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For a couple of years now it's been
clear that the world was about to fall apart, with the only question being
which local failure turns out to be the catalyst for a systemic breakdown. So
many things were on the verge of blowing up...yet none of them did. The
world's governments have engaged in a heroic period of "extend and pretend"
that has kept the system together longer than seemed possible.
But now the game seems to be ending.
It's still not clear which bomb will go off first, but a bunch of fuses have
gotten very short indeed. Here's a survey of old crises that are finally coming
to a head:
California and Illinois
These two U.S. states are bankrupt by
any reasonable definition, but are somehow managing to pay most of their
bills. Their political classes are dominated by public sector unions, so
neither has tried the tough medicine of places like Wisconsin or New Jersey.
Instead, they've used a combination of much higher taxes (Illinois) and
accounting gimmicks as a means to much higher taxes (California) to delay the
inevitable reckoning.
Both are reaping what they've sown. Illinois,
after raising corporate and income taxes, now faces
an exodus of businesses to more friendly climes like Indiana and Texas. The
governor is doling out tax breaks to keep major employers, a practice that 1)
sends those new taxes right back out the door and 2) leads every other
company to demand the same treatment. Latest on the list is the Chicago
Mercantile Exchange, the state's biggest financial institution. No end in
sight but bankruptcy.
California desperately wants to raise
taxes but can't get an increase through the legislature. Thanks to a recently
passed referendum, lawmakers don't get paid unless they produce a budget, so
they'll do so pretty soon. But without more tax revenues it will fill the
gaping deficit with gimmicks like delayed payments. No one will be fooled.
The only question now is whether there's room in Texas for all the California
companies that will soon be leaving. Again, no end in sight but bankruptcy.
Short munis and pretty much anything dependent on
consumer spending, since the resulting public sector layoffs will devastate
demand for cars and other luxuries.
The Middle East
As country after country blows up,
the U.S. finds itself sucked into increasing numbers of
"humanitarian" military operations that are, of course, really
about protecting the flow of oil. It won't work. An oil crisis of some sort
is coming. Buy energy stocks, from oil to clean tech, short everything else.
The U.S. budget
With America borrowing, in effect,
its entire military budget from China, unemployment headed back to double
digits even by Washington's fraudulent accounting, and neither party willing
to really address the military/entitlements complex, the
debt will keep piling up until it can't. The rating agencies are now,
belatedly, threatening the US AAA rating, the loss of which would either
drive interest rates back to their historical average of 5%-6% (sending
interest costs out of control) or force the Fed to start buying all the bonds
issued by Treasury (sending the money supply out of control). Result:
imminent currency crisis. Buy gold and silver, short Treasuries.
Housing
After seeming to stabilize for a few
months, housing is tanking again. Sales and prices are down, underwater
mortgages are surging, home builder confidence is at new lows, and poor
innocent Bank of America is stuck with trillions of bad paper that it's not
accounting for. As home prices accelerate to the downside, look for huge bank
write-downs, massive stock volatility, and maybe another bailout. Short
anything in the financial sector.
Europe
Ah, the euro. Greece is
imploding...riots in the street, the government is falling, and the Bundesbank and ECB can't agree on how to handle the
coming default. This one is coming to a head very soon, to be followed by the
other PIIGS countries -- assuming there's still a Eurozone to try to save.
Short the European banks with the most Greek paper, load up on precious
metals.
Does it matter which blows up first?
Not any more.
They're all so close that just their prospect is enough to send capital
running for cover. It's a nasty year no matter what. But then comes the next stimulus plan, which complicates the whole
"short the world" thesis. The markets have been consistently fooled
by this kind of thing, and there's no reason to believe that QE3 won't ignite
another rally in risk assets. So monitor those shorts and be ready to close
them out when CNBC starts hinting at a big pending announcement from Bernanke
or Geithner. Shift the proceeds into precious metals, which will absolutely
rocket when the next wave of fake liquidity hits the market.
John Rubino
DollarCollapse.com
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