Despite the current, volatile environment, though, the expert team at Casey Research maintain their core prediction: that a highly inflationary cycle is not far off. While we, along with several external experts, continuously review our assumptions and conclusions and encourage dissenting opinions and analysis to avoid biased conclusions, so far we keep returning to our views about what’s coming. That said, the hardest thing to predict is not what will happen, but when.

The way I see it, the swift, far-reaching and mostly ill-conceived reactions from most of the world’s governments under the leadership of two apprentice sorcerers (Bernanke and Paulson) have until now resulted in a widespread run for an exit to nowhere, a deep credit freeze, and total and indiscriminate mistrust in the market and all of its players.

The fact remains that in the last year, many principles that have long been rooted in the success of capitalism have been thrown out of the window.

• First, market players discovered that the longest-lasting asset bubble in recent history was made possible by poor regulations (as opposed to lack thereof), greed, and the misunderstood and misrepresented risks of credit derivatives.
• Second, we found out the real meaning of “too big to fail.” If a business is large enough and has enough clout, it doesn’t matter how poorly managed it has been, it will be bailed out at the expense of taxpayers (us) and investors (us again).
• Third, we found that the rating systems the financial markets had been relying on have been misleading investors and failing to identify some of the riskiest asset classes. As a result, investors and all other economic agents are left with no means of evaluating risk as they conduct business, hence the credit freeze and rush to cash.
• Fourth, to add to the confusion, the U.S. Fed and Treasury, followed by many other central banks, have been altering the rules of the game by the minute (buying toxic waste at face value, bailing out certain financial institutions but not others, becoming shareholders of several behemoths in the banking and insurance industry, and trumping all accepted rules of creditors’ and stakeholders’ priority, prohibiting the shorting of certain classes of assets on a moment’s notice).
• Last but not least, the U.S. presidency, weakened by almost eight years of mismanagement, has continued to show total lack of leadership. It has empowered a couple of technocrats to run the country’s finances without leadership until a new administration gets in and, hopefully quickly, figures out what to do. To make matters worse, the EU has shown its ugliest face and demonstrated a fact we all truly knew but didn’t want to recognize until recently — that economic unity and coordination is easy in good times but almost impossible when the going gets tough.

No wonder economic actors are wreaking havoc as they race for shelter.

Add to this the fact that all natural resources have been hammered by the combination of a credit freeze and lower real and anticipated demand from most industrial nations.

Finally, junior exploration stocks – being very thinly traded and rightfully considered to be in a higher risk class — have been hammered twice as hard as the rest of the markets (hence the performance of the TSX-V, which has lost 76% in the last year and 30% in the past 30 days alone). The fact that many hedge funds had to unwind large positions in such a small market certainly did not help values.

What does this mean for investors in this market?

We all have suffered significant losses in our portfolios, and although our choices may have reduced some of the downside, quality companies have been hit almost as hard as fly-by-night juniors with no future.

Several of our companies are trading at or below cash value and get no goodwill for the significant assets and outstanding management teams they have assembled.

Although there is no way to tell when we will hit a bottom in these markets, we believe that once tax-loss selling season is over and reality settles in, we will see the beginning of a slow recovery process for the best of the juniors. Investors who have the ability to stay the course and are invested in the highest-quality juniors will recover from their losses and benefit from what will eventually be another bull market in commodities.

Precious metals and agriculture, followed by certain segments of the energy sector, will lead the way to widespread price increases across the range of commodities. While we can’t predict the exact timing of this run, the fundamentals are in place once the world economies take a turn for the better or at least stabilize somewhat.

Here is why:

• The current crisis is taking tremendous amounts of needed capacity off the supply pipeline. Whether it be energy, base metals, or agricultural goods, projects to bring online expensive oilfields and alternative fuel sources are being shelved and will take years to get back on track. Mines are closing and projects are being canceled, thereby removing much of the supply; the credit squeeze is cutting down on agricultural investment, and working capital constraints will dramatically limit supply.
• The world’s demographics are not changing, nor are the aspirations of a hard-working, fast-growing middle class in emerging economies. The changes that drove commodity markets up for the last few years are long lasting and real.
• Peak Oil and peak-everything. There is limited supply for many commodities, and although there are alternatives (curbing consumption and finding alternative sources of energy), it takes large investments to do so. In current markets, many of these investments are going to be put aside until the next crisis/shortage hits – at which point we will have years of a commodities bull run before an equilibrium is reached.
• We anticipate that China, Russia, and India will take advantage of low commodity prices to secure very large, long-term supply commitments while the Western world licks its wounds and tries to recover. By the time we do, an even larger portion of the world’s available resources may no longer be available on the markets, for example oil and gas.In the last edition of Casey Energy Opportunities, Marin Katusa pondered how the U.S. is going to replace the supply of uranium when the HEU program with Russia is set to expire in 2013. The answer is that the U.S. will struggle to replace 40% of its needs, and this will benefit a handful of U.S. suppliers with proven reserves. Currently shares of these companies, which have the cash to develop resources or are already producing with positive cash flows, are incredibly cheap – a win-win situation. Eventually similar opportunities will come from copper and strategic metals.
• We can expect the world to continue to be a very unstable place, where regional conflicts can quickly spread and spin out of control, with obvious impact on the smooth supply of key commodities (Gulf region, Nigeria, former Soviet republics, to name a few). In fact, a widespread financial crisis could precipitate those events as conflicts are often linked to economic hardship.
• The unprecedented deficits, a wave of bailouts, and growth in the money creation by central banks in the Western world will eventually lead to massive inflation. In the U.S. alone, the monetary supply has increased by 50% since early September. This will unequivocally reverse the current short-term deflationary pressures and lead to a steep devaluation of the dollar and other major currencies. At that point, precious metals and all tangible assets are poised for a strong recovery.

So, if you ask me if I am still bullish on the resource sector, my answer yes, now more than ever. Juniors are juniors, and when things go wrong, they get beaten down. The strong ones with great teams and lots of cash will survive and prosper, the others will disappear. When commodities come back with a vengeance, there will be fewer companies, almost all with good projects… and those who are invested in these few companies will see a very sizeable appreciation of their capital as the broader public returns.

It’s very hard to be a contrarian investor, especially when all forces seem to be against you, but one thing the markets have taught me is that memory on the Street is unbelievably short, and they will come back.

Not only is the economy presently going haywire, there’s also still the boogeyman of Peak Oil looming on the horizon. While oil prices are at a low not seen for a while, it is all but certain that this sweet relief for motorists won’t last very long.

When oil prices come roaring back, the energy market will virtually explode… and,  if you are safely positioned in the right stocks by then, your bank account will too. Learn more about how being a contrarian investor can earn you a fortune – click here.

Source: Lost Principles

Credit losses could reach $2 trillion. That translates to $10 trillion of liquidity wiped out, using a very conservative estimate of leveraging (Lehman Bros (NYSE:LEH) had a leverage ratio of over 30 last year).

Charles says we could be entering the biggest deflationary period since the Great Depression. The best protection lies in top grade corporate bonds.

This from Investor’s Daily Edge:

One day you’ll hear about an $8 billion fund going under. Yet, if it’s a mutual fund or hedge fund that loses the $8 billion, then it doesn’t seem like much. After all, some funds have in excess of $100 billion in assets.

Freddie and Fannie both control nearly half of a $12 trillion mortgage market. Suddenly, even $80 billion seems like a pittance.

Yet, this is still nothing.

China has currency reserves approaching $2 trillion. The FOREX market has about $4 trillion flowing through it. The US GDP hovers around $13 trillion. Global GDP is a little over $54 trillion.

Eh, that’s still not that much money. Want to see a big sum of money?

The global derivatives market is worth about $516 trillion.

With sums that large, it’s hard to feel moved by $500 billion in bank losses. Yet I’m still amazed when people assume that we might only lose $500 – $600 billion.

The mortgage market is worth about $12 trillion. Consumer Credit in the US alone is about $2.59 trillion. So far, the losses we’ve seen are only 3.4 percent of the consumer credit and mortgage credit available.

Do you think the biggest real estate slowdown we’ve ever seen… combined with the biggest bailouts the government has ever made… will only create losses of 3.4 percent of the total mortgage and consumer credit out there?  Not a chance.

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Losses will grow as more people miss their mortgage payments. Defaults will grow as credit card debt overwhelms people who just lost their jobs. Defaults will grow as more banks, mutual funds, and hedge funds fail. This doesn’t even account for the losses both Fannie and Freddie will accrue while under government ‘conservatorship’.

The government has promised to infuse a combined $200 billion into these companies should they need it. And that doesn’t include the $2 billion in preferred shares that the government bought. You can be sure that if they need even more money, the government will give it to them because they now have a vested interest in not allowing these institutions to fail.In all, the government wants you to believe that a portfolio of over $5 trillion mortgages, in the midst of the worst real estate slowdown since the great depression, will only lose $200 billion. That’s less than five percent.

Does Uncle Sam think we’re fools?

This is what we’re dealing with: One of Washington Mutual’s Alt-A (no doc loans) mortgage pools (WMALT 2007-0C1) is showing 25 percent of its mortgages as 60 days late, and 13 percent of them are in foreclosure.

This pool was originally rated AAA, but looking at its condition right now, you’d have never guessed it.

Defaults on credit cards are rising. Defaults on mortgages (all types, even prime) continue to rise. Commercial property defaults are moving higher. Corporations are maxing out their credit lines, and corporate defaults are picking up.

It doesn’t sound like an end is near for credit losses.

You should expect them to rise well over $1 trillion. They could hit $2 trillion or more by the time all is said and done.

Of course, what isn’t mentioned is how all of this credit was leveraged. If we are conservative and estimate that this credit was leveraged by five times, then a $1 trillion credit loss turns into a $5 trillion liquidity loss. A $2 trillion loss becomes a $10 trillion liquidity loss.

$10 trillion is only $3 trillion shy of being as large as the US GDP.

You can imagine the effect that type of loss would have on the global economy. Actually, you don’t have to imagine too much, because it’s going on right before your very eyes.

This deleveraging could turn out to be one of the biggest deflationary events since the Great Depression. So I hope you are prepared for it.

Financials will continue to get slammed in the meantime. Commodities won’t have the same ‘fire’ we saw over the past few years. And debt-heavy corporations will find it harder to roll over their bonds.

I wish I could give you the answer du jour – to buy gold and silver. But gold and silver don’t do well in deflationary environments. So I expect them to underperform over the next twelve months.

The truth is, picking stocks in this environment is going to be rather difficult. As money disappears from the credit markets, the deleveraging it causes will bring down the overall value of stocks, commodities, and real estate.

Financials will continue to get slammed in the meantime. Commodities won’t have the same ‘fire’ we saw over the past few years. And debt-heavy corporations will find it harder to roll over their bonds.

I wish I could give you the answer du jour – to buy gold and silver. But gold and silver don’t do well in deflationary environments. So I expect them to underperform over the next twelve months.

The truth is, picking stocks in this environment is going to be rather difficult. As money disappears from the credit markets, the deleveraging it causes will bring down the overall value of stocks, commodities, and real estate.

My only recommendation to you is to begin looking into bonds. Because very strong companies have bond yields that boggle the mind. I’m talking about eight to nine percent in interest alone.

In a market where most assets are falling, the corporate bond market is one of the safest places to put your money.

Luckily enough, we found a way to get you names of very high-quality bonds, with above-average yields, and very little interest rate or default risk.

Just go here to find out how to get more information absolutely free.

Source: A $10 Trillion Problem