January 2010 Newsletter
Issue One, Volume Eleven
THE DOOMSDAY SCENARIO
By Mike Gasior
Well how is that for a cheerful title, “The
Doomsday Scenario”, for the “Happy New Year” edition
of my newsletter? Many of you who have read my writings over the
years know all too well that I haven’t approved of many of
the fiscal and economic decisions made in Washington for many years
now. For goodness sake, I titled the November 2007 newsletter “Back
in the U.S.S.A.” as a complaint of America’s slide into
socialism and that was a full year before Barrack Obama would be
elected president. Clearly I have felt we have been heading down
a dangerous path for a very long time and I believe we are now accelerating
into the abyss.
Though my attitude may clearly seem negative on
the economy and markets, it is the information I plan to share with
you that helps guide my decision making about protecting my own
assets and ensuring my own financial future. So while I will make
my case to you shortly, please be reminded that none of this is
meant as advice about what personal decisions you should make. I
think you will find at least some of the facts quite compelling
and all I can hope is that you will consider them when protecting
your own personal future.
What causes me to write this edition is the fact
that Americans are being inundated with a public relations campaign
regarding the state of the economy and condition of our financial
system. In some of my recent writings (“A Wonderful Fiction”
and “Your Government is Lying to You”) I even go as
far as to accuse officials of outright falsehoods and explain the
facts backing my accusations. Franklin Delano Roosevelt at least
had the nerve to tell people that “[t]he only thing we have
to fear is fear itself”. Since Americans were indeed afraid
during the Depression and had damn good reason to feel that way.
In this modern era where no one is supposed to be allowed to fail
or lose, it seems the method of choice employed by politicians (and
eaten up like candy by the media) is to convince people that everything
is just peachy and everyone should just head to the mall to buy
anything that catches their eye. However Americans, while perhaps
not knowing the economic facts, DO know in their heart that something
just isn’t right here. They know the stimulus package didn’t
create or save 2,000,000 jobs. They know the TARP is the reason
that Wall Street paid out larger bonuses in the middle of the worst
economic period of their lifetimes and that somehow they’re
going to get stuck with the bill at the end of the day. They know
that they opposed the TARP by a margin of 100 to 1 and Washington
passed the legislation anyway. My only goal in this month’s
edition of my newsletter is to tell you the truth about the trajectory
of the economy and explain the facts that cause me to think the
way I do.
But first let me take care of a little business.
OUR SCHEDULE IS COMPLETE FOR 2010
I have been offering training to the institutional
investor community for 21 years, but this education may never have
been as important as it is going to be in 2010. With the turmoil
we have just endured and the confusion surrounding many of the assets
held by investors, staffs need appropriate knowledge to operate
in these conditions. With many organizations reducing headcounts
in various departments, cutting back on education for the remaining
personnel in this environment could be potentially catastrophic.
We will be offering 15 of our most timely programs
in New York City during the year and you can view the entire schedule
at the following link:
We still have a variety of convenient dates available
if your organization is interested in holding an in-house session
for your staff or having me speak at your function. You can view
our course catalog, which details all of our "standard"
sessions at the link below. Please remember that we are also happy
to create a custom program of topics that is perfectly tailored
to your audience's needs at no extra cost.
I introduced a new session last year, which has
become tremendously popular with accounting, audit and fraud examiner
groups called “Preventing Investment Fraud”. It is a
two-day seminar, but can also be presented in shorter form as well.
You can host this course for your organization. I have also presented
the topic to many boards of directors and as a speech as well. You
can view the link for the full description and more at these links:
To inquire about either in-house seminars or my
speaking availability, please call my offices at (860)347-6568 or
write me at firstname.lastname@example.org
THE MIKE GASIOR STIMULUS PACKAGE
Because I truly believe that the entire crisis
we currently find ourselves in is almost completely due to the ignorance
of MANY different people (please don’t make me compile the
list) I think knowledge is the most valuable asset anyone can possess.
With that in mind, I would like to offer subscribers
to this newsletter an offer I have never considered before.
For my first two New York sessions of 2010, I am
offering organizations to register three people for a program and
send a fourth at no additional cost. Simply four attendees for the
price of three. The two courses are among our most popular:
Introduction To Securities & Markets
February 24, 25 & 26, 2010
CMO, ABS & CMBS Securities
February 23, 2010
To register, please call my offices at (860)347-6568,
or use the online registration and add your fourth person when checking
THE DOOMSDAY SCENARIO
First and foremost, I must make the statement that
the doomsday scenario does not necessarily have to be the course
we have to follow, but a path I certainly think is within the realm
of possibility. Actually, I would lay odds at around 1 in 3 right
What is most scary to me is that in the 30 years
I have watched the economy and markets closely, there has never
been a time I can remember when there were so many different ways
to get your kneecaps broken. Stocks. Bonds. Real estate. Commodities.
This is a time for tremendous caution to be taken in everything
you do financially.
My brief analysis shows three possible futures:
BEST CASE SCENARIO
--Governments move to reduce budget deficits but they still remain
--High economic growth comparable with the past 25 years
--High and increasing inflation
--High and increasing interest rates
--Government budget deficits continue to rise
--Small increases in GDP
--Limited amount of inflation but no deflation
--Slowly increasing interest rates
--Government budget deficits continue to rise rapidly
--The economy stalls again and GDP shows no growth
--Deflation takes hold in the larger global economies
--Interest rates stay at historic lows and even decrease
On many occasions during the past five years in
this newsletter, in my seminars, during speeches and while appearing
on radio and television programs I have made allusions to the lessons
the United States could learn from Japan. Yet we hurtle down the
exact same path the Japanese have been traveling down for the better
part of 20 years now. This is the central theme to my intense feeling
that I have already read this book before and I know how the story
ends; it ends in the above Doomsday Scenario.
It is interesting to look at a list of the parallels
between the Japanese crisis, which began in 1990, and the crisis
the United States now finds itself in. Here are all things common
--Stock market crash
--High P/E ratios prior to the crash
--A banking crisis
--Corporate debt crisis
--Real estate bubble
--Ballooning government debt
--Historically low interest rates
Please ask yourself if you see any theme here.
We are trailing Japan by almost precisely 10 years
with our crisis and if you extrapolate from that data overlay you
can assume the following things:
--U.S. government debt will exceed GDP very shortly
and continue to rise after that.
--The U.S. government will lose its AAA/Aaa credit rating no later
than 36 months from now.
--The U.S. equity markets will soon revisit the March 2009 lows
and we can expect a Dow Jones Industrials that will begin with the
number 4 within the next 36 months.
--Interest rates will stay low for a prolonged period, both at the
short and long ends of the yield curve.
--The dollar will continue the long-term trend of weakening.
Of all the recent developments in the economy and
markets, none have confounded me more than the rally in the U.S.
stock markets since last March. It is also upsetting to me on a
personal level since I carried (and continue to carry) very large
short positions on the S&P 500 and have suffered heavy losses.
I will predict here and now that we have seen the
highs for 2010 already and the market is set up for a substantial
move lower, but that’s not the interesting part.
Let me state for the record that I have never been
much for conspiracy theories. For example, I really do believe that
Oswald acted alone and that American astronauts walked on the moon
(and it wasn’t staged in some soundstage in Arizona). But
some research I’ve done recently about the move up in the
U.S. stock market has me smelling a rat somewhere. Let me explain
what I mean.
I did some research on the stock market move from
March 9, 2009, and January 7, 2010. This time period encapsulates
almost the entire upward move in the U.S. markets. Here is what
I found that was interesting:
--80% of all the market gains occurred on just
--70% of all Mondays during that time period were “up”
--Most recently, in the 18 Mondays immediately prior to January
7th, 16 were “up” days, or 89%.
--Literally almost ALL of the gains actually occurred during the
overnight futures trading sessions and no gains occurred during
daytime U.S. trading hours.
So what might all this mean? Well consider who
we can probably rule out as the cause of this phenomenon. It is
almost certainly not pension funds, mutual funds, banks, individual
retail investors or even my hedge fund manager friends. Very, very
few of them are usually sitting at their desks placing buy and sell
orders at those sorts of hours. Also, one would need massive amounts
of capital to cause any sort of substantial movement in a marketplace
as large as the United States and nearly no institution would have
that sort of juice.
But this doesn’t mean there isn’t such
an institution out there with enough capital, motive and operations
to do so. It’s just not one that we would usually expect to
be taking massive positions in U.S. equities on any given day.
It is called the Federal Reserve.
And the Federal Reserve’s Open Market trading
operations just so happen to open at 4:00 a.m. Eastern Time too.
Did you find it at all interesting that the real
downward mojo in the U.S. stock market began at about the exact
moment that Chairman Bernanke’s confirmation seemed to be
in doubt in the U.S. Senate? Could it be Mr. Bernanke’s attempt
to unwind this equity position prior to the new Chairman getting
the keys to the office and finding out about this attempt to pump
confidence into the economy? Or could it be a less sinister unwinding
of the Fed’s positions in all sorts of securities they’ve
accumulated during the past 12 months.
Truthfully, who knows what the hell fed this run
up in the stock market, but the whole thing stinks to the high heaven
to me and I wouldn’t touch it with a ten-foot pole. You do
whatever you’d like of course.
The summary of reasons that causes me to believe
the Doomsday Scenario is entirely plausible are the following, seemingly
--Exploding Government Debt
As perhaps the most cynical person you might ever meet, I do not
believe that politicians at any level of government have the political
will to cut any services or raise taxes in any substantial way.
The only way to continue those levels of spending without staggering
tax increases is by continuing to issue more debt. Until, of course,
the markets prevent you from doing it cheaply or at all.
Please remember that the U.S. government is not
the only issue here, but all the state and local governments are
suffering massive budget deficits and dwindling tax revenues. The
states actually behave much like Banana Republics by increasing
spending dramatically during boom times and then slashing and burning
when things ultimately turn negative. My own home state of Connecticut
is the worst in the country right now with a state debt of $4,490
per citizen. Luckily I now own a home in Florida and plan to make
that my residence soon. Unfortunately the States (but VERY fortunate
for us) have no ability to print their own money to monetize their
way out of the problem. Most Americans might be shocked to hear
this, but corporate income taxes paid into the U.S. Treasury in
2009 were 55% less than what was paid in 2008. This is an extremely
difficult situation to be in and the same situation is being felt
by every governmental entity in the U.S. When you study economics
over the past 800 years, a very clear pattern emerges in one regard.
Whenever a country surpassed 90% in relation of their national debt
to GDP, the ability to grow their economy becomes extremely limited.
And the higher above 90% they go, growth shrinks exponentially.
The scariest statistic I can share with you is
that sovereign governments around the world are expected to issue
a total of $4.5 trillion of national debt in 2010. Horrifying to
me is the fact that the United States alone will account for 45%
of all of that, yet Washington is still talking job stimulus bills,
tax credits and health care. Best of all, when you total all federal,
state, local, corporate and individual debt in the United States,
you arrive at 350% of GDP. This best illustrates how it isn’t
just a U.S. government problem, but a national problem. Most people
know it was excess debt that got us into this situation, but the
fact is that we are in more debt today than we were one year ago,
two years ago or three years ago.
Finally, worldwide sovereign government debt is
projected to reach $45 trillion by the year 2020, which is two and
a half times higher than where things stand right now.
The specter of higher taxes is inevitable and unavoidable. I used
to become amused when people would ask me if I thought taxes would
increase and lately I’ve become annoyed. Didn’t anyone
take civics or social studies in school? How can any government
keep spending and borrowing forever without someone ultimately being
called on to pay that money in the end? The simple and obvious truth
is that they can’t. And they won’t. Governments at the
federal, state and local levels are all going to be forced to raise
taxes in substantial ways along with cuts in services and social
programs like Social Security and others.
This scenario will be anti-growth and anti-investment.
Long before the subprime era and the creation of credit default
swaps, America’s (like Japan’s and much of Europe’s)
population was aging and demographically would have started to spend
less, save more and be less productive toward GDP. This is a trend,
which is unavoidable and irreversible. Along with this trend will
come the increased social cost of taking care of this ocean of retirees.
This is another trend that will dampen any growth
Unemployment has already gone much higher than a vast majority of
economists predicted it would (except for this one) and will likely
edge slowly higher for another 12 to 18 months. And none other than
Chairman Bernanke warned during Congressional testimony recently
that Americans should begin preparing themselves for “prolonged,
European style unemployment for the foreseeable future”. What
Chairman Bernanke was implying was that with America’s increasing
social costs and likely tax increases we will experience unemployment
several percentage points higher than what we would consider “normal”,
but very comparable to Europe’s larger, industrial economies.
With fewer people working, there are increased
social costs for these people as well as a smaller pool of taxpayers
to extract money from. All of that is also not good for economic
In years past I have lamented with you the dismal savings rate being
maintained by Americans and how sooner or later that chicken would
come home to roost. Well, after a couple years of negative savings
in recent history, Americans are finally coming to grips with the
fact that we will still have an occasional economic rainy day. I
think Americans now know we’re in the middle of quite a thunderstorm.
The truth is that trend toward more savings lies
within the demographics trend, because as people age they are already
prone to earn less, spend less and save more. What we will find
now is the situation will be even more intense with the addition
of the subprime/debt crisis.
Even before the economy took the turn to bring
us where we are now, political scientist Ronald Inglehart did some
outstanding research in this regard that I very much enjoyed reading.
He did exhaustive research that showed (prior to the credit crisis)
that there was a worldwide shift toward “postmaterialist”
values, where instead of economic achievement being the emphasis
for many people, they are increasingly finding satisfaction in other
things. Simply, the more stuff you accumulate, the less satisfied
people tend to be with the idea of accumulating even more and instead
will migrate toward memorable experiences, meaningful work and self-realization.
When you have an economy like the United States’,
where it is 70% driven by consumer spending, this trend toward more
saving and less spending is going to adversely affect growth. And
it was underway long before the previous 24 months and will only
continue. This will also bode poorly for a country like China that
depends on exports to the U.S. and will be a drag on their economy
until they achieve organic consumer growth within their own borders.
While many readers might think that I’m only
focusing on the negative, I beg them to please write me and present
the positives that point toward a robust recovery in the economy.
Or ANY recovery in the economy. When you look strictly at the facts
and the trends, it does not paint a very good picture at all. I
am by no means against hope and I do very much hope that I’m
wrong about the Doomsday Scenario; and I hope the politicians will
soon find some intestinal fortitude and begin making tough choices
to right the ship and put us back on course for a better future.
But as I’ve expressed to you over and over again, hope is
not an investment strategy. Hope is not appropriate for your retirement
planning. And although I’m not a particularly religious person,
one thing I always keep in the back of my mind on a daily basis:
“God helps those who help themselves”. I’m not
sure if that’s an accurate biblical representation but you
get my drift.
So what should you do, or not do to protect yourself
in this Doomsday Scenario? Here are a few things that come to mind,
and understand that I will not be including wildly speculative things
in my list. I admitted that I continue to carry a short position
in the S&P as I write this, which I construe as massively speculative,
but it represents an extremely small percentage of my net worth.
WHAT YOU MIGHT WANT TO OWN
--10-year U.S. Treasury Notes
--Some Agricultural Commodities
WHAT YOU WOULD NOT WANT TO OWN
--U.S. or European Equities
--Low Quality Corporate Debt
--Residential or Commercial Real Estate
The summary point is that there has never been
a more important time in the life of anyone reading this newsletter
to be extremely cautious and careful in his or her financial dealings.
There is still more uncertainty in the world than anything else
and you’ll notice that nowhere in my scenarios did I include
terrorist attacks, pandemics, instability in North Korea or Iran
or other volatile situations that could destabilize global economics.
So there are days that you should be out sailing and there are days
you are well advised to be tied securely to the dock. Until the
skies are clearer it might be very wise to stay safely in port.
YOUR JANUARY BRAINTEASER
Since it’s been a while since I’ve
given you a brainteaser I thought I would take it easy on you so
you won’t pull a brain muscle prior to me getting you warmed
up. Not to say that I’ve made things too easy for you, but
I wouldn’t qualify this as one of my toughest ever.
Here it is:
"Three people check into a hotel. They pay
$30 to the manager and go to their room. The manager suddenly remembers
that the room rate is $25 and gives $5 to the bellboy to return
to the people. On the way to the room the bellboy reasons that $5
would be difficult to share among three people so he pockets $2
and gives $1 to each person. Now each person paid $10 and got back
$1. So they paid $9 each, totaling $27. The bellboy has $2, totaling
$29. Where is the missing $1?
Give it a good try before caving in and peeking
early, but when you want to view the answer you can do so at the
2010, Michael Gasior. All Rights Reserved
AFS Seminars LLC
500 Chamberlain Hill Road
Middletown, CT 06457-5564
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