Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

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Thursday, September 18, 2008

Next Steps



Next Steps

Wow!

I’m speechless. And, I love to talk. The self-destruction of the post World War II global banking and financial system is in full drive. In Washington and New York, ideology has given way to pragmatism. Potomac Socialism is alive.

The ratio of leverage (debt) to assets, a liquidity crisis (falling cash flow or the rising cost of capital), plus declining asset prices (contracting supply/demand curve) is a sure recipe for massive amounts of non-performing assets, a prelude to an avoidable financial Armageddon.

RISING DEBT LEVELS
RISING COST OF CAPITAL
FALLING ASSET PRICES
FALLING CASH FLOW
FALLING DEMAND
CONTRACTING CREDIT
= MARKET CRASH
= ECONOMIC DEPRESSION
K.I.S.S. (KEEP IT SIMPLE STUPID)

If you had allowed me to build your fixed income portfolio since 2003, and you left it intact, you slept well this week. Am I crowing in this email, perhaps? And, you should, too. Look around; there has been tens of billions of dollars in wealth destruction; major financial institutions have been eliminated, executive managerial careers have been extinguished, fear is widespread, credit markets have seized up for a week yet your bond portfolio is untouched, if not up.

Only, yesterday, gold gained $70 in a single day, the 13-week t-bill traded at .02 of one per cent, part of the reason, institutions are liquidating commercial paper, cash and money market fund accounts because Reserve Primary money market mutual fund “broke the buck”. Investors will get .97 cents for every one of their dollars on deposit. Just incredible.

Before we pop champagne corks and celebrate dodging this credit market implosion bullet, there is much work to be done. Now that the world is no longer in denial and has begun addressing this current financial calamity, I want to have a conversation with you very soon about realigning your portfolio to withstand the next phase of capitalism’s meltdown and the probable upcoming economic depression.

Why do I think a depression is probable? The levels of consumer, corporate, and municipal debt will be reversed to pre 2000 levels. Our economy will contract. At some point, investors will only be able to sell quality assets, like, you know, the bonds in your portfolio and treasuries. If the term depression is too provocative, look at things this way; we are experiencing three simultaneously transitions: 1) from an expanding to a slowing economy; 2) from an extreme credit to a moderately credit driven GDP; and 3) from the largest single economy in the world to a much smaller economy.

Understand this; you currently hold a unique bond portfolio. It has an extremely long-term duration and was designed for the unprecedented seismic shift unfolding this moment in time. Your portfolio is at its greatest vitality, now. Without proper and timely adjustments to your portfolio, radical liquidity injections coordinated by central banks around the world is toxic for long-term duration. The total return of your account is vulnerable. When that day comes to take decisive action will you be prepared?

I am preparing proprietary fixed income portfolio models for EVENT STRATEGY INVESTING, which includes Defensive Estate Planning. In this environment, there are certain insurance contract structures, AIG notwithstanding, are worth considering, for certain situations. And, the properly constructed portfolio should incorporate the next five to ten years.

Also, earlier this week, my email to you contained a link to Federal Reserve Bank of NY referencing where they are stashing all the Collateral Debt Obligations (CDOs) bad paper. There could be up to one trillion dollars in assets, on which, the feds have announced that they are prepared to lose several hundred billion dollars.

Eventually, a Resolution Trust Corporation will be established to liquidate these assets. If you know any buy-side fixed income CDO analysts, traders, or operations managers, interested in this prospect, have them email me or send their CV to: Monsoon Wealth Management, PO Box 15521, Scottsdale, AZ 85267, Attn: CCO.

Finally, as a small business, please forward this email to fellow investors or send me referrals of acquaintances envious of your portfolio or who is unhappy with their advisor. I need to grow my business, too. Thanks.

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