The Best Time to Panic is Before Everyone Else Does

Baby Boomers it is now time to Panic. I don’t mean the uncontrolled hysterical panic of absolute fear. I’m talking about a controlled panic even if that sounds like an oxymoron.

Panic gets your adrenalin working and makes you more alert. It’s then a fight or flight choice.

You need to take the flight option right now. Figuratively speaking you have to run away from this catastrophe and take as much of your wealth as you can.

Why?

Because the another shoe still needs to drop – the Credit Default Swaps or CDS’s. It seems in the US alone there are over $60 Trillion CDS’s that have to be unwound. That dwarf’s the Sub Prime Mess by about 60 to 1.

What are Credit Default Swaps?

“Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It’s supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

Except that it doesn’t. Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded — or swapped — from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends — the insured and the insurer.”

This is a mess of mega proportions and will need to be fixed. So panic now and try to get out of the way.

What the governments are doing now it well meant and might fix the problem. But what if it doesn’t? You need to plan for that eventuality.

It is in your interest to try and put some cash into the banks as the first back-stop if things turn bad. It is also in your interest to have some gold stored where you can reach it if things get really bad.

No one knows what the fall-out will be as the CDS’s hit the fan. So try to protect yourself as best you can for at least the short term.

2 Responses to “The Best Time to Panic is Before Everyone Else Does”

  1. Will says:

    Once upon a time, in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

    The villagers, seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort.
    He further announced that he would now buy at $20 for a monkey.

    This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so small that it was an effort to even find a monkey, let alone catch it!

    The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

    In the absence of the man, the assistant told the villagers. ‘Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35, and when the man returns from the city, you can sell them to him for $50 each.’

    The villagers rounded up all their savings and bought all the monkeys.

    They never saw the man nor his assistant again, only monkeys everywhere!

    Now you have a better understanding of how the market in Credit Default Swaps works

  2. admin says:

    Will,

    Thanks for a great story that provides a little levity during this time of financial crisis.

    I was actually looking for a way to explain CDS’s in a simple and informative way but your explanation is also entertaining.

    Thank you

    David

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