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Real Estate and Asset Deflation 11: Death of the "Sure-Thing"

"The only unchangeable certainty is that nothing is certain or unchangeable." ~ John F. Kennedy

I have two sons in college and therefore work for a living, so I'm not one of those pundits able to crank out daily or weekly market updates. Then again, the credit implosion/liquidity crisis/asset deflation scenario is so assured at this point, I feel obligated to weigh in a bit more frequently.

As you can see (all Bernanke Band-Aid solutions aside), big things are happening with respect to Mr. Toad's Wild Investment Ride -- and these market events are disastrous for most investors. The "sure-things" we were so sure we could be sure about are turning out to be anything but sure.

The Endless and Almighty Inflation Brigade thought they had all entrances sealed off from the enemy, but the guards fell asleep after a wild four year bender and the stealth Asset Deflation Contingent has taken over the fort for the foreseeable future.

In a non-scientific way, I came to know which "bets" investors felt constituted a sure-thing. First off, I'm a certifiable financial media junkie and you do get a feel for the things folks think will happen "no matter what" based on what percentage of pundits and market commentators weigh in saying the same thing. I do have (sentiment) charts and graphs to go along with it, sure, but I'll leave that to the writers who prefer Bollinger bands over discourse.

Beyond that, I guess you could say we're an anecdotal barometer of sorts, based on the many emails we started receiving the day we went public with our asset deflation hypothesis back in May of 2005. The more vociferous and impassioned the defense of a particular asset class was (and, believe me, we heard ‘em all), the more entrenched we interpreted that group's belief and investment psychology to be. The sense that (name your asset class) is 1) "headed for the sky!" or 2) "always going to go up in the long run!" is, unfortunately, considered by most to be a birthright and/or "guaranteed" by the Fed.

Investors who come to believe that certain investments are "sure-things" often learn painful lessons at the most inopportune times (like when far too much leveraged speculation pushes the asset class to unsustainable levels). And, by definition, those lessons are learned when investors least expect it. The NASDAQ crash of 2000-2002 should have indoctrinated people to some extent, but our Fed's goofball monetary policy was so extreme, any sense of the first leg down ("hey, maybe you really CAN lose all of your money investing!") realization was lost like a fart in a hurricane.

Fast-forward to today. Herd investors as far as the eye can see -- until a month ago confident to the point of unqualified complacency -- find themselves wide-eyed and scared, trying to hopscotch across a fertile minefield as fellow investors get their legs blown off one "sure-thing" at a time.

And as those "sure-things" continue to fall by the wayside, along with them come ever-greater and more unimaginable problems. We all know how much money has been bet on the same real estate and mortgage horse (don't ask). But try to imagine the consequences if other legions of whacked-out, over-leveraged speculators start encountering similar fates.

The assumption that housing prices would go up forever prompted market participants to go completely bananas finding every conceivable way to project that bet out to infinity. Forgive this 25-year investment realtor if I don't write another pre-mortem about real estate; you surely must know by now that the entire asset class is in deep, deep, deep, deep trouble.

What about stocks? Are you kidding? A month ago, this was all being described as a "Goldilocks Economy" and the porridge was juuuuuuust right. Earnings were up, consumer spending was up, the job market was strong, IPO's and private equity ruled the roost, interest rates and inflation were tame, and "global liquidity" (turns out to be borrowed money) offered what some analysts perceived to be a virtual "investment guarantee." 100% home loans remained easy to come by. CNBC cheerleaders were in full peacock. And for a 14,000 point minute, investors got to taste the sweet nectar of a new Dow Jones Industrial Average record close.

So knowing what we now know about Wall Street, you don't think this warm and fuzzy environment resulted in even more reckless, speculative behavior, do you? Think about it; we've just barely begun a historic decline in equities. What happens when these certainly-also-leveraged positions begin to unravel?

The dollar? Heavens to Mergatroid! Everyone knew the ol' greenback was heading down, down, down. No respites, no meaningful countertrend moves, just a clear-cut "dollar disaster" sure to occur at any moment. Clearly, most considered it a given that the U.S. Fed's reckless and loose monetary policy made the dollar/euro a one-way trade. But history teaches us that too long a run and too many bets on one side will eventually produce a prolonged countertrend rally. Assuming the dollar is going to rally at a time that everyone least expects it (in my opinion already taking place), just how many super-leveraged currency positions do you think will unravel on this one?

How about commodities, including the "real" currency, precious metals? Since most agreed that the dollar was going straight into the tank and that ever-more-severe monetary inflation was a given, certainly gold, silver and precious metals stocks were the slam-dunk, ain't-no-doubt-about-it way to go, right? I'm sure the speculative excess crowd backed up their flat-bed trucks to load up on this "sure-thing," too. Have you been watching the HUI and the XAU lately? Oops. Yet another round of unraveling leveraged positions, I'm afraid.

Crude oil? Gasoline? "Don't make me laugh!" EVERYONE will say. "Haven't you been watching the prices at the pump? Absolutely, positively, there is only one way this one can go (we're running out of oil!), and that is up, up, up."

Unfortunately, investment history suggests otherwise. I can only imagine how many additional, hyper-leveraged bets are riding on this holiest-of-holies "sure-thing."

When it comes to investments, Group-think is rarely good, and it's a real mutha when Group-think's investments start to unwind. The surer the herd believes that an investment can only go one way, the more frantic things become when the premise suddenly turns out to be false, even if it's only false for just a year or two.

The Fed's reflation "strategy" enabled all boats to rise -- at least for a while -- on pretty much the same swelling sea. It lasted just long enough for most investors to be lulled into a false sense of guard-down security. Alas, it looks like those speculators were all partying too heartily on the same boat.

And that boat happened to be the Titanic.

As the housing and mortgage markets implode, the stock market dives, the precious metals (and their related stocks) incur unanticipated losses, commodities tank one after another and the dollar rallies against the euro just long enough to unwind too many one-way positions, leveraged investors in all categories will be scrambling to sell assets under ever-more-distressed circumstances. An unanticipated unwind of the massive Yen carry trade could add mightily to the turmoil. Of course, now some of our readers are telling us "The Japanese will NEVER allow the Yen carry trade to unwind!"

Uh, oh.

Regardless, Ponder This...readers, I ask you to please connect the dots: From real estate deflation to credit implosion to stock market crash to liquidity crisis to asset deflationary depression. Safe cash you figure out a way to hold onto now will be your eventual ticket to paradise. Don't wait for your own liquidity to disappear.

Take my word that it is no fun to deliver such predictions. It pains me, really. My solace is that many of you will be standing strong with me when it's time for solvent Americans to dig through the rubble and start picking up the post-bubble, bubble, bubble pieces.

 

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