Teeka Tiwari: Train Wreck- 6 Scenarios to Prepare for

Orginal report to download http://publications.thetycoonreport.com/t/2170145/1282096/630862/0/

Scenario 1 – Interest Rates Stay Down
In this scenario, the U.S. experiences an extended period of Japanese-style
deflation.
What is deflation? It’s the opposite of inflation: instead of prices steadily rising
over time, they steadily decline. Impossible, you say?
PRICES IN JAPAN
HAVE BEEN
DROPPING FOR 20
YEARS!
In the chart to the right
we can see that in 8 of
the last 14 years prices
have been declining.
Even in the up years,
price appreciation has
been negligible.
And you know what
triggered Japan’s deflationary spiral? Out-of-control real estate prices, that’s
what! They had their 2008 in 1988 and they still haven’t gotten out of it.
Not only was real estate
to blame, but there was
also a second very
important piece to that
puzzle. What most
analysts failed to grasp
was that Japan’s
downturn was presaged
by the peaking of its
wealthiest citizens – the
39- to 43-year-old
demographic.
In any industrialized
economy, there is a
demographic segment
that represents the peak earners who are the engine of growth. In Japan that
happens to be the 39- to 43-year-olds. As this group went into decline, the entire
Japanese economy followed, as you can see in the chart to the right.
We are seeing the same exact series of events occur in the U.S., except that due to
societal differences, our peak earning demographic is the 45- to 54-year-old
group.
Fortunately, the rise and decline of any age group can be almost perfectly
predicted based on birth and immigration records, so we can see into the future,
right now, with near-perfect clarity, about how the 45- to 54-year-old age group
will change, and what we see isn’t good.
Take a look at the red
line and you’ll see
that shortly after
2010, this age group
drops off a cliff – a
decrease in
magnitude that’s far
greater than the blip
that happened
during the Great
Depression.
But that’s not our
only problem – along
with these big-money earners, we also have another influential demographic, the
so-called baby boomer generation, which is set to exit the workforce at roughly
the same time that the peak earners are leaving.
So that means that simultaneously we have the most productive part of our
population, the 45- to 54-year-olds, on a downward slide, and we have the largest
part of our population, the baby boomers, about to exit the workforce and tap
into Social Security and Medicare, two entitlement programs that are already
bankrupt and only
going to get worse –
see the chart on the
right.
That’s a pretty
powerful one-two
punch, and the
effects simply cannot
be ignored.
As the buying power
of these two groups diminishes and as we see general consumer demand stay
sluggish as people refuse to spend, we could see prices actually start to drop.
This is what deflation looks like; prices start going down! As prices continue to
drop, consumers spend less and less because they know if they wait they will get a
better deal. This leads to a deflationary spiral, where spending slows to a halt and
companies go out of business left and right.
Under this scenario, the buying power of
paper cash actually increases over time
rather than declining over time.
In a deflationary environment you want to
buy bonds or high-yielding debt
instruments before deflation becomes
apparent to the crowd. You see, as deflation
takes hold, the central bankers take interest
rates all the way down in a futile effort to
stimulate their respective economies.
As interest rates go lower, bond prices go up.
Let me walk you through it.
Imagine that you have a bond with a face value of $1,000 and it pays a coupon of
4%. Each year you get $40 in interest on your $1,000.
Now imagine that interest rates drop from 4% to 2%. You will still receive your
4%, or $40 per year, but your bond will increase in value. This happens because
now the prevailing interest rate is 2% instead of 4%.
So the value of your bond will increase as prevailing rates go lower.
If you decide to sell your bond before its maturity date, the person buying your
bond will still receive a 4% coupon paid by the original issuer of the bond but
their yield will only be 2%, which would once again reflect prevailing bond yields.
The yield is only 2% because your bond would have appreciated in value to reflect
current interest rates.
If you are receiving 4%, or $40 per $1,000 invested, and rates drop to 2%, your
bond would have to increase in value to $2,000 to reflect the change to a 2% rate.
2% of $2,000 equals $40.
Remember, the coupon rate never changes since the coupon is the amount of
interest paid by the original issuer of the bond. The yield on the bond however,
fluctuates every day and is based upon prevailing interest rates.
Under this scenario,
the buying power of
paper cash actually
increases over time
rather than declining
over time.
To reiterate, if you now sell your bond at
$2,000, the buyer still receives the same 4%
coupon or $40. However the buyer’s effective
yield is only 2%.
Are you beginning to see how much money
can be made going long with bonds in a
declining-interest-rate environment?
They are, but
compared to how
low Japanese rates
have been, we are
just getting started.
Even now, 10-year
Japanese
government debt is
yielding just 1.4%.
By contrast, the 10-
year Treasury is
trading close to 4%!
A 2.46% move
lower in bond rates would have bond prices sky rocketing. In a worst-case
scenario you could see 10-year bond yields trading below 1%!
Remember, 2008 taught us that nothing is impossible!
Assets to Own: Cash, Bonds, Interest Bearing Instruments
Assets to Avoid: Gold, Commodities


Scenario 2 – Interest Rates Skyrocket
In this possible future, we see nightmarishly high inflation. As our country
struggles to bridge the budget deficit gap and fund our social programs we will
invariably crank up our printing presses even more. In fact, it’s already
happening, as is dramatized by the chart below!
The only thing stopping this runaway inflation so far has been the banks’
reluctance to lend. The availability of credit has contracted while the money
supply has ballooned. As the bankers feel more secure, it won't be long before
But I can hear some
of you saying,
“Interest rates are
already super low.”
Americans are once again deluged with easy-access, inflation-inducing consumer
loans.
This in turn will devalue the dollar further and drive interest rates on our
government debt higher as buyers demand a bigger risk premium to protect
themselves.
In the worst-case scenario we see
1923 German-style hyperinflation rip
through Western European
countries.
Quick history lesson: After World
War I, to finance war reparation
payments, the Germans hit the
printing presses full force, the entire
effect of which was not felt until late
1923. By the end of 1923 prices were
rising at a rate of 500% per week!
This is, of course, an extreme
example, and I’m not suggesting we
are anywhere near that type of an
event taking place in America…at
least not for the next 40 years or so.
However, even a more moderate
version of a hyperinflation
environment could push U.S. interest
rates to above 20% as an embattled
Fed attempts to stem the complete
collapse of the U.S. dollar.
Remember that not too long ago, in the early 1980s, the federal funds rate did
climb as high as 20%.
Inflation is a vicious redistributor of wealth
income; it smashes the value of life insurance payouts and destroys savings
cash.
BUT!
If this happens and you make the right moves
to make untold millions of dollars. The money that we can make under this
scenario is truly scary.
As interest rates rise, the prices of bonds get HAMMERED and you can make a
fortune shorting bonds.
The leverage you can employ in the bond market is staggering. Depending upon
which vehicle you use, you can get anywhere from 2:1 to 50:1 leverage!
This is the exact scenario we saw in the 1980s when out
forced the then–Fed president Paul Volcker to raise
eye-popping 20%! Traders such as Gary Bielfeldt (profiled in Jack Schwager’s
wealth; it destroys anyone living on a fixed
moves, you can put yourself in a position
out-of-control inflation
the federal funds rate to an
in
u unds
excellent book, Market Wizards) went from being a one-lot corn trader to one of
the biggest bond traders in the world! And he did it over a two-and-a-half-year
period from mid 1984 to 1986, as interest came down off its peak.
This time around I aim to put you in a position to catch the bond market coming
and going. Should this nightmare scenario come to fruition, we want to short
bonds as rates climb and then buy bonds as rates collapse. Bielfeldt made
millions just catching the second half of that move in bonds…imagine if you can
catch both?
Does 50:1 leverage make sense if you’re an individual investor? Absolutely not –
but through the use of certain leveraged vehicles known as ultra ETFs, or
exchange-traded funds (about which I will be going into much more detail in my
webinar series), you can participate in this huge move in bonds without incurring
any of the unlimited risk characterized by trading bond futures.
In my upcoming webinar on Tuesday, April 27 (the final installment in the Train
Wreck series), I’m going to walk you step by step through several specific ETFs
that you need to be aware of so you know exactly what to do should this
particular scenario come about.
Assets to Own: Gold, Commodities, Short Bonds, Real Estate, Art,
Collectibles, Foreign Bank Deposits
Assets to Avoid: Cash, Bonds, Interest-Bearing Securities


Scenario 3 – We Turn into a Welfare State
Under this scenario,
the more liberal
elements in our
country use the
confusion caused by
the financial crisis as a
way to vastly expand
government power.
Under a welfare state
the collective masses
work, produce and
contribute up to 70%
of their economic
output, which is then
redistributed by the
government.
In fact, it’s already happening. Did you know that the U.S. now has MORE
government employees than it has employees working in private, goodsproducing
industries? See the chart on the right to better understand the
dramatic rise in the public sector versus the private sector.
In this scenario, more and more of our country’s wealth will be diverted to serve
the growing public sector, to the detriment of the private sector. Does anybody
reading this think that’s a good thing?
This is the worst kind of job growth because it sucks the nation’s wealth away in
an effort to support itself. Make-work projects, sweetheart deals and gross
inefficiency are the hallmarks of this type of government.
Of all the scenarios, this is the one I fear the most! Under this type of regime,
wealth is created by those that are able to successfully navigate the system as
more and more buying power gets appropriated by the government. Pockets of
sectors end up doing very, very well while others wither on the vine.
So we may see the Construction sector do extremely well as it becomes the
recipient of massive federal spending. Alternatively we could see the Medical
Equipment sector do poorly as more and more of the nation’s health care costs
are unfairly pushed onto these companies via punitive taxes.
Welfare government policies lead to all types of protectionism, which drives up
the prices on everything from a loaf of bread to a new car. The cost of doing
business becomes prohibitive; even more jobs end up being farmed out overseas.
This scenario is the most difficult to trade in for traditional money managers and
individual investors alike. This potential outcome, more than any of the others,
will demand a deep understanding of how to select sectors for both long and
short trading.
Under this type of political regime, everything is driven through political policy.
As policy shifts occur, sectors and other financial assets will move. The good news
is that if you know what to look for, many of these policy moves will show up in
the different stock sectors before they become front-page news.
Assets to Own: Companies with strong government contracts with
emphasis on sector rotation
Assets to Avoid: Under this type of government this will be an evermoving
target



Scenario 4 – Strong Dollar
Stick a 300-pound man next to a 600-pound man and the 300-pound man will
look skinny, guaranteed.
And that’s exactly the logic behind scenario four. In this scenario, Western
countries are swamped by debt, their currencies deeply hurt by fears of imminent
default, and yet somehow due to the U.S.’s deep and complex economy we
stumble but we manage to avoid the abyss.
In this scenario,
global wealth
managers and
sovereign reserve
funds flock to the
U.S. dollar the way
they did in 2008 in
an attempt to secure
a safe port in the
storm. In 2008 we
saw the U.S. Dollar
Index rally from a
low of 72 to a high of
88 in just five
months! Under this scenario we could see the U.S. Dollar Index go above 140!
Under this potential outcome the rest of the world
falls off an economic cliff.
The UK gets downgraded, multiple EU countries go
bankrupt and Germany fails to stem the tide of
sovereign failures. If this happens and the U.S. can
still push off its immediate problems for a few more
years, then we will see the U.S. dollar march much,
much higher.
Under this scenario, commodity prices get torn
apart as the relative cost of U.S.-dollardenominated
commodities creates inflationary
pressure in Europe but ends up being deflationary for us.
Imagine that you live in Germany and that oil is at $80 a barrel. Virtually all
commodities are priced in U.S. Dollars, so as a German, if you want to buy a
barrel of oil you must first convert your Euros into Dollars.
A Common Mistake
Most people think that the
only way to profit from
moves in the dollar is to
trade futures. They are
wrong! In this series I will
show you exactly how you
can play the dollar without
having to come near a
futures contract.
Let us assume that the exchange rate is 1.5 U.S. Dollars for 1 Euro. So for every
Euro you change, you receive $1.5 American. To find out how much an $80 barrel
of oil is in Euros, we simply divide the price of the oil ($80) by the Euro exchange
rate of $1.50. This tells us that it takes 53.3 Euros to buy one barrel of oil.
With me so far?
Now let us assume that the U.S. Dollar rallies and instead of you (remember, you
are a German holding Euros in this case) receiving $1.50 per Euro, you now only
get $1 per Euro. This would mean that if oil stayed the same price at $80 a barrel,
you would now be paying 80 Euros for the same barrel of oil that used to only
cost you 53 Euros.
All that changed was the exchange rate, and your cost of oil went up 50%! So
under this scenario, oil becomes more expensive to the rest of the world while
remaining static to us.
As our dollar increases in value, the price of oil as well as all other commodities
acts as a massive tax cut for American businesses and consumers alike. To
compensate for the above scenario, commodity prices will typically drop in value
as the U.S. Dollar rallies. This happens because foreign demand for commodities
slackens because those same commodities are now more expensive in their local
currencies. Again this relative price difference is solely caused by the U.S. Dollar
rallying.
As those commodities come down in price, all of that extra money that was
getting sucked up by high commodity prices is free to be put back to work in our
economy. Think of it this way: when we spend $100 a barrel for oil, that oil
money gets literally shipped out of the country and out under the dessert
somewhere.
Wouldn’t that money be much better used by being reinvested into the U.S.
somewhere? When oil is cheap, all of those extra oil dollars stay in America to
get put to work in our economy.
The downside of this is that as our dollar appreciates, our exports become much
more expensive for foreign buyers and we would likely see a widening of the trade
deficit.
Assets to Own: U.S. Dollar , U.S.-Dollar-Denominated Assets
Assets to Avoid: Multinational Corporations, Commodity Producers,
Gold, Oil and Almost All Commodities


Scenario 5 – Weak Dollar Scenario
Under crushing deficits, the Treasury finally crosses the tipping point and prints
one bill too many and the world collectively turns its back on the dollar. Under
this scenario we see OPEC, Russia, South America and China abandon the dollar
as a global reserve currency and begin the systematic selling of their vast holdings
of U.S. bonds.
In fact, there is strong indication that China has already started to do that, as
evidenced by the chart to the right.
Commodities become priced to
absurd levels in U.S. dollars,
hurting all those living in the
U.S., and yet are cheap to foreign
buyers with their much stronger
currencies. Savings accounts get
destroyed by hyperinflation,
bond funds end up being ruinous
to their owners and small
investors see the buying power of
their dollars entombed under a
mountain of national debt.
This is a scenario that seems to
be the most popular among the
naysayers and doom-andgloomers.
It’s still too early to tell if this will be the ultimate scenario that will
play out. What I can tell you is that as more and more people expect this
particular scenario to play out, the less likely it will be.
However, under this series of events the number one play will be to go long on
real assets like income-producing real estate, commodities and other incomeproducing
real assets. You will also be able to make an absolute killing shorting
the dollar and buying
gold.
In a true U.S. dollar
rout, gold prices could
move far past $2,000
per ounce and oil could
move well north of
$200 a barrel.
In fact, we have already seen a fairly steady and strong move into gold over the
last 10 years, as you can see in the chart to the right.
Assets to Own: Commodities, Gold, Real Estate (both commercial and
residential), Non-U.S.-Dollar-Denominated Bank Deposits
Assets to Avoid: Cash, Cash Equivalents, U.S.-Dollar-Denominated
Bonds


Scenario 6 – Goldilocks Scenario
Under the Goldilocks scenario the U.S. doesn’t borrow too much, doesn’t borrow
too little, doesn’t fall too far, doesn’t rise too high – under the Goldilocks scenario
the United States gets it just right.
Under this scenario we see a real consumer-demand-driven recovery take hold,
we see the tax receipts bounce back in time to prevent a disastrous credit
downgrade, and we see a new growth cycle emerge from an as-yet unknown
industry.
In short, the politicians’ hopes and dreams come true and we all live happily ever
after!
Don’t laugh – this is
exactly what happened
after the 1991 recession,
and no one, and I mean
no one, saw it coming!
The chart to the right
shows the massive
strength that the U.S.
had coming out of its
worst recession in a
decade.
As investors, our job is not to protect our cherished opinions; our job is to make
money. As bleak as everything looks right now, we must absolutely plan for the
highly improbable idea of total economic salvation.
As ridiculous as our current spending and budget deficit are, should a new
industry sprout up overnight the way the Internet did, we will exit our economic
woes pretty quickly. They won’t be eliminated, but they’ll be pushed off for many
years to come.
So we need to be vigilant to the telltale signs of a true recovery. The key leading
indicator for us will be the stock and debt markets. If we see credit flowing
without government intervention, if we see equity markets embark on a sustained
period of higher highs, and corporations begin to show solid top-line and bottomline
growth that is matched with an industrial breakthrough, then we absolutely
want to be a part of that.
The big winner will be equity prices, and typically as equities outperform,
commodities underperform. Should this occur, you can catch the market going
both ways: long equities, short commodities.
Assets to Own: Stocks, Real Estate
Assets to Avoid: Commodities


How to Simplify Your Investing
What I have just shared with you is my best guess on the six scenarios that could
potentially unfold as this crisis works itself out.
Many of you reading this are probably used to trading only stocks and may be
wondering how in heck you are supposed to buy or sell commodities, currencies,
bonds and other assets classes with which you are not familiar.
Investing can be confusing enough just with stocks, so what on earth is going to
happen when you throw all of these other options into the mix?
Well, friends, fortunately the market has come to the rescue. You see, over the
past few years a financial innovation has allowed the average investor to invest in
these seeming “exotic” assets classes just as easily as he or she could in stocks.
I am talking about exchange-traded funds.
ETFs are somewhat similar to mutual funds in that they hold a variety of different
stocks and can give you broad exposure. However they are much better than
mutual funds because they are much cheaper to trade, they are liquid, they trade
options and you can short them.
They are also free from any and all manager bias. This means that they are not
personality-dependent because most ETFs (at least the ones I would buy) are
designed to give you exposure to a specific industry or index.
This allows us to trade in markets and securities that we never could before.
In fact, I am so excited about ETFs that I am going to hold a special teleseminar
soon for the next installment in the Train Wreck series, during which I’ll share
with you:
Can ETFs outperform individual stocks …
Why all ETFs are NOT created equal …
How I used ETFs to profit from the 2007-2008 meltdown …
Why you need to think “sectors” and not stocks …
How simple it is to trade commodities and interest rates using ETFs …
I’ve personally been using ETFs for years to rake in the profits and they’re by far
my favorite investment vehicle. I want to share these insights with you.
The investing world can be complex, but ETFs make it dramatically simpler,
easier and cheaper to make the moves that you want, to put your chips where you
think you have the best odds to win – and profit.
Parting Thoughts
Friends, I hope this report has opened your eyes to the wildly different ways that
this crisis may play out.
Dozens of warning signals are going off right now that prove without a shadow of
a doubt that something big is going to happen…and you need to be prepared.
What I’ve shared with you today are the broad strokes of what’s potentially going
to happen, but to be properly prepared, you will need to know EXACTLY what
specific securities to trade, EXACTLY what strategies to employ and EXACTLY
when to pull the trigger on your moves.

Train Wreck series – a webinar that will be held toward the end of this month.