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The Financial Markets Are Leveraged For a Crash...

Contributed by mm | April 4, 2004 4:47 PM PST

"The financial markets are leveraged for a crash...

...The only question is when?"

Richard Benson gave a bleak picture of what will happen in the next 12 months in this article. (Although the article is published on April 1st, it is not an April Fool's Day joke.)

His view echoes a number of articles I have discussed in this website (here, here, here and here). That is, our financial system is heavily (and unhealthily) leveraged and is poised for a disaster, which, when it comes, may be even more damaging than the 1929 stock market crash.

Richard also provided some perspective on the crucial days that will break or fail Fed who wants to keep this leveraged system working for as long as possible:

For investors knowledgeable about the Treasury financing cycle, following is the most likely time frame when we expect the "wheels might come off and the markets and roll over a cliff:"

In January to March of this year, the U.S. Treasury financing need was $177 Billion and the Japanese bought over $142 Billion (15 trillion Yen) of our debt. (In the February 2004 refunding, Asian central banks bought 50% of the auctions, which caught the world's attention).

In April to June, the U.S. Treasury receives both quarter-end and annual tax payments, keeping the financing need a modest $75 Billion.

In July to December, the U.S. Treasury has to raise $300 Billion. The August and November re-fundings will be critical. If the Japanese and the rest of Asia don't come in to buy $200 Billion, bond prices are virtually certain to roll off that cliff. Our entire deficit needs to be financed with newly printed American, Asian or European central bank currency.

He recommends individual investors to sit in cash or park money in safe places like short-term treasuries, CDs, I-bonds and TIPS. My personal taking is:

1) Check out your current loan rate and the next few weeks or months may be your last chance to refinance (disclosure: I'm in the process of refinancing my mortgage from 4.25% to 3.50% now)

2) Stay defensive; do not play with the "flying pigs" and chase the last few percentage points of gain in the stock market

3) If you still want to have some exposure in the equity market, buy some insurance like long-term put options (see this post)

Source: The Kirk Report

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