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Crisis Watch: Here's What You Need to OwnBy Jeff ClarkThursday, August 12, 2010 It's time to get liquid.
Yesterday, the Fed announced plans for "QE2" – Quantitative Easing, the sequel. It'll be using the principal payments from its mortgage-backed securities to buy Treasury Bonds.
In other words, the Fed will be both selling and buying T-Bonds.
In more words... the fed will be monetizing debt.
This is a big, BIG deal. The market seemed to ignore the potential effects on Tuesday. But it looked like investors finally got the picture yesterday, when the market spent most of the trading session down more than 2%.
It's a big deal because the Fed is basically using its Visa card to make its MasterCard payment. Yes, it's a relatively small amount. But healthy entities don't do that. And it's a slippery slope.
Think about Argentina in 2000.
Think... liquidity crisis.
Of course, it's a big leap to go from a small amount of debt monetization to a complete financial meltdown. After all, one small child throwing a pebble into the ocean isn't going to create a tidal wave. But in the current economic and psychological environment, small moves have big ramifications.
Everyone knows the U.S. will never be able to pay off its massive debt load. Yet, everyone keeps piling into Treasury bonds at record-low interest rates. We all know it's a Ponzi scheme, but we all keep playing the game.
The only way to survive a Ponzi scheme breakdown is to get out at the first sign of trouble.
Debt monetization – even just a small amount of it – is a sign of trouble.
In a liquidity crisis, everything gets sold. Stocks go down. Bonds go down. Even precious metals get hit.
Cash – in the form of U.S. dollars – is the only thing that holds up. That may seem counterintuitive. After all, if the Fed is essentially printing money to buy its own debt, the value of a dollar should fall. But in times of crisis, everyone rushes to own dollars. The demand for dollars more than makes up for the increased supply.
Look at what happened to the dollar during the financial crisis in 2009...
 From mid-December 2008 to mid-March 2009, while the financial markets were on the verge of a meltdown, your dollars gained 10%.
Make sure you have plenty of them this time around.
Best regards and good trading,
Jeff Clark
Further Reading:
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Severe market weakness yesterday sees...
...Bank of America smack a new 52-week low.
...Computer giant Hewlett-Packard hit another 52-week low.
...Volatility Index climb back over 25.
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