Economic Storm, Pt. 2: The Dominoes Begin to Fall

Back in 1999, I began predicting an era of extreme economic volatility that I believed was on the way. I believed that sometime in the mid-2000s, there would be a real estate crash, followed by a crash in the stock market, followed by ill-advised bailouts, and so on. Not surprisingly, this view was not shared by many people back then.

But these predictions were not the stuff of crystal balls. Nor was any particular brilliance of mind necessary. More than anything else, understanding what is coming is a question of studying similar historic situations. If we recognise that human nature is unchanging over millennia, we can expect that the same general pattern would be followed the next time around. The most significant new feature this time is that, as the events leading up to this debacle are more extreme than at any time in history, the damage will be correspondingly extreme.

It’s not rocket science; it’s really little more than common sense.

The Second Half of the Economic Storm

In my estimation, we have now passed through the first half of the economic hurricane, in which all the initial, more predictable events have taken place. In large part, 2011 was, to my mind, the eye of the hurricane – the calmer time when the storm appears to be ending. But, like the eye of a hurricane, what comes next will be the other side of the storm… the period in which devastation returns with a vengeance.

For any person forecasting aspects of the Greater Depression, now is the time when continued denial by the naysayers will be at its strongest. In the early 2000s, projections of another Great Depression were seen by most as a harmless delusion, something to be laughed at. Then, from 2007 to 2011, the world experienced the unease and confusion that accompany a period of this type, and now, in the quiet period, many people are hoping that the all-clear whistle will sound. This is a period where reports will show that the stock market is up. Also, there will be announcements of false figures of diminished inflation and increased employment levels to help buoy up this hope.

So, the general mood will be different now.

Those of us who are forecasting “Part II” of the Greater Depression should expect to be met with much greater resistance by those who, understandably, want to believe that a recovery is underway. They feel that they have been through enough already and will grit their teeth at the suggestion that there is more to come.

In this present period of relative calm, before the more serious aspects of the Greater Depression make themselves known, many will say, “I have no use for those who predict doom and gloom — I believe in being positive.” This always sounds good. However, I would argue that those who stick their heads in the sand are not by any means being positive; they are merely making a grave error. Given the choice to be an ostrich or a giraffe, I prefer the latter. To be truly positive in such times is to keep your head good above the fray, assess the situation as honestly as possible, and adjust your situation accordingly.

The Dominoes Begin to Fall

While it is unwise to predict a timeline for any economic event, I believe that it is likely that, in 2012, we may see the dominoes begin to fall. This is a risky prediction as there will be a great effort on the part of governments to stave off any and all falling dominoes until after the American election in November of this year. In the end, it will boil down to whether or not it actually can be staved off.

But, whether we start to see the first major events occur in 2012 or whether they are delayed a bit, what we will most assuredly see when they do occur is an increase in fear. In any economic downturn, the second wave down is invariably the time when people tend to say to themselves, “Oh, no, this time I think it’s for real.” Generally, their gut has already been telling them that all along, but their brain may have been fighting the acceptance that it will truly happen.

As fear becomes increasingly dominant, what will occur is what always occurs in such situations. People begin to act more rashly, and governments react accordingly. In Europe and, more so, in America, there are signs that the governments are preparing for a time of major unrest. The passage of draconian laws, the creation of FEMA camps, etc., point to the preparation for significant violence on a national scale. If what the governments are preparing for becomes a reality, fear will double and redouble as events unfold.

An Investment Possibility

In terms of investment, periods of great fear cause people to turn to investments that represent economic safety. This is the period when a gold mania should begin in earnest.

Those who have been quietly investing in precious metals may increase their positions from time to time, and there will be many opportunities for this. It would not be surprising to see US$2,000 gold before the year is out, and, equally, it would not be surprising to see a corresponding correction. Those who are new to precious metal investment may well sell in a panic, and those who are more experienced will see the drop in price as an opportunity to increase their positions. But, as the dominoes begin to fall, I believe that gold will most assuredly begin its mania stage, and in due time, $2,000 gold will be just a pleasant memory of “when gold was a bargain.”

Throughout the next few years, we will see dramatic increases in gold prices. One school of thought suggests a top of $4,000 – $6,000; another school anticipates $12,500. There is even a logical argument for a much higher figure.

The majority of people, however, have little or no idea as to what gold might do, and, should they choose to buy in, will be buying and selling erratically, trying to chase perceived trends. It is entirely possible that the number of panicking trend chasers will greatly outnumber those who buy and sell based upon reason. It is this factor that will be the cause of the mania.

Many people are under the general impression that the time to do well is in good times, but this is not always so. The greatest advances may be made in periods where there is the greatest change. As one investment goes down in value, another rises. Wealth does not disappear in difficult times, it merely changes hands and, more often than not, moves to a new geographical location.

The period that we are entering will by no means be sane and sensible, but that does not mean that the individual cannot be sane and sensible while the world unravels. To be sure, we are in for a real rollercoaster ride. How each of us prepares himself now, both economically and geographically, will largely determine what sort of shape we will be in when we come out the other side.