Severe Market Event - Special Alert

The potential loss of a major US brokerage is shaking markets. Gold over $1000. Dollar breaks to record low. Stock market volatility erupts.

Despite the 'good news' of unbelievably low inflation, and overnight stock futures up strongly on the 'good news' the markets are all now reacting badly to what was, I am sure, supposed to be even more good news - the bailout of Bear Sterns and Co by JP Morgan and the Federal Reserve.

Here's the news:

SAN FRANCISCO (MarketWatch) -- Bear Stearns Cos. said Friday that it got short-term financing from the Federal Reserve and J.P. Morgan Chase after the brokerage firm's liquidity "deteriorated significantly" during the past 24 hours.

On the surface it's a great thing that JP Morgan and the Federal Reserve were able to join hands and string together a bailout so quickly.

On the other hand, what does it mean that Bear Stearn's "liquidity deteriorated significantly"? It turns out that we are facing the very real prospect of the collapse of a major financial institution. And you never get just one of those. Once one big one falls down, they tend to drag a bunch of others with them.

More coming as the news develops.

The stock market has been ignoring the bad news for entirely too long.

It is completely clear to nearly all observers that we are already in a recession, and a particularly nasty one at that. The only indicator not giving a reliable clue here is the stock market.

I think that's going to change and, as you know, what little money I have in the stock market is positioned to benefit from a decline. Why? Because even garden-variety recessions typically take the stock market down by 28% and we're nowhere near that yet. So I see more downside.

But even more, I see this recession as being anything but garden variety. It is the double whammy of both having to correct the excesses from the last recession we never had (thanks to Al Greenspan lowering rates to 1%) PLUS the bursting of the largest credit bubble in all of history.

But wait - there's more.

We've never been in this situation because, in the past, we were a net-creditor nation with savings. Neither of these conditions are true today which means that Ben Bernanke's options to cut rates are severely curtailed by the fact that doing so could cause the dollar to plunge in value. So we have to add the potential for a dollar crisis into the mix.

So what does this all mean?

I am certain of several things:

  1. The Federal Reserve will do everything in its power to prevent asset prices from declining. By "assets" I mean stocks, bonds and houses. Plan on continued rescues and liquidity injections and various other schemes. None of these actions will be good for the dollar. Get out of dollars. Consider buying gold, silver, foreign currencies, foreign bonds, oil.
  2. The US Government will continue to be less-than-forthright about the current situation (witness the 0.0% inflation tale they told today). In a faith-based economy, such as ours, maintaining the appearance (or illusion) of health is literally as important as any other factor. So plan on our government officials doing the most responsible thing they can which is saying whatever they must to preserve the illusion that 'all is fine'. Heck, it's what I'd do in their shoes so I do not fault it. However, if you fall for it you could be severely misled into either the wrong actions or inaction at a time when you should be vigorously seeking solutions.

All my prior recommendations stand.
  1. Get out of stocks (or at least buy puts &/or offsetting inverse index funds if you cannot sell at this time for some reason)
  2. Keep some cash at home
  3. Reduce your exposure to US dollars (gold, silver, commodities, food)
  4. Get out of variable rate debt
  5. Investigate your financial institutions (banks, brokerages, 410k and pensions facilities) and be sure you are working with financially sound entities.
Let me know how I can help.


This is a companion discussion topic for the original entry at

Ezekiel 7:19 NKJV

‘They will throw their silver into the streets, And their gold will be like refuse; Their silver and their gold will not be able to deliver them In the day of the wrath of the LORD; They will not satisfy their souls, Nor fill their stomachs, Because it became their stumbling block of iniquity.”