The Debt and Leverage Party Has A Massive Hangover!

By Jennifer Bawden
November 10, 2008

Reporting from Marbella Spain

As many of you know, I have been making speeches and writing extensively since the spring of 2007 on the dangers of over leveraged CDO’s (Collateralized Debt Obligations) and the credit bubble.

On August 12, 2007 I wrote to warn you that ‘the gigantic credit bubble was about to burst’ and that ‘concurrent with out of control inflation gold would soar to over $1000/oz.’ I also warned you that the ‘smart money would run to cash.’ explaining that I was very bearish on stocks, especially financial stocks. Click here for the article.

I went on to explain ‘it is a glimpse at the cancer that has not been diagnosed yet.’ Lastly, I went on to compare the coming disaster to the crash of 1929.

I was called an alarmist; way too pessimistic, close friends with 20 years experience in the markets were angry and told me in no uncertain terms that new regulations and safe guards were in place so a 1929 crash could never happen again.

Others went on to say ‘its time to buy more stock on those dips and that I was scaring people for no reason.’ Another nicknamed me Cassandra and still another banker wanted to send me a T-shirt that said “The Sky is Falling, Sell Sky!”

I was told by almost every broker, banker and businessman I knew and watched on CNBC and Bloomberg that it was just a small blip and that I was dead wrong on my analysis.

Still I held my ground and tried to warn everyone I spoke to although it fell mostly on deaf ears. Well you all know what ensued. Now the whole world understands why I am a nervous Nelly.

Yet, a small group of my readers took my advice, sold stocks and bought the inverse ETFs I suggested shorting Real Estate, Financials and the Dow. They are up somewhere between 75% and 300% as almost all other stocks cratered.

Yes, A very small group of others and I predicted all this because it was predictable!

Then on December 30th, in my speech on the economy that I gave to attendees of the Renaissance think-tank, I said ‘unprecedented seizing up of financial markets caused by the mortgage credit derivatives could bankrupt businesses unable to raise funds, cause more large banking layoffs, and put some highly leveraged hedge funds out of business.’ I explained that the ‘super virus in interconnected global markets could spread very quickly plaguing even the darling China and emerging markets’ and ‘cash will be king, gold will be emperor and small cap will be the fool.’ Click here for the article.

Now, once again, the perma-bulls are racing ahead hoping we are at the bottom and things will now get better. Today’s CNBC headline reads “Professionals say 70% chance of a massive rally.”

In my opinion it will not play out well for the eternal optimist. There will be no quick fix and no short recession although I do think we could see one or 2 strong rallies. I am sorry to forecast that America will experience a prolonged deep recession. Many stores will close, commercial real estate will get clobbered and factories will shut down causing skyrocketing unemployment and many more foreclosures. (Don’t let me even get started on an over trillion dollar debt that is growing exponentially every day!)

I believe the economic collapse is just getting started. Once again I do not agree with the Wall Street pundits who are calling this the bottom. The cancer has finally been diagnosed but the bailout band aids are too little too late. Make no mistake we are entering an era of DEFLATION where millions world wide will default on their debt.

Jen’s Top 10 predictions for 2009:

I. This will be one of the worst Christmas shopping seasons on record and the tapped out consumer will lead us into a full fledged recession. Corporate profits across the board will be far worse then expected as the economy contracts and consumers stop spending.

II. Unemployment will skyrocket, nearly doubling to 12%. Crime will rise exponentially with unemployment.

III. Hundreds of banks and corporations, unable to secure credit, will go bankrupt. Others will severely cut back on technology, travel, advertising and any other non essentials.

IV. High interest rates, stock market losses and shrinking credit will assure that housing prices will continue to fall (that is until the great inflation of our dollar and currencies worldwide start to show up and the rush to tangible assets starts.) Watch for commercial real estate to get crushed as stores close and offices contract.

V. The bailout will be too little too late and a deep recession will ensue, possibly the first world depression.

VI. In a massive race to liquidate assets to pay off debts; jewelry, art, boats, special cars, watches, furs and all other non essential luxury items will all be selling for fire sale prices in a few years (less then half of what they sell for today. (Adjusted for inflation, of course.) Frugality will be in. Conspicuous consumption will be out. The Jones will have a foreclosed sign on their ‘grass is greener’ lawn.

VII. The next bubble will be in Alternative energy (wind, solar, nuclear and Geothermal)

VIII. US Debt will rise to over $3 trillion sending the dollar into severe shock and the world into awe as the US Peso quickly plummets against gold and other strong currencies like the Swiss frank and the Yen.

IX. Gold and Silver could fall lower in the short term deflationary period. As the world rushes to treasuries the dollar will strengthen before it crashes and burns shooting gold again to over $1200/oz. (If in the short term gold falls between $550 and $650/oz this would be crazy bargain territory and I suggest loading the boat with 2x up ETFs and top Canadian mining companies like Seabridge and GoldCorp. (Both of which I already have.)

X. The Dow will fall between 6000 and 7000 as more forced liquidations and strong deflationary pressures hurt corporate balance sheets and consumer spending plummets. The deflation genie has been let free. As everyone rushes to sell and most buyers stand back everything will fall in value. Giving atomic firepower to this de-leveraging are derivatives that were 5 to 25% leveraged on the way up. On the way down they become what Warren Buffet calls ‘financial weapons of mass destruction’ amplifying as the crisis unwinds.

Top 10 things you can do to protect yourself from the coming crippling deflation followed by massive inflation:

I. Stay away from Real Estate bargains, they are going a lot lower. Rent, don’t buy!

II. Get out of stocks, bonds and corporate paper on any strong rallies. For those who have safeguarded cash don’t get trapped running with the bulls in a dead cat bounce Obama-mania stock market rally that will probably end by retesting or breaking below October 10th lows. Yes, at some point there will be great deals, but not yet.

III. Wait to buy double up on gold ETFs like HBU & HGU and top Canadian gold and silver mining companies like Kinross Gold, Agnico Eagle and Silver Wheaton. (If Gold drops between $550 and $650/oz load the boat!)

IV. Buy ETFs double shorting the market like DXD, SRS and TWM on large market rallies.

V. Most importantly PAY ATTENTION! If you let your bullish optimistic broker make decisions for you, you could lose most of your life savings!

VI. Time to hunker down. The bail out won’t work. The problem is too massive. Times are going to get a lot tougher and harder.

VII. Pay off debts and wait to make major purchases. They will cost a lot less in a year and your cash will buy you a lot more. (That is if the exploding inflation of world currencies hasn’t kicked in by then.)

VIII. Make contingency plans; get ready for the day when the world starts to sell the US dollar en masse. (Feel free to call or email me for the name of the safest bank in Switzerland.)

IX. Be ready to move quickly and be flexible. Obama will probably bring back a much higher capital gains tax so tax free oil and gas pipelines will be a great investment if oil drops below $50 a barrel- and I think that could be soon. Look into buying top Master Limited Partnerships when they resist their recent lows. They give a high yield and have favorable tax credits. A few on my shopping list are PAA (Plain All American), EEP (Enbridge Energy Partners), KMP (Kinder Morgan Energy Partners) EPD (Enterprise Products Partners) and ENP (Encore Energy Partners.)

X. Have your shopping list ready to pounce if and when the dow falls below 7000 with recession proof, debt free, high yielding, inflation protected companies.

It is important to understand that now during this deflationary time, each dollar saved will be able to buy a lot more. But, sometime not so far in the future a crippling hidden tax called inflation will push the dollar to new lows. At this time tangible, non renewable assets like gold, silver, oil and gas will explode from the present lows.

I am enclosing a list of the few newsletters I found that really understand this bear market. They also predicted it. If you have money to lose you need to subscribe. (The cost is $45 to $99 for a year and worth every penny.) Both have numerous free updates as well., Lastly, if you haven’t heard of it yet I suggest picking up the DVD of I.O.U.S.A. at the Agora website above.

Since I have proven without a doubt that this ‘crisis’ was predictable. I have been asking myself if there could be an invisible helping hand that benefits if currencies and countries crumble under their own debt? Is the Illuminati playing Russian roulette so they can usher in the Amero, their new currency? Wait for my next email coming soon to find out.

Jen Bawden

Jen is a best-selling author and serial social entrepreneur passionate about disruptive technologies, with a decade of experience in Homeland Security technology solutions. She is also a contributing author at Seeking Alpha, a top financial news site, and a member of several think tanks including: The Aspen Institute, TED, The National Committee on American Foreign Policy, Renaissance Weekend, Summit Series, Task Force on National & Homeland Security, & Secure the Grid Coalition.