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September 21, 2008

The New Normalcy
by Gary Tanashian

Preamble

This article is intended as a primer for the many people who were either too busy or too well-adjusted :-) to be watching the ongoing macro-financial mess unfold over the last several years. It is the first of several articles that will attempt to deal in reality amid the hyperbole and mania of the major media that has an interest in scaring the bejeezus out of people. It is an attempt to help people deal with the new normalcy that will follow the now obvious financial meltdown in the United States and the panicked policies just rammed home by our political and economic leaders.

There are plenty of other people out there who can give and have given sane and straight information all along. I personally recommend the diverse views Robert Prechter and EWI, Bob Hoye, Inca Kola News and Steven Saville along with the Ludwig von Mises Institute for the final word on Austrian economics. Then, from a more socio-economic comes James Howard Kunstler with biting commentary on the state of our 'happy motoring' culture. Finally, check out my friend Chris Martenson and his amazing Crash Course. Take it! There are many more folks out there who will give the straight scoop with honesty, intelligence and integrity; areas where the major financial media always seem to arrive a day late and a Dollar (or a few $100 Trillion) short.

Going forward I will give my 2 cents as I have been doing for four plus years now. You can check Biiwii.com archives here, where you will see many early articles that clearly described what would eventually happen, years before the actual acute phase of the fact. But for now here is one of those articles, the title of which clearly illustrates what went wrong for America in a macro sense: Hubris (2005). My personal view is not born of grand intellect or guru-like vision. It comes from an interest in psychology (Jungian Shadow applied to the collective) and an ability to know what I see and not bullshit myself. That's it in a nutshell. That and a now well honed ability to interpret charts in all time frames.

So the public has finally fallen down the rabbit hole, welcome. I, and many writers/analysts outside the mainstream media have been waiting for you. So has Ron Paul. He is the man you may have dismissed as a crank or a kook during the Republican primary. He clearly explained the dynamics of what went wrong in the financial system recently on Glenn Beck's show; see parts 1 and 2. More importantly, he was describing the root of the problems many years BEFORE the outwardly obvious fact. Aside from allowing Dr. Paul, David Walker and a few reputable others to present rational views on all too infrequent occasion, the major media have done a disservice to the American people by continually highlighting the economic views of cartoon characters on CNBC and a certain book salesman former 'Maestro', who it can be strongly argued carries major responsibility for the current crisis.

Regardless, here we are down in the rabbit hole. You should not panic as hysterical media serve up legions of so-called experts who in hindsight will dissect the minutia of what went wrong but were conspicuously absent when clear, brave and out of the box thinking was needed. In earlier efforts to communicate financial troubles, I have had people laugh in my face, yawn and avert their eyes, wishing to be anywhere but in a conversation with me or worst of all, dismiss me with a well chosen one-liner steeped in financial convention. That has now changed. Regular, well adjusted, but blessedly ignorant people are having their 'come to Jesus' moment amid the alarming news that even money market funds may not be safe. It is important that they gain access to credible information and analysis as something old dies and something new - the new normalcy we'll call it - rises in its place.

Anyone reading Robert Prechter's Conquer the Crash knew as early as 2002 how to prepare. At least where cash liquidity is concerned. Most everything laid out in the book still applies. Readers of Biiwii.com and the blog have heard about "Short term US Treasuries, T-Bills or Treasury only money markets" over and over again even as a casino mentality in hot commodities and markets reigned from 2003 to 2007. The T-Bills and Treasury funds are straight from Prechter. His book did me a great service in 2002. This past week the T-Bill became the star of the show where cash equivalents are concerned. An important distinction however is that these Treasuries are for liquidity needs, not long term investment. You don't invest in a chronic inflator but you realize that said chronic inflator will not go out of business any time soon, unlike many corporations. By the way, EWI also has a free report on the 100 safest banks in the country (2 from each state) which is free. Get it.

Unbelievably, people are actually afraid of losing funds previously thought to be stored safely in regular money markets. Down the rabbit hole indeed. A new normalcy. It is amazing how quickly the public has whipsawed from a content slumber to hypersensitive financial survival mode. All with the able assistance of the major media.

All Or Nothing

It is obvious that the week of September 15, 2008 will be remembered as the day America as we knew it ceased to exist. At least it was the week that the exclamation point was tacked on to the notion that should have been obvious from the onset of the credit crisis in the summer of 2007 if not much earlier, in 2003 when Alan Greenspan's inflation driven bull market was first stoked and ready to run; the notion that an economy based on consumption by credit (debt) and a global labor and currency arbitrage without commensurate productivity can only last so long before implosion.

We just imploded. Now how to deal with it? First of all, the United States thinks it is a free capitalist nation, but it has just instituted obviously socialist policies. What will be the social and geopolitical implications of these measures? Due to Biiwii.com's financial orientation we will leave that for others to chronicle. Financially, I am sure the majority will support Secretary Paulson's extreme bailout measures because the majority lived by the code of the previous Ponzinomic cycle. They did not sacrifice a bit of extra return for the safety of UST money market funds. They did not resist using home equity for that 60" Plasma to watch Sunday's Pats game. They were not questioning policy makers and they certainly were not paying serious attention to the oddball congressman from Texas in the Republican primaries. Instead, the majority were buying what a cartoon named Sean Hannity was selling on Fox 'News'. Around the time of the Democrat convention this used car salesman in TV news drag was trumpeting how sound the economy is and implying that Democrats were trumping up the negatives. I saw it with my own eyes and I thought to myself "we are so screwed". A few weeks later that became obvious. I am no Democrat but I am also no Republican given what Republicans have come to represent.

It is all done now. Implosion... and reaction. We have imploded. It is the reaction to what was a panicky meltdown that is of interest going forward. Like it or not, your children and mine have just signed on to bail out this sorry system for decades to come. I am not saying Paulson had any choice. He didn't. This mess was a falling soufflé in progress and may still be. But in the event there is not outright panic in the streets or an 'off with their heads' backlash by the public, it would do one well to think about the implications of getting 'all' (inflationary bailout / boom) vs. 'nothing' (deflationary depression). We'll start with nothing first...

Deflation

Readers of the website and blog know that I have written about an impending 'deflation scare' and that a fright fest was needed if we were ever to get another round of inflation, which of course has actually been the life blood of so called modern economics. $150 oil was a manifestation of the previous inflation boom. Alan Greenspan's panicked policy was the product of the previous Armageddon, the dot.com / tech bubble bust that by today's standards seems like child's play.

So the question therefore is this; is this a deflation scare or is this a genuine deflation? If it is a scare and the Paulson/Bernanke panic policy takes root, get ready for a whopper of an inflation problem down the road. If it is genuine deflation, where the money supply shrinks relentlessly in the mad dash for cash, then the last one out can turn out the lights because the current system ends right here and right now.

If this is genuine deflation, then cash is king. Cash and its reliable equivalent, T-Bills. Gold will decline, although less so than other assets, which might still bode well for my speculation of choice, the gold miners. But if this is merely a whopper of a deflation scare, which I think it is given the all or nothing desperation now evident, then get ready for ramping money supplies, likely globally. Inflation is after all... Bueller?

Inflation

Get ready to pick up bargains. Hopefully you left your casino gambling mentality (that was so 2007) beside the graves of all those imploded hedge funds supposedly sound American financial institutions and you are prepared to exercise patience and a rational approach to investing - my tact for handling the new normalcy is currently that of an investor - you will want to be prepared to pick up bargains of the century when no one wants them. Because it looks to me like da boyz are inflating to beat the band. I am not an economist and I cannot tell you the mechanics of how they are going to blow out the money supply, but they are going to do it and they will be allowed, even encouraged to do it because the alternative is simply not an option anymore. Not when we have so little actual productive infrastructure in place to fall back on.

Again, patience is the key word because we are not going to just pass through this deflationary impulse without some additional dislocations and panics. But I expect a revaluation of productive enterprise in the United States and I am not just talking about companies that dig stuff out of the ground. The next cycle will not be accompanied so easily by the financial chicanery that Wall Street was allowed to pull on a gullible and unsuspecting public. This time I expect we will revalue productivity that will be sought after on the world stage. The world will have had enough of our paper. But that is getting ahead of ourselves. First we have to go through the process of...

The New New Deal

We come to terms with the bailouts of multi-billion dollar corporations, the bailouts of consumers who should have known better than to use their homes as piggy banks, the bailout of our primary vendor-financier China (holding all that Fannie, Freddie and US Treasury paper). We come to terms with the uncomfortable notion that we have socialized these debits on a black hole and something has ended and something is beginning. The Republicans claim to be for free enterprise and letting markets decide but I think that last week's events put the kybosh on that fairy tale.

I look forward now more than ever to following global financial and economic events and personally refuse to go completely negative. The major media have that covered. I have done everything I could to prepare readers thanks to some amazing teachers I had, both public and private and to my own b/s detector. I did my panicking in the 2002-2004 timeframe which began with my running around Massachusetts seeking safe banks and researching US Treasury money market funds and culminated with significantly paying down personal and business debt, an investment philosophy in alignment with ongoing inflation cycles and finally in the formation of Biiwii.com.

Going forward a cool, engaged and rational approach is needed. We'll let the major media panic the public as we try to interpret the new normalcy. I think that a core holding in a sensible portfolio is as it has been for centuries; the relic, gold. Readers know I speculate in the gold stocks but physical metal is not a speculation. It is core. It is value. Individuals can buy their own coins or bars, the GLD, IAU etf's, gold and silver with Central Fund of Canada or my recommendation, BullionVault with its options to store your metal in New York or importantly, London and Zurich. I receive a commission (which I would promptly cycle into Zurich bullion) if you use BullionVault through this link. I believe strongly in the service and its options, however. But you should independently research all your alternatives in the gold market.

The panic of the New New Deal will also usher in a time to reinvest in the general 'inflation trade'. Oil, base metals, natural gas, coal, uranium, food, etc. The resources trade, when it kicks back in is going to be a whopper given the stimulus that current events are creating. But again, the most important commodities at the moment are patience, clarity and an open-mindedness as we enter the new normalcy. Good luck.

Gary Tanashian
http://www.biiwii.com/

Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

Copyright © 2005-2009 Gary Tanashian

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