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Are We Just Beginning A Depression? Two Coming Disasters, How To Prepare And Profit If They Hit

24 November 2008 2 Comments

In my previous article, I talked about how we got where we are economically. We addressed real estate, why stocks are crashing and more. I also hinted at two future major crises that are potentially may hit our economy next. It is important to consider such events so you can prepare, and even profit, from them.

The Trusty Common Sense Test

Back in 2007, I remember reading an article that basically said, “If I told you we were in the middle of a housing collapse and oil prices were at record highs, where would you guess the stock market would be?” Meanwhile at the time, the Dow was near 14,000. The article ended with the simple question, “And you’re still that long?”

I read that article, paused, and immediately sold off chunks of my positions. Why? Because, like the article said, the stock market values really didn’t make sense with the economic conditions. Boy, was that article correct as stocks teeter around 8,000.

Recently, I’ve been asking myself my own “common sense” type question. I often marvel at the enormous, new retail developments around my area. These consumption meccas have gotten bigger, more impressive and more inviting over the years. They pop up on every corner. As I drive around these shopping centers, I ask myself, in a rapidly increasing unemployment environment, with consumer spending plummeting, how are there going to be enough shoppers for all of these retail centers?

The Retail And Commercial Real Estate Crisis

The next shoe to drop, in my opinion, is going to be commercial real estate, specifically that tied to retail. Retail is absolutely going to get slaughtered in the coming months and year. Circuit City and Linens N Things have already gone down. It is almost a guarantee that others will too. A big thing to realize, however, is regarding the ones that survive.

The retail chains that survive will most likely shut down massive amounts of stores. They simply have too many stores and too much inventory with not enough shoppers. Stores and inventory will be cut.

With major stores being shut down, commercial real estate is going to plummet. Once a “big box” store leaves a shopping plaza, it’s only a matter of time before the smaller, adjacent stores go down. Sears Holdings (SHLD) for a few years has used its real estate holdings as a back drop in the case of slumping sales. The only problem with this theory is that if Sears’ sales are down, most likely the other retailers’ sales are down as well; basically, no other retailer will buy their large foot print real estate in a slow economic time. Thus, their strategy is severely flawed.

Commercial real estate backed securities are going to most likely suffer the same fate as the mortgage backed securities tied to residential real estate. If this happens, our economic troubles, specifically in the financial sector, have just begun.

The Dollar Crisis

If that weren’t gloomy enough news, a coming dollar crisis would be worse than everything we have experienced and would be worse than a commercial real estate bust. A currency crisis would simply be devastating.

Unfortunately, our government has made its course clear. They will borrow, print, and spend as many dollars as its necessary to minimize the economic pain of our country. Obama, in his recent 60 minutes interview, confirmed this strategy, saying the government will do what it takes.

The accelerating debt of our country cannot go on forever. Soon, foreign countries will stop accepting our dollars as “bullet proof” holdings. When it does, the dollar will drop like a rock. Compare the United States to a the doomed automakers like GM. The reason I am against the bailout of GM is that the money you give them is lost. It won’t be repaid and it won’t help the company except keep them afloat for a few more months. Peter Schiff draws the comparison of lending money to America with lending money to struggling individuals or businesses well:

Similarly any money that the world lends to America to finance more consumption will never be repaid. We will simply blow through it, and be back, hat in hand, begging for more. As we painfully learned in the housing bust, lending people money that they cannot pay back makes no sense. This applies equally to foreign central banks lending to America as it does to commercial banks lending to homeowners.

The effects of a serious dollar crisis would be devastating. The middle class would be wiped out as inflation would shoot sky high making basic necessities many times more expensive.

How To Prepare And Profit

First, let me say this, I hope I’m wrong with these predictions. If I’m wrong, we will all be fine. But, what if I’m right? If you are unprepared and I am right with these predictions, then you will suffer severely. My advice would be to take positions that will benefit if these things happen. If you are not a full believer, then at least take a small position to hedge against a loss of wealth!

Buy Gold. Peter Schiff, an ultra bear on the U.S., who accurately predicted the events of the last three years, predicted gold would hit $1,000 this year. He predicts it will hit $2,000 next year. Gold will go up when the dollar goes down. Gold will help preserve wealth. Other commodities might help as well.

If you want to be aggressive, acquire short positions exposed to commercial real estate or even the U.S. dollar. The Ultra Bearish Dollar Index ETF (UDN) will give you inverse exposure to the dollar. iShares Retail Index (RTL) is an ETF exposed to commercial retail real estate. This ETF will keep going down.

Again, I reiterate, it’s not a matter of what if I’m wrong. If I’m wrong, you will hopefully keep your job and the money you earn will retain its purchasing power. If I’m right, even your savings are not safe. Take steps to hedge against these potentially disastrous crises that might be next.

2 Comments »

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