Covestor

Double-dip, double-dip, double dip?  What's happening with the markets lately as we see huge market volatility and supposedly slowing economic numbers, and cries of prolonged recession coming from many expert sources in the U.S. and the globe?

This economic cycle is no different from other economic cycles in the past – notwithstanding the significant global effects of the financial meltdown.   It is supposed to feel like a recession – as we have had one – albeit a big one.   There is no such thing as a "feel good recession" and Goldilocks scenarios only exist in fairytales and never in the real world.

There are many reasons for so much creation of confusion, and these are caused by the key players in managing – and fixing - economic cycles.  Many investors are fooled by those who "truly" know what's going – out of necessity.  The powers that do know cannot openly reveal their hands so as to keep their main options open, and to allow their allies to continuously and silently establish positions and create market moves that help implement matters of national security that now encompasses economic and financial prerogatives.

Let's focus on this period.  The U.S. government will be having mid-term elections in November, 2010 – and both political parties fear public anger will result in the displacement of incumbents by new candidates promising "real" change.  I believe this is the real impetus of the financial reform which appears to have changes that might actually do some good for the long-term stability of the financial system (we hope!).   The U.S. government will do everything it can to ensure that economic recovery will continue to take place – even if it means, you guessed it, printing more money to buy up bad mortgage assets on bank balance sheets.  This was signaled very clearly, and recessions and even depressions can hardly continue to take place when global powers have agreed to work in concert.  Before fearing the bogeyman of a nation's default – and believing that the world must come to an end if a nation does so – guess what happened after Russia defaulted on its bonds in1998?  Well, it was a tough couple of years, but has anybody stopped buying Russian bonds, stocks and rubles a few short years later?  How the Russian juggernaut arose again in the 2000's culminating in a commodities super-boom in 2007?  Who said that life ended after "bankruptcy?"  Please ask a certain well-known Manhattan-based real estate magnate if the great life (especially the financing of romantic pursuits of Miss Universe-quality material) ended after personal bankruptcy.  Rhetorical!  Bankruptcy is a great thing – if you know how to work it!

No doubt that the US and other countries have upped the ante by going deep into the red thru monetizing – and I believe that the US Treasury in the last few years – perhaps in the Bush II administration – has realized that there is no way out of the debt conundrum – except some time in the future when the US will have to have a "deep thoughts" meeting with it biggest debtors and make them an offer they can’t ultimately refuse….  How about halving my debts so I can continue to pay you the interest and some principal as well?  Refuse, and you get nothing. 

Before you wave away this thought as pure impossibility, you may use Occam's Razor on this.  Once you peel away the onion layers, and realize what the U.S. government has done in the last ten years, you know that it is not going the "pay in full as soon as possible" route.  Before dissing on Americans for this, we should note that primarily American funds were used in the IMF and American banks to invest in and subsequently bail-out so many countries in the world – pre-war Britain, China and U.S. allies; post-war Germany, Japan, Europe; Latin American countries in the 80's; Asian countries in the 90's; you name it - and American taxpayers contributed generously at their own future generational expense in the interest of global financial stability and the projection of U.S. political influence.  Now, wouldn't it make sense that someone in the U.S. Treasury starts to think, let's do one for ourselves – we've been bailing out everybody for so long.  Everybody else has got it good – at our expense.  It's about time for us to get the goodies – without paying full price for it!

I believe such a "payback not necessarily necessary" philosophy was implicitly accepted in the Bush II administration and the Treasury Department at the time.  

This stark thought is not accepted by many mainstream investors because it is too "scary."  But it is the only acceptable conclusion.  And while many investors and financial professionals harp on the insurmountable U.S. deficits, key global players have already looked beyond and started to move the chess pieces in preparation for this! 

In the last few years, what countries have been maneuvering to put large equity investments (transparently known and non-transparent "Cayman-sourced") in global companies that actually have intrinsic net worth measured in tonnes of raw materials, and in direct investments in resources exploration projects and companies?  Don’t you think it's because they are exchanging U.S. dollars for real, tangible – and finite - natural resources in preparation for "the day?"  Why would they want to do that? (Answer: Because at that time natural resources will be far more expensive as the U.S. dollar is seriously devaluated).  All the strategic macro players in the world – already know this and are preparing for the moment (even if they don’t want it to happen).

This fundamental recognition of how the U.S. government is likely to handle U.S. debt will give you a new perspective on how things will be carried out.  That means they will do everything they can with all they have got - to stamp out the present recession as they now have, in effect, unlimited funds! 

Presently, the U.S. Treasury needs to raise billions of treasury bonds to finance U.S. deficits – which lowers the prices of bonds and increases interest rates – while the Federal Reserve needs to keep interest rates clamped down.  This is a conundrum made in hell!  To make it work, key U.S. macro economic managers must alternately drive global risk levels to increasing volatility to allow the continuous consumption of U.S. Treasury bonds by causing severe market declines - and engineering market saves that will still keep economic growth alive.  In market breakdowns, these Treasury bonds get passed from Treasury at high prices to fearful, vulnerable investors – who then sell them at lower prices to savvy investors or banks during intermediate market recoveries – for losses - in the hope of chasing higher equity returns.  It's a sucker's game – like any other game in the casino called "investing" – and only if you let yourself become the "sucker."

We have come from a huge market break in late April until now in late June.   All economic recoveries take the same tortuous route.   In late 2003 to late 2004, look at the intermediate cycles from peak to trough before the market ascent in late 2004.  Go back to some Wall Street Journals in that period, and you will see articles and headlines talking about the much greater and more harmful second dip that was surely coming...and never did.  Same old worries - culminating in a full market recovery later.

The bottom-line?  I am not a natural optimist, but I am a very independent thinker and I make my own conclusions – based on the study of human history and by analyzing key players' actions (and never their words).  I also take personal responsibility for all my winnings and losses as a professional full-time investor. 

It is my opinion that we will see more peaks and troughs, until this intermediate secondary phase of the bull market ends.  And I believe that all the large countries that affect the global trade and financial system are working in concert to contain deflation and the hyper-inflation at the same time!  I believe major players are coordinating their economic and policy efforts very diligently.  The U.S. government is aiming for a recovery that sets-up to elect as many Democrats as they can – while Republicans want to avoid being seen as economic spoilers. 

The economic numbers will definitely get better as mid-term elections get closer.  It's a given that the numbers will be made to look that way.

Then we will move into the tertiary phase in the bull market – and that's when everyone in the media and main street feel confident enough to "get back in the markets in full force."  Ah, finally, a market that we can invest in….  Where P/E's actually matter, and companies have profits that will increase forever.  Those are the days, you guessed it, for suckers – without their participation, long-term investing profits would not exist.

You see when the time surely feels right to invest in the market confidently without any storm clouds on the horizon, the party is almost over, and that is the most important lesson in investing….

There are at least two more years worth of bull market play on this ticket….  Stay patient, and we are continuing on our positions as established last month. 

Fear not the "default" future – just be prepared to make a buck out of it!  Or, two!