The Titanic - Another model for the economy
In my last blog, I compared the 2009 market to the southern coast of the US. The current economic conditions can also be compared to that fateful voyage of the Titanic.
The economic iceberg hit about a year ago, when Lehman went under. Lehman was only the 'tip of the iceberg'. The ship broke into 2 pieces and half sank in March '09. The back of the remaining half is rising, but the ship is still taking on water (home values continue to fall, foreclosures continue to increase, national debt is increasing at an outrageous pace, unemployment near 10% and still increasing). For the moment, things are looking better as the remaining half rises higher and higher, but the inevitable conculsion is that the remaining half will sink as well. A frighteningly similar scenario has actually happened before (aka 1929-1932). Sure, times are considerably different, but two main market drivers (human emotions of greed and fear) remain exactly the same.
The current dilemma for us as investors is that we don't know how big this Economic Titanic really is. We just don't know how high the remaining half will rise and how long it will take to sink. We can buy protection in the form of puts, but this could be entirely wasted because of the unknowns. Furthermore, whoever is *buying* those puts is taking on an incredible amount of risk! Gold and precious metals (and mining stocks) might be the best lifeboats, but I'm not even sure they are safe.