Financial topics

Investments, gold, currencies, surviving after a financial meltdown
Higgenbotham
Posts: 7436
Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

aedens wrote:The other possibility is that bullishness and inflation fears have reached their maximum point. These comments and the comments I quoted from Biggs could indicate the market may have reached its apex or is very close.

Higgenbotham Posts: 338
Joined: Wed Sep 24, 2008 10:28 pm
Private message
I don't really want to predict a high, but if someone forced me to I would guess that yesterday was the end of the bear market rally. The options speculation on this run has been amazing to behold. The past few days I have witnessed what seems to amount to record call buying in the early morning ISEE figures and it's been persistent for several days running. They don't keep long term records of early morning readings so I can't say this for a fact, but I've never seen anything like it. However, here is an article where someone who probably does know better is quoted to the same effect:

http://dailyreckoning.com/peak-march-wh ... indicator/

My interpretation is that the public does not want to buy stocks at this point, but they are willing to gamble on call options (which are basically lottery tickets that pay off if prices rise) because they cannot lose more than the pittance that the options cost. In other words, the current stock market has become more like a lottery than a casino. Remember my comment that the stock market has turned from a casino into a carnival. That is exactly what has happened.
Citing a completely different collection of financial market tealeaves, Shartsis relates, “An important measure of option speculation is now in deep space. If one takes the number of bullish option transactions (buy calls, sell puts) and compares the total to that of bearish option trades (buy puts, sell calls), the results reflect the highest level of option trader bullishness in years, perhaps ever recorded. Note that the current level is far beyond what was seen at the Grand Top in 2007,” Shartsis continues. “Hard to believe. This is only one indicator, but an important one I think, and it suggests a severe whipping of the bulls is coming soon.”
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
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Joined: Wed Sep 24, 2008 11:28 pm

T-bills, Cash, etc.

Post by Higgenbotham »

So far as I know, you can't make direct withdrawals out of a Treasury Direct account. The funds have to be wired to a bank account. In other words, Treasury Direct only deals electronically. In the event of an emergency, that could change.

T-bills are cash equivalents. In our present system, it is impossible to have a functioning banking system without T-bills. That is because T-bills are backing for Federal Reserve Notes and are bank reserves by definition. If the US government defaults on T-bills, it's my understanding that every bank including the Federal Reserve is wiped out by definition. The Federal Reserve holds T-bills as assets and issues Federal Reserve Notes as liabilities on those assets. Federal Reserve Notes are not US government obligations, though I'm sure the US government will honor them if the Federal Reserve goes bankrupt. However, if the US government goes completely bankrupt, neither T-bills or Federal Reserve Notes will be worth anything. That is why the price of gold is going up.

If gold was reserves like in the 1930's, then the government can default on all debt and the banking system can still function (I think).

On the other hand, the US government can default on all notes and bonds and still maintain a functioning banking system. The level of default can vary. What would probably happen is the government would suspend interest payments, but the bonds would maintain their principal value. That way, banks, including the Federal Reserve, can maintain their US notes and bonds on their books as assets. Then interest payments could resume when the mess is straightened out.

I guess the extreme situation would be that the US government goes bankrupt, the Federal Reserve goes bankrupt, and the government uses the gold in Fort Knox as backing and issues new US Notes off of that. At that point, I guess they would have to decide whether or not to honor any T-bills or Federal Reserve Notes and to what extent. But I would say that a partial default is about 100 times more likely. One definition of a partial default is what's in the paragraph above.

Last thing, it's always best for everyone to do their own research. It's taken me hundreds of hours of research to come to these conclusions. What I'm saying here is only a starting point for someone to do their own due diligence.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

John
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Location: Cambridge, MA USA
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Re: T-bills, Cash, etc.

Post by John »

Dear Higgie,

I keep getting asked for advice on how to prepare for what's coming.
If I understand you correctly, then Treasury Bills are roughly equally
as safe as an FDIC insured bank account. Thus, there's no reason to
prefer one to the other (if safety is the only consideration).

Long-term treasuries continue to be less safe. It's hard for me to
believe that T-bonds are as safe as you imply -- namely that the only
significant risk is the loss of interest payments. The market is
flooded by an ocean of these things, and just on the basis of supply
and demand, I expect them to lose a great deal of value.

Keeping cash hidden in your basement is safer than all of these.

I continue to discourage people from owning gold, unless they have
enough money to keep gold in addition to cash. Gold is in a bubble,
and should be priced around $500/oz. Any spike in gold prices might
be short-lived, even in an emergency.

Gold in the form of gold-equivalent securities seems highly dangerous
to me. In the case of emergency, there's no guarantee that the
securities would be redeemed.

Thus, I've always said that if you're going to own gold, then you
should take possession of the actual gold coins or bars. However,
here you have to be careful because scams in the form of fake gold
coins and bars are becoming more widespread.

If you own gold, then it's doubtful that gold would be anywhere near
as liquid as cash in an emergency. If you're desperate for money,
then you may have to sell goal at a sharp discount to get cash.

Putting all this together, it's very hard for me to see any good
reasons to favor gold over cash, for most people. I expect the US
dollar to remain strong, even in an emergency.

Let me try this approach. I'd like to rate various savings options
based on the amount of savings you're liable to have left after a
worldwide financial crisis. 100% means you'll have all your
principal, 0% means you'll lose everything. A value greater than 100%
is theoretically possible, and means asset appreciation.

Here are my ratings:
  • Cash in the mattress: 100%.
  • FDIC-insured bank account: 98%. (Taking into account interest
    rates versus chances of FDIC not paying out.)
  • T-bills: 97%. (Taking into account difficulty of redeeming them.)
  • 10-year Treasury bonds: 70%.
  • Gold: 50%.
  • Stocks: 20%.
How do those values sound to you, Higgie?

John

freddyv
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Joined: Sat Oct 04, 2008 4:23 am
Location: Oregon, USA
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Re: Financial topics

Post by freddyv »

http://www.caseyresearch.com/pdfs/20100 ... ingSun.pdf

As I read this article it became clear to me what the scenario to the real crash, the one John predicts, is likely to be: America and other nations continue to bailout and stimulate until a point where confidence is lost in the ability of the US to repay her debt. At that point it becomes obvious that not only will Japan be unable to service her debt but that many nations will be in serious trouble, including China.

As John has said many times, it is impossible to predict the exact circumstances leading up to this crash, or to know exactly when it will happen, but to me, it is becoming more and more certain as I watch events unfold. The only alternative I see is for our leaders to "get it" like the people do and begin to get our nation's finances under control, and even then we would experience a very serious recession/depression. I would say that the chance of our leaders suddenly getting it are about 1/10th of 1%.

Fred
http://www.acclaiminvesting.com/

Higgenbotham
Posts: 7436
Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

The first thing that comes to mind is to draw an analogy between the present state of housing and the potential future state of T-notes and T-bonds. At the moment real estate mortgages are on the balance sheets of banks and many are nonperforming assets (no mortgage payments are being made) with real values on the market less than the original principal. The same will probably be true of the T-bond market if things continue down the present path. The T-bonds will still exist, they will be discounted in the market if you actually want to sell them, and they will not be paying any interest if the US government partially defaults (because they do not have enough tax revenue to meet the interest payments). Banks will carry them on their books at par and pretend to remain solvent and the government will play along. That's if things continue to evolve as they have been evolving.

As a practical matter, my opinion really hasn't changed since the Fall of 2008. If people are looking for maximum safety, depending on how much money is involved, they should spread it out between cash (Federal Reserve Notes) and gold (maybe silver too), then step to a Treasury Direct account (and if they don't want T-bills, they can let them mature into C of I and that is immediately available cash if the banks are still open). Finally, there's the option of buying currency issued by responsible governments who have clean balance sheeets like Singapore. It's impossible for me to give percentages because it all depends on how deep the crisis is. It's my suspicion that the viability of the US government is going to come into question during this crisis, unlike that of the 1930's. That did happen in the 1860's and anyone living in the Confederacy who hid those cash notes in the basement lost everything they had. One thing to keep in mind is that if there's an upcoming war with China, they may attack our computer systems and it is my belief that from that standpoint holding paper cash is good advice.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
Posts: 7436
Joined: Wed Sep 24, 2008 11:28 pm

Re: T-bills, Cash, etc.

Post by Higgenbotham »

John wrote:Here are my ratings:
  • Cash in the mattress: 100%.
  • FDIC-insured bank account: 98%. (Taking into account interest
    rates versus chances of FDIC not paying out.)
  • T-bills: 97%. (Taking into account difficulty of redeeming them.)
  • 10-year Treasury bonds: 70%.
  • Gold: 50%.
  • Stocks: 20%.
How do those values sound to you, Higgie?

John
Sounds about right to me. I'd guess the FDIC insured bank account and T-bills at 100% but they may be tied up for awhile, the 30 year Treasury bond at 50% (10 year I don't know, it's not far out enough), gold the same as what you have and stocks at 10%. That's under the most probable scenario I can come up with, but outcomes may vary widely from that.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

jwfid
Posts: 56
Joined: Thu Nov 13, 2008 11:10 pm

Re: T-bills, Cash, etc.

Post by jwfid »

Here are my ratings:


* Cash in the mattress: 100%.
* FDIC-insured bank account: 98%. (Taking into account interest
rates versus chances of FDIC not paying out.)
* T-bills: 97%. (Taking into account difficulty of redeeming them.)
* 10-year Treasury bonds: 70%.
* Gold: 50%.
* Stocks: 20%.
John and Higginbotham,

You guys are far more informed than I am, but I'm having problems believing that an FDIC insured account would stand a good chance of getting through the financial crisis. I believe the FDIC is insolvent for all intents and purposes and is relying upon the treasury for funding. Right now, I think that the vast majority of banks will go bankrupt and leave the FDIC and the treasury with no choice but to leave depositors hanging out to dry. I've tried to find a local bank that is fairly solid and put some of my money there hoping that even if the FDIC fails, others will see this bank still standing and decide to do business with them, thus making that local bank even stronger.

Some of what I wrote above might be advice from Robert Prechter's book.

What do you guys think about the FDIC?

Joe

bluebird
Posts: 41
Joined: Tue Jul 07, 2009 7:59 am

Re: Financial topics

Post by bluebird »

IMO, banks are insolvent and the FDIC is broke. But everyone believes their money is safe in the banks because of FDIC. When the global financial Ponzi implodes, I think the banks will limit the amount of withdrawals to prevent bank runs and civil unrest. I really don't think the government (and police) want to see angry mobs of people breaking down bank doors with people demanding all their money.

There is precedence in Ohio for limiting amount of withdrawals...
March 15, 1985 - Ohio Governor Richard Celeste temporarily halted business at all of state's ailing thrifts;
March 21 - allowed to reopen on with $750 cap on withdrawals (designed to prevent all-out assault on deposits);
http://www.kipnotes.com/SavingsLoans.htm

Also effective 4/1/10, CitiBank might require 7 days notice before withdrawal of money

This can be found in Citibank's Privacy Notice Rules and Regulations
see bottom of page 23
Withdrawal Notice
We reserve the right to require seven (7) days advance notice
before permitting a withdrawal from all checking, savings and
money market accounts. We currently do not exercise this right
and have not exercised it in the past.
https://online.citibank.com/JRS/popups/ ... 091228.pdf

Karl Denninger wrote a couple essays about this in February:

2/19/10 Karl Denninger: Time To Leave Citibank Folks
Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts
http://market-ticker.org/archives/1983- ... Folks.html

2/20/10 Karl Denninger: Citibank - No More DDA Accounts (DEMAND DEPOSIT ACCOUNT)
http://market-ticker.org/archives/1985- ... ounts.html Denninger's essay

Higgenbotham
Posts: 7436
Joined: Wed Sep 24, 2008 11:28 pm

Re: T-bills, Cash, etc.

Post by Higgenbotham »

jwfid wrote:What do you guys think about the FDIC?

Joe
It depends on how deep the crisis gets. Probably the key question is whether the federal government can stay solvent enough to "bail out" the depositors. If they can't, or you don't think they can or aren't sure, one thing that might help would be to get creative and think like the people in charge might under these circumstances. For example, if things get sticky, a decision might be made to pay off the depositors with 30 year Treasury bonds. Or they might pay the depositors off with IOU's and make statements to the effect that people will get their money over time as things get better. And they might. I think all the while the news will be blaring that the government is keeping their committments to depositors and everything is on a sound footing. Just one scenario to think about. That seems to be their MO. If you get a bond or an IOU, it might pay a certain percentage of principal each year so you get a little money. I think even when the Soviet Union collapsed the pensioners got a little money from the government. That might be another thing to check into to get some ideas.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Tomalee
Posts: 1
Joined: Sat Mar 27, 2010 1:51 pm

Re: Financial topics

Post by Tomalee »

John and Higginbotham,

Much has been posted about the FDIC and funds held at an FDIC insured institution but do you consider NCUA insured funds held in large credit unions equally secure? In a financial collapse how do you think things would play out for credit unions in general?
Image

Tom

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