Debt Losing Its Luster

12/20/2011 10:04 am EST

Focus: MARKETS

Curtis Hesler

Editor, Professional Timing Service

This goes for both governments and individual investors, who need to protect their assets above all else in the face of worldwide deleveraging, writes Curtis Hesler of Professional Timing Service.

There has been some excellent analysis done and extremely astute suggestions poised for solving both the EU debt problem and our own domestic financial quagmire.

The problem from where you and I stand is that it is not so important knowing what the best thing to do is, but what the powers that be will actually do. That includes the option of doing nothing, as is the case with the so-called “supercommittee.”

Political incentive does not motivate the elected toward the best course of action for the populace, but toward the most
expedient action (or inaction) which will garner the most votes.

The future is not so difficult for us as investors to anticipate. Problems will be ignored, if possible, and then swept under the rug, if possible…and then the can will get kicked down the road with short-term solutions. Problems will not be truly addressed until they reach crisis proportions. I think we can all count on this.

More money will be printed and more debt will be created to pay off the debts we already have. Money will be printed to buy votes with largess for the non-productive and to create the illusion of hope that tomorrow will be a better day if you only “vote for me.”

The reality is simple. Debt has to be paid, and you cannot pay debt with artificial juking and dodging—only with real money. Gold is money. It truly is.

The next ten years are going to be stressful economically. The prices of those things you have no decision about paying for will rise, while inflation will be masked with voodoo math. Nevertheless, the reality is not hard to see. Gold is still your friend.

There will come a time when things will change. I believe our government will at some point do the right thing, but only when forced by a serious crisis or by a series of progressively worse emergencies.

Just as Paul Volcker stepped in and finally did the right thing to stop the inflation of the 1970s and 1980s, someone will eventually stand up to the challenge and turn the political path back toward reason. Our challenge as individuals is to protect our wealth in the meantime.

What About Deflation in This Process?
There will be some. Debts will default and leverage will be satisfied.

Deleveraging takes money out of the system. Those things other than taxes, insurance, scarce resources like energy and food, and other basic essentials may fall somewhat in price.

Who needs more than one house? Perhaps as families move in together again, one house may do for several families. How often does one need to eat out? What services might be unnecessary or postponed? For the most part, your personal budgets will be constrained by rising costs of necessities and an increase in the cost of unavoidable expenses.

I expect to see the process of deleveraging in the private sector continue, at least until the end of this decade. Personal economics will eventually improve, but economics and politics will certainly be different.

As a financial goal, growth will not be as important as sustainable profits and dividends during the next cycle. However, before that, look for another recession and another financial crash next year.

My cyclical analysis is pointing to a significant top in the stock market averages sometime next spring. At this point, this work is indicating that the beginning of the next leg in the secular bear market that began in 2000 will begin in March.

NEXT: Why Is Oil Still So High?

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Why Is Oil Still So High?
With the weakness in world economies well understood, why is crude oil selling for $100?Could it have anything to do with the US withdrawal from Iraq and the resulting increase in Iranian influence in the region?

The fact that Iran could end up as the major power influencing—i.e. controlling—Iraq, Syria/Lebanon, and Jordan is more troubling at this point than its nuclear development. I’m sure this is not being lost on Turkey or Saudi Arabia.

Furthermore, an attack either preemptive or not on Iran is very difficult to pull off successfully. Although the Iranian army is no match for the US forces on the ground, the certain result of any attack would be the immediate closing of the Straits of Hormuz. That would shut off 40% of the world’s crude supply in a heartbeat. You should own some North American crude oil investments.

Crude oil is not immune to volatility, and it likes to follow the popular averages to some degree. The reason for that is that the stock market averages are expected to reflect the future for the economy. Thus, if the economy is going to improve, demand for crude will be higher and so will its price.

On the other hand, if the economy goes into another recession, the popular conception is that demand for crude oil will abate and its price will fall. With the gyrations we have seen in the stock market this year, the rolling action in crude should come as no surprise.

There is also the problem of cash panics that we have seen from time to time since the great meltdown in 2008. When cash becomes king, self-control and reason seem to fly out the window and everything gets sold down, including, to some extent, crude oil and precious metals. This type of volatility, on the other hand, is what provides the patient investor with buying opportunities.

So, What Is One to Do?
Well, it is wisely said that you cannot direct the wind, but you can adjust your sails. If you have extra cash and are looking for a good return with no risk, I suggest you pay off or at least pay down your mortgage and other debt you are carrying.

You need to liberate yourself from the shackles of debt. Debt all but enslaves the debtor. If the income stops, the debts must still be paid. There is no wisdom in debt.

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