Monday, June 30, 2008

An October Scenario

Let's impose a planning grid on the noise and turmoil of daily news items and the babble of talking heads and use it to help us plan for any asymmetric events that might be lurking in the dark, like a grue, ready to pounce.

We will use Monday, October 13, 2008 as our arbitrary crisis date. It's a Monday in October - as good a day for a crisis to begin as any.

The hope is that you will use the events and questions generated from them to help crystallize your plans and preparations. It has been very easy to sail along and watch as this crisis slowly builds. Now is the time to move from spectator to actor, if you have not already.

We'll step through a multi-week scenario. If you have a specific point you want me to review or research, kick me an email at flagg707 -at- gmail -dot- com.

What This Is NOT

This is NOT the end of the world. Markets have crashed many times in the past. Floods and riots have swept cities and countries. Entire economic systems have fallen, only to be rebuilt (I suggest you educate yourself on the rise of industrialization in Great Britain for a review of one such collapse and rise), new religions and politicals systems have penetrated the mental hardware of entire populations, virulent memes that have reordered the thought patterns of nations for generations to come.

It is the FutureJacked opinion that another such wave of change is heading towards the U.S. It will consist of an economic component (the collapse of late-stage degenerate finance crony capitalism), a social component (a shift in mood away from the full-blown consumerist materialism that dominated the 20th century), a political component (the reorienting politics towards a more local focus as the federal government flounders in insolvency) and a whole host of blowback effects that I have no way to foresee at this juncture.

If your planning relies on some New Age pablum about the Space Brothers coming to save us after the Maya calendar resets in 2012, or expect Jesus to return based on your timetable, not His to save our world from the accumulated follies that must be paid for, well, then go find another web site to peruse. This is not for you.

The War Game Scenario

It's Monday, October 13. You wake up, have some coffee. Maybe you have the news up on your PC or Bloomberg is playing on the television, the sound muted as you glance at the occasional news item scrolling across the screen.

The DJIA futures are down hard before the market opening. There are stories of angry exchanges between the U.S. Federal Reserve, the SEC, the U.S Treasury and the IMF as a result of the ongoing audit of the U.S. financial system. The President has invoked a number of Executive Orders, declaring the books of a number of financial firms as national security interests, preventing IMF auditors from reviewing them. In addition, there are continuing lawsuits by gold bugs to fully audit the gold holdings at Fort Knox, which the federal government refuses to do as well. The recent collapse in gold prices, along with that of stocks, oil, ag commodities has befuddled the "experts" and recrminations have filled the newspapers, blogs and television news programs since early September.

You go to work or to school or out to your permaculture garden to work. You check back in at lunch time (or late breakfast for you on the West coast or in the Rocky Mountains) and the markets are crashing hard, down over 707 points. The market has whipsawed violently all day, but the trend is down, and down hard. You wonder briefly about your 401(k) plan, or your annuity. Maybe if you've read up on how pension funds invest you are worrid about your pension as well.

But hey, buy the dips. The market always goes up. Besides, the newsies are talking about some significant intervention by the Feds or the Plunge Protection Team or a bailout coming from the Saudis.

The market closes down 911 points. Trading was suspended in smaller exchanges. A few online brokerage firms watched their servers crash as customers attempted to execute sell orders in numbers never before witnessed.

Gold had a brief flurry upwards, but, to the consternation of most crisis investors, it fell and fell hard by the end of the day as well, as big investors unwound long positions to cover their losses elsewhere.

That night, the evening news is awash with high-level federal officials, cabinet members, the SEC Chairman, the Fed President and anyone else who looks impressive in a suit on television. Larry Kudlow is not on as regularly scheduled and is in the back of the studio, foaming at the mouth, restrained. Kramer is eerily calm, his usual antics damped down. The message is the same:

  • All is well.
  • Your money is safe.
  • Speculators are to blame.
  • Fundamentals are sound.
  • The rumors that a huge number of regional banks are technically insolvent is not true.
  • Your money is safe.
  • Buy an SUV.
  • Rumors of a surprise federal move to prevent all withdrawals from IRA and 401(k) accounts are false.
  • Rumors that California may declare bankruptcy are false.

The suburban types check their 401(k) accounts that night and grimace. Many won't check them at all. Most see this as just another hiccup in the markets. The sun sets on a nervous country. The doomers are convinced this is the end and head out to the ATM to withdraw cash. A few more people than normal go to Wal-Mart of the local grocery store and stock up on supplies - much like the rush you see before a big storm hits.

Action

If that happened, would it affect you directly and immediately? Directly, but not immediately? A retiree living on dividend and bond income will have a different response than someone who has taken a flyer on a few stocks. What specifically would a severe market drop do to you? If anything?

How strong is your bank? If we see a continuing wave of write-downs of assets, will this destroy the balance sheet of the institution that holds your money? How exposed is your bank to commercial real estate? If your bank experienced sudden losses and had to shut its doors for a few days (or weeks... or months...) to be reorganized by the FDIC - do you have any cash on hand to help you through the transition? How would you pay your house payment or rent?

If you are a speculator, are you ready to execute short sales? What would you do if the exchange changed the rules to crush the shorts? What if you bet paid off handsomely, but the clearing firm used by your brokerage failed?

If you knew a crash was imminent - what actions would you take? How would you change your equity portfolio? How different would a crash portfolio be than what you currently have invested - if you have anything invested.

Market crashes are not difficult to prepare for in and of themselves. It's the follow-on effects that we'll worry the most about. That's what we'll look into tomorrow...

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