The Dow Jones: Why You Definitely Should Not Hold Cash

If you don’t understand what’s coming…you’ll lose more than just your shirt before 2020.

We’re facing an emerging markets debt crisis, global sovereign debt defaults, sovereign wealth and pension fund collapses, thousands of bank collapses, a gigantic stock market crash, and a massive property crash. Indeed, the word you’re looking for is contagion; this is the future we face before 2020.

Thankfully, there’s a way to avoid what’s coming. You need to be in the right asset class and at the right time. And if you think you can protect yourself by holding cash in any bank account across the world…think again!

When I wrote cash is no longer a safe option, I showed you how global politicians have plans on taking 10% of everyone’s bank accounts during the next financial crisis. Yes, Aussie politicians are in on this game. Well, as you’ll see below, this situation has spiralled out of control — it’s a lot worse than even I had thought.

Thanks to the IMF, the rules of the game have changed — deposit holders globally are no longer safe. Expect for banks and governments to take a lot more than 10% of your savings. Thanks to the new policies, expect to lose much or possibly all of your savings. What I’m about to show you is a very serious problem for people who deposit cash in the bank.   

With that in mind, let’s wind back the clock for a second…

Recent history shows that, thanks to global government bail-outs, looming bank collapses weren’t a concern for deposit holders during the financial meltdown of 2008/09. Bailouts meant that the government (AKA the taxpayer) provided liquidity (bailouts) to keep the banks alive. Your savings were safe.

The days of bailouts are over. Welcome to the NEW world of bail-ins.

The EU has already enacted bail-in legislation — Cyprus was the test case. Bail-ins are coming down under soon. When Cyprus’ sovereign debt collapsed in May last year, European politicians thought it would be a great idea to steal 10% of everyone’s bank accounts to pay for it.

But this wasn’t enough for the arrogant politicians…

After the G-20 meeting in Brisbane earlier in November 2014, the rules of the game changed forever. You may or may not wish to read the following…legal jargon. According to an International Monetary Fund (IMF) paper titled ‘From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions’ (with my emphasis):

[B]ail-in . . . is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution.’

Don’t worry if your head is spinning from the legal talk, you won’t be alone…

In simple English, the new bail-in laws pretty much say:

If banks seem like they may be in financial distress (i.e. financial crisis of 2008/09) and don’t have enough capital to live another day, they will be allowed to ‘steal’ all unsecured deposits. The term ‘unsecured deposits’ includes every bank deposit — the largest class of unsecured debt of any bank.

Said more simply, the cash that you deem ‘savings’ is no longer yours. ‘Your’ cash, under the new rules, belong to the banks. The insolvent bank is to be made solvent by turning our money into their equity – bank stock that could become worthless on the market or be tied up for years in resolution proceedings.

This means that if a bank’s capital and share price crashes by 80%, the bank could meet this capital void by taking 80% of your savings!

These are the new rules of the game discussed behind closed doors during the G-20 meeting last year. I’m surprised that the mainstream has said little to nothing about this!

In my view, this is an absolute disgrace. I don’t know about you, but I’m outraged that politicians think they can keep taking what isn’t theirs, and then claim it as their own!

The Australian government has attempted to ratify IMF bank bail-in laws. Joe Hockey, Australia’s Treasurer, and David Murray, Financial System Inquiry Chair, believe that the bail-in law is a great policy and are shipping the new rules to Australia.

Australia’s big four banks control around 80% of household mortgages, equivalent to one-third of Australia’s gross domestic product. There’s no doubt that Australia’s big four banks are winners of the ‘too big to fail’ status.

Australian banks were saved from the global financial meltdown of 2008/09 because of aggressive Chinese stimulus policies. These policies ensured that there was plenty of work for everyone. And, for this reason, Australian property did not experience a crash.

That being said, and this may be fresh news to you, the supposedly ‘sound’ Australian banks nearly went bankrupt during the financial meltdown of 2008/09.

Some of the big four banks were unable to repay their enormous foreign debts. As a result, they had to beg the government to go guarantor for new foreign borrowings to roll over their existing loans. The banks told Rudd that without the government guarantee, ‘they would be insolvent sooner rather than later’.  

Things haven’t changed to this day. In fact, I’d argue that the banks are more leveraged than ever before. 

If I were you, I would plan for the worst. Don’t expect smooth sailing next time around. China is highly unlikely save us from the next financial crash. Considering the coming financial storm, there’s a real risk that we could see massive financial losses stem from the big four banks. And this could lead to one or more of the big four banks collapsing.

Assuming a collapse, under Australian laws, the government guarantees $250,000 for every deposit holder. Other countries have guaranteed different amounts. 

But is this really something to celebrate about? Keep in mind, superannuation funds (which likely hold the majority of your savings), property offset accounts, and business bank accounts all hold funds well over the insured limit of $250,000. 

Most state and local governments also keep far more on deposit than $250,000.

See the potential for a big crisis down under? The next financial crash could evaporate a lot of savings. The next time a crash comes, governments will likely use a combination of bailouts and bail-ins. The new bail-in laws will destroy jobs and the financial system. These new rules will lead to more deflation and higher taxes. These policy puppets in government really have no idea.

Arrogant politicians and policy makers are destroying the world economy inch by inch. If we keep going along this road, everything the world has built after the Second World War will be destroyed.

The western world’s economic future looks worse than the Great Depression of 1929-33. If you didn’t get to check it out, I wrote about why this is the case late last year (see here).

Thankfully, it’s possible to avoid what’s coming by investing wisely. This means, first, investing to avoid the massive sovereign debt defaults coming 2016/17.

You can do this by buying quality equities and gold stocks at the right time — the time to buy is coming. Diggers and Drillers readers will know when this time comes. I wrote extensively about what’s going on with gold this week.

With this strategy in mind, we’re about to see a gigantic switch from debt markets into equity markets. The US Dow Jones will lead the world, catapulting towards 26,100 points by year’s end (see here for technical analysis on the target). The Aussie market will follow towards 6,000 points by year’s end.

Gold doesn’t offer yield. And it will be smashed by the bullish US dollar.

When gold was trading at US$1,350 per ounce in August 2014, I explained to you how it’s falling to US$931 this year. It’s now trading at US$1,263.40 per ounce. I’ve shown Diggers and Drillers readers a detailed monthly analysis on gold and silver. If you’re interested in knowing where gold is heading this year and when to buy it, click here.

The only game in town is equities.

Have a look at the chart below. It tracks the Dow Jones Industrial Index. Each bar represents one day.

Source: Diggers and Drillers;
Click to enlarge

The chart shows you that the Dow Jones has been in a strong bullish uptrend since 2011. The blue channel lines have held the Dow’s trading pattern relatively well over this time period. Once the Dow moves above the upper blue channel on a weekly close (now 18,500 points), it’s game on for the 2015 equities bull market. The year-end target exists at 26,100 points (see here).

Keep in mind, the Aussie market should follow the lead of the US. However, thanks to the anticipated glut in resources this year, I see a target of 6000 points for the ASX 200.

As I wrote last week, I still see the chance of a minor correction before 22 of January 2015. After 22 of January 2015, we’ll see the market break through 18,500 points. Although, I expect this level to be broken during the second week of February. In this case, the correction will not last.

That said, we’re possibly seeing my forecast of a minor correction play out in real time.

I’ve been banging on about the 17,274 point level since last week. I said last week,

Given the bullish trend, I now see the 17,274 point level as far more important for the weekly close. A weekly close below this level should see the Dow trend lower next week.

17,274 points is the level to watch this week. If we are nowhere near this level at the end of this week, it’s unlikely that we’ll decline much lower next week.

This analysis remains accurate for next week. Right now, about the 17,274 point level is the most important number you need to know.

Last week’s we saw a decline to the 17,274 point support level (shown by pink horizontal line). On Wednesday this week, we bounced of this bounced off this level. Needless to say, 17,274 points is a major support level. 

If we do dip and close below 17,274 points, we may only see another retracement to the red trend line. The red trend line has acted as strong support over the past year.

For a correction to take place, I’d like to see the Dow close below the red trend line. We’re very close to this level. A daily closing below 17,130 points this week would likely send the Dow lower next week. This target moves to 17,174 points next week.

A breakdown of the red trend line should see the Dow Jones re-test the lower blue trend line. This target represents 16,350 points next week. Under this scenario, we should bounce hard off this level after 22 of January.

If we experience a correction, I’d expect we’d see a 17,000 point close on Friday 23 of January. In this case, we should break through 18,500 points mid-February.

The flipside is that the market turns bullish and breaks 18,000 points this week in anticipation of money printing in Europe. Money printing should be approved on Thursday next week. As money moves from European assets into US assets, we could then head towards the delicious 18,500 point target next week.

The question is…what will the anticipated Grexit do for overall market mood in the next two weeks? I have a bullish gut feeling for a number of reasons. However, thinking about the consequences for Europe, punters may turn nervous heading into the Greek exit and sell. Whatever the reaction is, I’m not concerned in the slightest.

This year will mark a tremendous buying opportunity for quality resource stocks. After getting crunched this year (see here), the resources bull market will restart in 2016. You make big money buying quality when everyone else sells in panic. Check out Diggers and Drillers to see what sectors I’m bullish on this year — I’m bearish on almost everything. 

The bottom line is that the Dow is making a very bullish setup for 2015. The market is extremely bullish. Sometime around 22 January 2015, you’ll see an explosive blast to the north as we head towards 26,100 points by year’s end. The Aussie market should follow — to the 6000 point level.


Jason Stevenson,
Resources Analyst, Diggers and Drillers

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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