Markets which trade paper assets will be a victim of the ongoing credit crash.

On the surface, things appear to be getting better in many areas.  Engineering jobs are starting to return to the US and I am getting several inquiries per week from headhunters.  Still, I'm using this time to store away value for the future in the sure and certain knowledge that the Bernanke QE bubble, while not fully played out now and possibly not even in the next couple of years, will eventually succumb to the great credit collapse that is still clearly underway.  The rocket ship of re-flation is battling against the gravity of deflation.  The rocket ship has to burn fuel in order to make headway.  Gravity-like deflation just has to sit there and be patient in order to pull the rocket back down.  Deflation is the natural course of things in a technological society. If the re-flation rocket ship can go high enough and break away from the gravitational deflation, hopes commander Bernanke, we can head straight into the next big inflationary cycle without paying off the last one.  If he can do it then his fraudulent banking system will live to fight another day and live to rip off billions and trillions of dollars more from the unsuspecting inhabitants of planet Earth through the scam of fiat currency and fractional reserve banking.

Markets which trade paper representations of real things underpin the great scam.  In a real market, the buyer has to bring real money and the seller has to bring a real commodity and the marketplace is nothing more than a public place for them to make the trade in.  But in paper markets, buyers bring credit instead of real money and sellers bring promises to deliver commodities some time in the future.  It's like a real life version of Farmville or some other virtual reality game.

Over at Chris Martinson's web site there is a recent interview with Eric Sprott  that says many things I agree with, the main one of which is that paper markets will eventually blow themselves up because of all the inbuilt leverage, corruption and Wimpy Promises which are part and parcel of them.  Sprott is well respected in the metals business and I think his long standing viewpoint that people should just dollar cost average into real, physical things is going to prove to be advice well heeded on down the road. 

Our entire economy is literally built on a foundation of leveraged paper asset trading.  At some point one of the sides of this massive something-for-nothing, get rich-quick-without-doing-any-work scam is going to break down and that will cause the paper markets to break down.  By that I mean that either the buyers will take on too much leverage and be unable to pay off their lost bets OR the sellers will promise the delivery of more stuff than they actually have to deliver and then a series of "unforeseen events" will occur which will smash all their carefully calculated assumptions to smithereens and we will have LTCM part deux, turbocharged, on steroids and in 3D.  At that point, the only thing that will matter is physical assets and who it is that physically possesses them.  It won't matter what someone used to owe you if they have gone tits up.  The greatest bubble of all is the Big Bubble - the entire Virtual Economy itself.  It is built on leveraged debt and Ponzi Promises.  All bubbles eventually peak, reverse course and then collapse.

Having said all that, let me be so bold as to offer a couple of trigger points I am watching closely.  The bubble is not ready to collapse if that public indicator of human psychology, the stock market, can break out to new highs.  The old high on the Dow Jones Industrial Index was in the low 14,000 range.  If we break through that then Bernanke wins this round and massive inflation becomes a serious risk.  Having said that, I believe that the big bust must come sometime before the majority of the baby boomers are able to draw their value out of the system because in a Ponzi not everyone can win.  My view is that only about 20% of the people will win (i.e. take out of the markets more actual value/buying power than they put in), 20% will about break even, and 60% will get screwed.  20% of that last 50% will see significant damage to their retirements and 40% will lose virtually everything.  Rough numbers, of course, but that's just how Ponzis tend to work in my experience and so this time I don't think it will be different.

Smart people will use whatever time we have left (before the retiring boomers suck the life out of the economy) to store wealth in a physical, undisputable, un-taxable form that will help them weather the very hard times that must come when the largest economic Ponzi in the history of man finally collapses.  I'm not picking on boomers here at a personal level but when they stop adding value to the economy through their labor and when they indeed become a drain on the economy through their attempts to collect government medical and social security (Wimpy) promises we are certainly going to feel it as a nation and even at the global level.  The additional value they pumped into our economy via their labor when they were young and strong will be matched only by the additional value they suck out of the economy in their old age.  One medical operation costing $100k that is paid for by "the state" is worth more than a decade of hard work and savings for most Americans.