sheets waiting to explode. You can read my full Debt Report here.
- The global economy is stuck with subpar growth because this debt was used to fund unproductive things like consumption, housing, stock buybacks, dividends, mergers and acquisitions, and financial speculation. After six years of largely uninterrupted gains in stock prices between 2009-2014, the markets are overvalued by almost every measure and running on fumes.
- Central banks are actively debauching the value of fiat currencies with QE and money-printing. Everybody's buying power is being demolished. Inflation is raging. Meanwhile, central banks artificially suppressed interest rates to levels that actually confiscate savers' capital. The government is effectively stealing savers' money. All this was done in the name of stimulating growth, but all it did was suffocate growth. Now central banks have no cards left to play. This is "the terminal stage of monetary policy."
- With interest rates barely above zero, and its balance sheet stuffed with debt, the U.S. Federal Reserve can't do much more to stimulate growth or bail out markets when they collapse. The Fed has already fatally mismanaged this credit cycle, and cowardly interest rate moves in either direction won't change any of the underlying issues. Central bank policy has reached its limits. Other central banks (ECB, Bank of Japan) are trying to pick up the slack, but ultimately all of these programs are doomed to fail because they try to alleviate a debt trap by creating more debt.
What all this means is that we are headed straight for a $200 trillion "Super Crash."
In order to protect yourself, you need to get a strong bear market portfolio ready ahead of time.
What's Going Up
Go here to see the five categories that should be in your portfolio. However, I've listed the most important two right here:
- Precious metals: Gold is key because it is the only asset that protects against both inflation and deflation. It is "Super Crash insurance" and it should be at least 10% to 20% of your portfolio. Click here to see my complete Gold Report with recommendations. Silver is another precious metal that's worth buying because it will bounce after the Super Crash and cause some additional upside, though it won't protect you as well as gold. You can get my silver recommendations here. Platinum, however, is a short candidate - don't include this in your portfolio.
- Cash: Cash should also comprise 10% to 20% of your portfolio. (In my own hedge fund, Third Friday Total Return Fund LP, more than half the fund is in held cash at any given time.) Cash may not be the most "exciting" of the asset classes, but in terms of protection, it's absolutely vital. I consider it second only to gold in importance... for several reasons. First, if you have cash then you can be a "liquidity provider" when things fall apart. That means you can buy distressed real estate, distressed stocks, etc., that have to be sold by highly leveraged owners forced to sell. Second, cash is important because it will hold its value better than assets whose values are inflated by high amounts of debt such as real estate, stocks, etc. It will depreciate against gold but will do better than high-priced financial assets like stocks when the dam breaks. Third, cash is important in a crisis because it allows you to buy items essential to survival. If things get really bad, cash is really king!
Investors should always hold as many of their assets as possible in U.S. dollars. While the value of all paper currencies will continue to be destroyed by central banks, the U.S. dollar should fare much better than other major currencies like the euro, the yen, and the yuan. You should store your cash somewhere safe and liquid like one- to three-month Treasuries (not stocks or bonds). Click here to see how to do that. If you use a bank, it should be a large regional bank without exposure to derivatives, like Fifth Third or BB&T, or else a bank that's "too big to fail" like Wells Fargo or Morgan Stanley.
While you are consolidating your assets in cash and precious metals, you should avoid the asset classes below, which are headed down as we approach the Super Crash.
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What's Going Down
- Paper currencies: Over time, central banks plan to entirely destroy the value of paper money (including the dollar). Right now, the hierarchy of currencies is: gold-dollar-euro-yen-yuan. Gold is not a commodity; it is a currency, and it will be the last man standing when all the paper money in the world has been destroyed. The next strongest currency is the dollar, as we discussed above. Right now, the dollar is strong and has been putting pressure on global commodity markets with a disastrous ripple effect. (Click here to see how to profit from the strong dollar.) However, keep in mind that this will not last forever. Eventually, the dollar will become devalued as well - but for now it is still a relatively safe haven.
The euro, the yuan, and the yen are all headed down on a much faster timeframe and are good short candidates. You can get those recommendations here.
- Stocks: Central bank stupidity has largely destroyed both stocks and bonds as investment classes. Earnings are inflated by massive stock buybacks and by artificially low interest rates. Since 2008, investors reluctantly but steadily increased their investments in risk assets like stocks, junk bonds, MLPS, venture capital, and real estate that are theoretically capable of providing higher returns. Unfortunately, however, you can't eat theory. In fact, policies that drove interest rates down to zero effectively destroyed fixed income as a viable asset class and created a bubble in Internet, social media, and biotech stocks while leaving the rest of the market overvalued. So now investors face years of low returns on risk assets because the Federal Reserve cannot suppress interest rates forever.
A select few companies will be good long plays (I've recommended some here, and will continue to find opportunities), but most stocks are highly overvalued and should be avoided.
- Bonds: The bond market is in a similar predicament. Bonds were turned into "certificates of confiscation" by the Federal Reserve. One key concept investors need to understand is the difference between "nominal" and "real" returns. Governments thrive on their citizens' failure to understand this difference. "Nominal" returns are measured in constant dollars unadjusted for inflation. "Real" returns are measured in inflation‐adjusted dollars. The U.S. government continues to promote the fiction that the prices of goods and services are falling when real world prices (other than energy since mid-2014) actually are rising at double‐digit rates. You can read my full report on the destruction of bonds here.
Large bond funds like PIMCO and Vanguard are turning in real (i.e. inflation-adjusted) returns of zero, making them nothing more than glorified money-market funds (with little glory). However, they are considerably more dangerous than money-market funds because of their high exposure to derivatives and use of leverage. Investors should minimize bond exposure as much as possible. I do see one good opportunity in the fallen angel space, which you can read about here.
How to Profit
Because of our overarching debt problem, a great many companies are headed for ruin. (Banks in particular are often exposed to debt in the form of credit derivatives, which are deadly.) You should avoid all exposure to these companies, but also be aware that many of them make good short candidates. (My favorite "short trade" is buying puts - this allows you to maximize your upside and minimize risk. I do not often recommend pure short selling.) A few of our latest shorts include:
- Valeant Pharmaceuticals International Inc. (NYSE: VRX)
- Deutsche Bank AG (NYSE: DB)
- Tesla Motors Inc. (Nasdaq: TSLA)
- Mall REITs
- European banks and insurance companies
You'll also have some opportunities to short the bond market as it collapses - here are some recommendations.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.