If we are lucky, this US recession might only last two years, says Adam Lass. The economic rot is spreading from banks to consumers to factories…and then back again in a vicious cycle. Investors can use this period to buy up healthy firms at rock-bottom prices.

This from Taipan Daily:

Let’s start with banks now that Washington is such a major player in this area. Both New York University’s Professor Nouriel Roubini and myself have delivered many early warnings on this topic.

However, where I have been primarily concerned with the possible fates of the 117 on the FDIC’s watch list of dangerously undercapitalized banks, Professor Roubini notes that some 8% of the 8,500 banks the FDIC insures are in just as deep a hole.

Now he warns that despite Washington’s pledge to back each and every bank, in the end, it will be forced to perform triage, and abandon the worst lest they become poisonous “zombies.” One need only look to Japan’s decade-long recession to see what can happen to us should we refuse to bury these walking corpses.

Remember that while Washington may (or may not) be able to protect these banks’ depositors, their investors and bondholders, on the hand, will be forced to join them in the grave.

The REAL crash

But even this agonizing process may take months if not years to play out. Looking to more immediate matters, I must point out some particular items that may have passed under your radar during all this folderol.

For the last few decades, the global economy has hung its hopes on American consumers. And right now, those consumers are hurting.

We have been seeing miserable numbers for over a year. But last month changed the very meaning of the word “bad.” The U.S. Commerce Department (remember them?) has announced that consumer sales fell 1.2% in September.

That’s the steepest drop in over three years, and double August’s reported loss of 0.7%. It’s also the third failing month in a row, the first time this has happened since 1992.

The rot spreads…

Needless to say, I believe that retail stocks will come up very, very short over the next few quarters. However, there is every reason to believe that this collapse will spread outward into other sectors.

The Commerce Department is reporting that inventory is backing up on store and warehouse shelves. And excess inventory inevitably translates into reduced orders for manufacturers. Thus I also recommend that you move away from the industrial stocks that feed into retail.

But it doesn’t end there. This precipitous drop in sales and orders means that stores and manufacturers are laying off workers willy-nilly. And when you either don’t have job, or don’t know if you will have a job, you stop buying (and charging: consumer borrowing has hit a 10-year low).

This roundelay should sound familiar to any investor old enough to drink legally. It is the formula for an entrenched recession. And in point of fact, Professor Roubini joins me in this assessment.

A two-year recession – if we are lucky!

In a way, he is optimistic: He notes that IF we do the right thing (certainly not a given), we just might avoid Japan’s fate, and get away with a mere 24 months of negative growth while the weak hands and walking dead are weeded out of the system.

And now, I am going to say something shocking. It will seem almost contradictory to everything I have just said.

If you can find a company that is not rotten inside, then by all means, buy its shares!

First of all, it almost seems like a patriotic duty, indeed even a human requirement, to support the guys that didn’t drink the Kool-Aid and debase their company and rip off their stockholders.

Investments that will make you proud

These are the companies that you will be glad and indeed honored to own in the decades to come. The gains you make off these straight flyers will in all probability put your kids through college and allow you to retire in style.

And over the next 24 months, they will be available for pennies on the dollar. However, there is only one safe way to acquire these shares in a market this crazy: You simply must buy put option contracts against the worst of Wall Street at the same time.

Stops simply won’t work in this volatile market. But puts will, because their gains will allow you to continue to accrue a portfolio of winners, no matter how bad they are treated.

As I have mentioned repeatedly, this strategy has set up WOW readers for triple-digit gains on virtually every open position in our portfolio. Many of my put contracts have tripled in value. Some have increased fourfold. Can you imagine how gains like these could protect your long portfolio?

As I said earlier, I have perused the histories. I have read the statements. I have looked at the charts. And this is the only path to sanity that I can map out for you.

Please allow me to take a moment to correct a misapprehension on the part of some TD readers: Believe it or not, I do not necessarily enjoy telling you all this bad news.

I may be bearish, but I am NOT a cheerleader for bad times. I do not gloat when good folks see their fortunes go down the tubes. In fact, the news these days makes me sad, very angry and more than a tad nervous.

I tell you these things because I must — I simply must — because I cannot stand to see the wool pulled over folks’ eyes. I just can’t stand it when these Wall Street crooks rip folks off. And I cannot abide it when politicians of any stripe try to steal away your rights in the dark of night.

And if I can help just one other person to protect themself from these shills and con men, if I can show anyone how to protect their portfolio against life-changing losses, then I will rant, rave, contradict and instruct ‘til they take away my typewriter and cart my sorry behind away.

Source: ‘Where’s the Bottom?’