Use access key #2 to skip to page content.

BillyTG (29.16)

3-Phase Economic Collapse: A look at a 2008 Prediction

Recs

25

May 09, 2011 – Comments (11) | RELATED TICKERS: USO , GLD

In 2008, I read a report by a man named Tom Gleason.  Within the report, Gleason laid out how the US would collapse, step by step.  Especially in the last year or two, we've all seen countless doom and gloom articles, but this one was different.  It was so specific in how different asset classes would react and in what order.  I got to thinking about his predicitions last fall and was curious how accurate they were, but unfortunately the report had been taken offline.  With the help of a mainstream investment author,  I got in contact with Gleason, who emailed me the report. 

Draw your own conclusions and please comment.  For my part, I think his predictions are quite accurate and that we're only midway through playing out, possibly hitting his phase 2 stock market downfall this summer.  He was obviously fooled (like most of us) by Obama's charms, at the time thinking that Obama might possibly fix our economic woes.  Gleason's recent letters tell of how Obama is just a continuation of the statist puppets we have for politicians.  For those interested, Tom Gleason has a free monthly newsletter.

Emphasis mine. Here's the applicable part of his October 2008 report:

 

 

What To Do
The recent stock market declines are just the first phase of our coming economic slippage. Many investors have lost over 25% on their stock portfolios since autumn 2007. They've run now from stocks and into bonds. Some think they can hide out in TIPS or money market funds. As the recession grinds down corporations, bond rates will rise due to defaults. The credit default swap insurance purchased by financial institutions will have headline failures. Unemployment will rise and the government will run trillion dollar deficits year after year. At some point foreigners will give up on providing cheap money to the Treasury so Treasury will just print money. Tbond rates will go up. Holders of bonds will lose as rates rise. The dollar will decline. Sitting in bonds exposes the investor to currency risk and interest rate risk and that includes TIPS.

I've called the first phase of this process The Big Markdown where asset prices drop in price. We're only part way through it. Phase two will usher in massive bond defaults and job losses. Phase three will include a currency collapse when the dollar is dropped as the world reserve currency. In phase one, asset prices fall. In phase two institutional promises to pay debts like pensions, annuities and bond insurance fail. In phase three the currency fails and systemic economic failure occurs and most probably amid very high inflation. Phase three could be avoided if there was international cooperation on debt rescheduling and America made a national commitment to financial solvency. Failure is not inevitable if internal forces were properly directed and external forces were cooperative. I doubt we'll see the optimistic scenario. That's because the oil depletion crisis will arrive at about the same time and stress economies across the globe (with some notable exceptions).

I think we're facing many years of negative interest rates. This is a condition where the rate of inflation exceeds the rate earned on treasury bills. Thus, holding cash will be a losing game. Gold will move up with inflation and will move dramatically upward as the dollar weakens. The only other asset likely to match or exceed gold's rise will be oil. We're probably near or past the point of maximum world oil production or will be within a few years.

As investors, our primary issue is to contemplate the consequences and decide what must we do now. Let me first make a statement so you know where I stand.

I firmly believe that most investors reading this eletter will be essentially broke within ten years. Your money will be lost to inflation, a dollar decline and a series of failed defensive asset repositioning's that won't protect your savings.

Each phase of our national insolvency has a particular course of action to follow and missing the transition points will quickly erode asset values. That's why very few will survive with meaningful liquid assets intact.

I'll offer my opinion on what to do but with the caveat that I could be wrong and possibly very wrong. You should and must countercheck anything I say against the opinion of a competent professional and consider all sides of the arguments carefully. I don't have psychic powers or an all knowing ability to predict the financial markets. At turning points, I've been right or lucky so far but may be wrong next time. With that in mind, let's go.

 

The Three Fuzzy Phases of an Economic Collapse
Phase One: This phase started in 2000. The Internet bubble popped and stocks started down. George Bush took office in 2001 with a laundry list of wars to win. These schemes were cooked up by Dick Cheney and various conservative think tanks. Some deliriously dreamed of an American Century or Pax Americana. Others were oil men keenly aware of the depleting oil production problem and wanted Iraq's oil. Some were honest idealists hoping to spread sound Christian values or conservative ideas to create a more civil society and one with sound money. These good people were the first victims of Bush's distorted world view and betrayal. Privately he called evangelists "wackos" (book source: The Bush Tragedy)

The war plans existed prior to 2000 and this is documented. 9-11 provided the perfect opportunity to set the war plans in motion. It was suspiciously timely. From 2002 to 2008 Bush doubled the national debt and amid weak market regulations instituted prior to his administration. He further weakened the rules. He was warned in 2002 by his Treasury Secretary Paul O'Neil that his plans were potentially financially catastrophic for America. O'Neil was fired.

Bush should have listened to O'Neil, Volcker, Rubin and many others in 2002 who strenuously warned him and the world of the consequences of his actions. Nelson Mandella said Bush had no ability to reason and would lead the world into wars killing many. Bush would have none of it. The dollar declined 40% between 2001 and 2006. The wars were all off budget to hide the true costs. The story has been told by others so I won't go on with it any further. Suffice to say, the crazy spending was the cause of the housing boom and the lack of regulation exacerbated the bond insurance scams and many other acts of financial malfeasance. These problems are now collapsing onto Bush just as he prepares to leave office. The nation is experiencing massive assets losses in housing and stocks.

I started my SWR web site in 2003 and warned about the wars. I'd regularly lose 10% of my subscribers in months when I criticized Bush. Never bothered me. I had bought gold in 2003 in the mid 300 range knowing this guy had a Manchurian Candidate personality. In autumn of 2007 I began warning of an imminent stock market decline (the eletters are still on the site). My subscribers avoided the falling stock market.

Phase Two: This phase is just starting with some overlap with phase one. During this phase corporate bonds will be crushed and stocks will continue to fall. I have a chart on the SWR site showing how rates usually rise as the spread between 10 year Tbonds and 20-30 year corporates exceeds 1.5% or so. The historical spread is .86% with a standard deviation of .40%. Two SD takes it to about a 1.6% spread. This is very rare. We are now at 3 SD with the spread over 2%. This only happened once before in US history - in 2001. I believe a wave of corporate bond failures and rising rates is just beginning and is irreversible. The weakening economy will be the trigger. When the bonds fail and the credit insurance fails, we'll see a massive credit panic and the start of a depression. The stock market will crash to unthinkable levels. Pension funds will fail. The debt will be assumed by the federal government. This phase could occur at any time and quickly transition to phase 3. Hold cash in treasury bills or short term insured deposits. Avoid all bonds with any duration longer than one year. No stock market in the world is safe.

Phase Three: This is the phase where you must take decisive action because time will be very short. Those not acting promptly might be financially destroyed. I was in the bullion business in 1978-82 as a scrap dealer, I'd have older people stop in to talk. My shop was in an a neighborhood with some foreign born WWII survivors of German prisoner of war camps and Holocaust survivors. These were the ones who didn't flee and got caught up in it. Their stories made a deep impression on me and caused me to always be alert to governments that work against basic justice and the needs of the people. The incompetence and malevolence that has infected our congress and administration has brought this nation to the very brink of disaster.

One of two things will happen. Either inflation will roar and financial assets held as dollars will lose value quickly. Or, deflation will set in as a resolute leader refuses to take the nation into the financial destruction of hyperinflation. Inflation is much more likely than deflation. We have to wait and see which way it goes. Like I said, Obama strikes me as a resolute man whereas McCain, my state senator, is tough talking phony. Whoever wins, it won't make much difference because the circumstances will force the course taken.

This phase will be marked by the abandonment of the dollar if inflation occurs. There will be plenty of warnings before this happens but most people will ignore the clear warning bells. The Treasury will be pressured to print money to help the unemployed, to support the failing credit markets and to take over paying private and public pensions.

Gold will hold value but will be hard to obtain. This is already happening - call any coin dealer and you'll see its true. There's weeks of wait for gold coins. When panic sets in people will lose fortunes to con men who won't deliver promised coins.

The government might take punitive action against gold by taxing it heavily on the sale and resale. Speculators will not be popular. All gold should be held in physical form in a safe deposit box or in allocated units in your name outside of the country. Canada is a good place.

The best investment during this period will probably be oil. When the world economy starts to dive, and this recession will be global, oil prices could fall for a while. At a certain point, when prices are depressed, I'd buy an oil etf like USO. This will be a play on the dollar and oil depletion. Buy in three groups to avoid committing everything on the way down. The advantage to buying oil over gold is the price is now headed down while gold is going up. This divergence is unusual and potentially profitable. In addition, the government can't manipulate the oil market like gold and can't outlaw it or tax it. It's an excellent proxy and will win big in a dollar collapse and during inflation. You want to buy USO in this phase and not in Phase Two. During an asset price deflation, cash will rush into the dollar and other strong currencies. However, the currencies can and will be manipulated by the central banks to prevent a massive bank run in any one country. This agreement will hold for a short time. During this phase currencies will win over stuff like oil at least for a while.

Another option is to hold money in various currencies using etf products or mutual funds designed for that purpose. You can check out FXF, FXC, FXY and the fund merkx although it's heavy on Euros. I'm cautious on the Euro because some countries in Euro Land also have huge debt problems. I might be wrong to avoid FXE.

Right now, the currencies and oil are declining against the dollar as cash rushes to safety. Under no circumstances would I put everything into one pot. I would never own all gold or all USO. I'd mix it with currencies and some prpfx and cash. A little gold or oil will go a long way. Use good sense at all times and don't get greedy. The objective is to maintain purchasing power and not to get rich. I know many people will ignore that injunction and you'll see for yourself what happens to them.

The issues I discussed are very important to retired people and the elderly living on a fixed income. Young people starting careers or in their first home will not be as severely impacted by a financial panic if they can keep their job.

 

Charts

PRPFX is much less volatile than gold or stocks and is holding it's own in a tough market. The charts below show the rate of return over a period.

Prpfx (The Permanent Portfolio) is even for the year whereas gold is up 20%. The fund holds 25% precious metals but its balanced asset mix smoothes things out. I really like this fund for this tough period.

 

Stocks have been crushed over the last year. Despite holding 30% in equities, prpfx is even yet stocks are down over 25%.

 

Gold and oil often move together but they're now diverging. Gold is up 5% in September 2008 whereas oil is down about 12%.

 

Oil can often have price swings of 30-60%. USO may be a good inflation play in Phase 3 if things go to high inflation and amid reckless spending and bailouts. I'd buy USO in three stages. Buy some when the price rises above the 50, 100, and 200 day moving averages. This strategy would have worked well in April-July 2007. Once in oil, stay in rather than trying to trade it. We just want to get in at a reasonably low price range. We want to buy on the way up in stages. In phase three oil is a good inflation hedge.

 

Reforming America
America's debt problems, wars and general level of poor leadership have been caused by greed and incompetence. Our public officials are bribed by lobbyists to work against the public interest. It's essential that we avoid the mistakes of the past. I'd propose some simple ideas for this country. One to fix what's wrong and the other to set a new direction.

1). Require the public funding of all federal elections. No candidate may accept private funds or provide their own funds in excess of a percentage of the public funds. This will reduce the influence of lobbyists. Public officials may not work as a lobbyist for a private employer for three years after leaving office. Public officials may not work for a private employer for two years after leaving office if they accepted campaign contributions from the organization.

2) Set a national objective of total energy independence from imported oil and gas. I'd exclude Canada and Mexico from the rule since they are close neighbors.

 

Other Notes
We are not in a commodity bubble. Bubbles imply a huge demand that's swamped by supply causing prices to fall.  In oil, gold, and food there is no huge oversupply of product so this recent market decline isn't caused by over supply.  It's a decline caused by fear and the need to raise cash but it's not a bubble. Regardless of what happens in world currency and commodities markets, nations with natural resources to sell will gain foreign currency exchange.   Nations that manufacture more than they consume will accumulate exchange reserves.  In an economic recession, people still need oil and other things.  This will be much more important than having a lot of banks.  I don't buy the story that commodities are dead.  They are very well priced right now. Therefore, hold the currencies of nations that don't have to borrow and that have essentials  to sell.

A subscriber sent me a link to a new asset allocation tool. It's much slicker than the one on my web site but lacks gold. Be aware that the data prior to 1980 is a guess because the indexes didn't exist at that time. http://www.assetplay.net/financial-tools/backtest.html

 The years ahead will be difficult. Our objective is to maintain purchasing power for now. There will be better days. At some point we'll be able to lock in high interest rates and low stock prices.

11 Comments – Post Your Own

#1) On May 09, 2011 at 5:42 PM, mtf00l (44.64) wrote:

Interesting read.

Where does his report end and your recommendation begin?

Report this comment
#2) On May 09, 2011 at 6:02 PM, BillyTG (29.16) wrote:

Not sure what you mean, but all the post's content is his after my sentence "Emphasis mine. Here's the applicable part of his October 2008 report:"   I wrote the two paragraph intro at the very top and then pasted in his report from there.

 

Is that what you're asking?

Report this comment
#3) On May 09, 2011 at 6:29 PM, SultanOfSwing (96.92) wrote:

There are many things that this Nostradamus has predicted that has not (yet) come to pass:

- Oil has not had a huge upswing (despite the recent run-up).  In fact, USO has traded slightly down since Oct 2008.

- Corporate debt has not failed massively

- Pension funds are still intact for the most part.

- Obama has managed to bring America back from a war posture (at least in the near term).  It's politically popular now to draw down forces in both Iraq and Afghanistan with the death of bin Laden and Al Qaeda's splintering.

Although it will be great to see our troops come home, the downside will be extra pressure on an already weak job market as many vets try to enter the civilian workforce.

So if this doomsday scenario is to play out, it hasn't gotten much traction in 18-months.  I wouldn't be so quick to follow his investment "recipe" (flight to oil & gold) just yet.

Report this comment
#4) On May 09, 2011 at 7:24 PM, BillyTG (29.16) wrote:

SultanOfSwing,

it will be interesting to see how the next couple years unfold.  His predictions have not been exact, but he has some very good calls in this report, and a lot of calls that still seem inevitable.  From higher tax rates on gold, to dollars being a losing investment, to trillion dollar deficits, to rising unemploymen, to the treasury just printing money when foreigners stop buying, to gold moving up as the dollar weakens, to peak oil production (witness Saudi Arabia's failed attempt at boosting production), he was spot on(pun). 

To respond to your points,

-Oil and gold correlate quite closely. Terd Ferguson discusses this often. Even within the last few weeks, with the "risk" tradesflashcrashing, we saw oil and PMs taking rapid, severe falls, and are slowly climbing together again.  Tom Gleason mentions a rare divergence between gold and oil in his Phase Three. We aren't there yet. Reading the report, I don't think we've even fully hit his phase two, but that may be imminent if the stock market's artificial pumping by the Fed ends.

-Right at the time of his post (October 2008), oil was in a massive freefall to the $30s.  Since December 2008, oil went from the low $30s to recently over $100.

-Since October 2008, gold has  gone from the $700s to over $1500.  So, his investment recipe has done quite well so far, obviously better than holding dollars.  The stock market bottomed in early 2009, so those folks who held stocks through the tough times have seen some inorganic massive gains, too, thanks largely to the Fed. 

-USO is an oil ETF with an atrocious tracking error, so not really something to use for long term investing, especially on the upside.

-Pension funds might be intact, but "intact" isn't exactly a strong endorsement, is it?  Pension Fund Losses Hit States Hard

-What's this talk of bringing the US "back from a war posture"?  This must be political talk coming out of you. That is really throwing me for a loop. Are you suggesting that President Obama has reduced our foreign military actions? Since October 2008, we have ramped up!  And do you actually buy the nonsense that we will "withdrawal" from Iraq and Afghanistan?  Sorry, but I have some serious experience in this arena, and it is incredibly naive to think we will leave those places.  You obviously have no idea what we are doing in Africa and the Middle East right now, stuff you won't find in the mainstream.  Killing Bin Laden will not change anything.  This is mostly about energy and the economy, one and the same.  The military is used to defend American consumption. The threat posed by terrorism is so tiny as to be inconsequential, but it is politically necessary to generate public support for our military presence in the area.  Apologies if this information makes your head spin---most of the American public don't have a freaking clue about the reality.

 

Report this comment
#5) On May 09, 2011 at 7:52 PM, buffalonate (93.97) wrote:

His prediction of peak oil is way off.  Iraq will be the largest oil producer in the world in a few years when they get their infrastructure built up.  Experts say the U.S. will increase our production by 40% in the next 10 years due to oil shale.  Brazil also has huge quanitities of oil off of their shores that they are just now starting to drill. 

Report this comment
#6) On May 09, 2011 at 8:11 PM, BillyTG (29.16) wrote:

buffalonate, the peak oil idea has been knocked around lately, precisely for the things you mention.  But, to me, those things also underscore our dire need to keep oil production at least as high as it is.  EVERYTHING about our economy is based on oil.  EVERYTHING.  Kill cheap oil and the economy dies. It's no wonder oil and gold track together. 

The Iraq and Afghanistan resources underscore our true reasons for being there (it's not because of terrorism).  In my opinion, there will be a lot more turmoil (war) in the Middle East before the US decides to withdrawal and leave those resources on the table for China/Russia/Iran or any other group wanting to fill that power/resource vacuum.

Keep in mind some of the  nuances of the "peak oil" position.  Peak oilers are not saying we are running out of oil.  They are saying we are running out of CHEAP oil, and that maintaining production levels will become very costly, if not impossible.  Oil shales, oil sands, and offshore drilling cost a lot more than the pressurized, easy-access, reserves in Iraq. The EROEI is going to continue to drop as production moves more to these harder-to-reach places. Oil prices then go up.  

Report this comment
#7) On May 10, 2011 at 11:58 AM, BillyTG (29.16) wrote:

Is Nobel Peace Prize Winner Obama More Brutal than Bush? http://www.washingtonsblog.com/2011/03/is-nobel-peace-prize-winner-obama-more.html

Report this comment
#8) On May 10, 2011 at 1:18 PM, Schmacko (60.65) wrote:

#3 "Although it will be great to see our troops come home, the downside will be extra pressure on an already weak job market as many vets try to enter the civilian workforce. "

This isn't vietnam, with draftees returning home unable to find work.  Most of the personnel that leave the warzones will just be going back to whereever they are normally garrisoned.  Guard and reservists will presumably return to their old jobs.  Some will not reenlist, when their time comes but I would think that reductions in troop levels in war zones would lead to less rotations into theater, would lead to less stress on the military and greater overall retention rates.  There may very well be vets looking for work but I wouldn't expect it to create any real noticible pressure on the overall job market.

#4 "What's this talk of bringing the US "back from a war posture"?  This must be political talk coming out of you. That is really throwing me for a loop. Are you suggesting that President Obama has reduced our foreign military actions? Since October 2008, we have ramped up!  And do you actually buy the nonsense that we will "withdrawal" from Iraq and Afghanistan?  Sorry, but I have some serious experience in this arena, and it is incredibly naive to think we will leave those places.  You obviously have no idea what we are doing in Africa and the Middle East right now, stuff you won't find in the mainstream.  Killing Bin Laden will not change anything.  This is mostly about energy and the economy, one and the same.  The military is used to defend American consumption. The threat posed by terrorism is so tiny as to be inconsequential, but it is politically necessary to generate public support for our military presence in the area.  Apologies if this information makes your head spin---most of the American public don't have a freaking clue about the reality. "

This comes off like propaganda and conspiracy talk more than anyone who actually has any "serious experience in this arena."  In Dec 2008 we had the following troop levels in the following middle eastern countries- Iraq 161,000; Afghanistan 38,500; Kuwait 43,600; Bahrain 4,800; Qatar 8000; UAE 2000.  AS of August 2010 that was down to - Iraq 50,000; Afghanistan 98,000; Kuwait 10,500; Bahrain 1,500; Qatar 8000; UAE 96.

It's true we've ramped up in Afghanistan but that's still a pretty big total net reduction of personnel in theater.  Obama has been pretty vocal about drawing down troop levels in Afghanistan starting this summer and I fully expect him to carry through with that.  Gates has plans to axe something lik 35-40k people from the active duty Army and Marines as part of defense spending reductions.  Cutting that amny people wouldn'y be possible without a reduction in opstempo.  I have no idea if or when we will be out of those countries completely... maybe never.  But the amount of troops in theater will be reduced drastically. 

Report this comment
#9) On May 10, 2011 at 2:13 PM, dmarkiv (< 20) wrote:

I am skeptical about any Doom and Gloom or Pie in the Sky predictions. The Elliot Wave people have been predicting Doom and gloom for a while and I'm sure one day it will happen. The market does move in mathamatical sequencies. HERE IS MY TAKE. I 'm not close to being an economist but no one seemed to give technological production its due. It Was Off the Wall. Many new and productive companies producing much more in the way of large Capital than any of the old manufacturing processes could muster. I think technology production has held off the coming down turn in the markets. If you follow John Murphy and his all markets are interrelated you get some idea of what the current arena looks like, but, yes there will be a correction, maybe now - maybe later.

Report this comment
#10) On May 11, 2011 at 4:11 AM, BillyTG (29.16) wrote:

Schmacko, you're cracking me up with your wiki stats.

You're right---we have fewer US military personnel in Iraq today than we did in 2008.

Now, let me throw some reality your way.  Obama and Gates will make good on their promise to "bring troops home" this summer.  That's the political game they play with the American public.  But, what if they are, at the same time, increasing mercenary forces (former military special operators, such as Xe/Triple Canopy/Dyncorp, etc.)?  Is it possible that the US can simultaneously beef up operations while at the same time decrease US troop levels?  The answer is yes.  The goal is to shrink our public footprint to as small as possible, while maximizing our influence in a region.  Welcome to post WWII US military-industrial-political complex.  This isn't exactly new.

So you're looking at how many soldiers are in a place, and that's exactly whatthe poltiicians want you to look at, and what the media pushes into your brain.  

How involved was the US in Pakistan in 2008? How much today? Much more.  How involved were we in Africa in 2008? How much today?  And I'm not even talking about Lybia...Look at a map of Africa and check out how many countries there are...now guess how many of them have US military and other covert activity happening right now.  Let me save you the trouble: It's A LOT, much more than in 2008!

So, when I say we've "ramped up," I'm looking not just at how many Army soldiers are on the ground in a specific location, but how many NEW locations we are now involved in, how much new covert activity we're doing, how much our military operations have shifted to privatized, outsourced mercenaries and allied frenemies.

Report this comment
#11) On May 11, 2011 at 1:14 PM, mtf00l (44.64) wrote:

BillyTG,

#2 Yes, thank you.

#10 Africom?!

http://en.wikipedia.org/wiki/United_States_Africa_Command

 

Report this comment

Featured Broker Partners


Advertisement