Do Not Mistake This the 2nd Liquidity Bubble for a Recovery – Wall Street Underground

By Nick Guarino | April 9, 2010

In 2008 through March 2009, the economy and markets wiped out. Just as we predicted. The banks and financial institutions we told you ahead of time would collapse, did so.

After that I had a brief glimmer of hope. There was a small chance that government really would set up the “bad bank.” That they would use the TARP and bailout funds to clean up the massive, derivatives-magnified bad debt. And they would rein in this uncontrolled irresponsible market manipulations by the worlds biggest financial institutions.

I had a brief flicker of hope that maybe just maybe the mega-financial institutions would take the bad loans off their books. Unwind the trillions in incredibly stupid, highly leveraged bad paper they all held en masse.

At that time when the last bubble burst we closed out our positions. We did quite well. And we stood back and watched. I soon realized the truth: they were trying the most insane “solution” possible to the crisis.

They were not going to liquidate their derivatives. The toxic money-losers that wiped out the world’s biggest financial institutions. Even though that was the specific purpose for the bailout money. So much for their promises.

Instead they turned to the horror of horrors. The institutions would be allowed to hold their mega-money-losing trades. They could even use the bailout funds to make more of the same derivatives trades!

This is known as doubling down. And that is what they did.

I knew this would create even bigger bubbles. Bigger trading opportunities, if we were right.

There was no chance real estate could recover. The damage to that market was too great.

Fannie Mae and Freddie Mac hold 50% of the nation’s mortgages. They are leveraged 100 to 1. They had already gotten hundreds of billions in bailouts. Congress just increased that to over a trillion dollars. Not enough. They are still losing their ass.

So you could forget about the pretty rescue/mortgage-workout tinsel working. The bloodbath in the housing market would continue. That is happening now. It will keep collapsing for some time. Remember, 5 to 10 cents on the dollar will be the bottom.

I also knew the bankers, Wall Streeters and politicians were beyond desperate. They would try to drive up every market they could get their sleazy hands on. I told you bubbles would occur in gold, oil, the dead-broke financial institutions, and the stock market.

I knew as the bubble grew bigger, more people would get fooled. They would buy into the recovery b.s. Stocks, gold, oil and bonds would go against us. So our strategy was clear.

Pick the instruments that would do the worst as the bubbles grew. When the bubbles burst, those instruments should do the best.

I was not about to make the mistake of trying to pick the peak, by buying in all at once. Instead, I recommended you layer in these instruments (i.e. buy positions over time, at different price point) a little at a time. At each purchasing point, you should add 25% of the total amount you want to trade with. That would give you even better bargains as time went on.

This also involved my most difficult job. Gauging how big the bubbles would get. How long they would last. And planning a strategy that would let us accumulate and hold positions that would do the best.


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