The World in 3D

Deleveraging, deflation, depression and your own "panic room" full of gold...

ASHES TO ASHES, dust to dust, writes the ever-cheerful Dan Denning of The Daily Reckoning Australia. Energy to matter and back again, except in this case today, capital is simply being destroyed rather than becoming economic energy.

That is the real cost of the preceding credit bubble. Capital is now become scarce. Good projects can't get money. Governments suck up the world's remaining savings to borrow for its inefficient stimulations.

It is a world in 3D – deleveraging, deflation, and depression. Financial markets witnessed the first loss of liquidity which led to deleveraging. That gives you US stocks at 11-year lows and the main Australian indices breaking down through technical resistance at 3,500.

What makes it so unpredictable now is that – in a balance sheet recession – what causes a given firm or trader to reduce his assets by selling them is also entirely unpredictable.

Insurance companies, pension funds, college endowment, super funds...they all have their own private balance sheet catastrophes. What they have in common is that every one of them is going to pick up the phone at some point and say "sell." This is why you see historic volatility on the indices.

The deflation is taking us back to mid-1990s levels on world stock markets. It connects to the real economy when firms have to cut costs to try and shore up the balance sheet. Reduce expenses. Fire people. Reduce inventories. Thus falling consumer and producer prices.

But sacked employees are consumers. And not only will they roll back consumption when they leave the work force, but the entire process of deleveraging and downsizing has a psychological effect on everyone else left in the work force. Seized with fear, consumers go on strike. They save. The economize. Private demand collapses. Depression ensues. The world in 3D.

What can you do in this situation? For the last week, construction crews have been drilling, excavating, and digging in one of the flats next to Old Hat Factory. The din is persistent annoying. We wondered what must be going on. Then it hit us. They must be building a financial panic room!

What is a financial panic room, and what goes in it? Well, it's a room – metaphorical, if you must – in which you could stash all your assets to ride out the duration of the bear and the depression. They would be safe and some secure from further damage. You would also have water, tinned food, and some good books (The Law by Bastiat, Human Action by Mises, What Has the Government Done to Our Money by Rothbard, and Twenty Thousand Leagues Under the Sea, by Jules Verne).

Building a safe panic room is easier said than done. It depends on what kind of assets you have to begin with. At this point, you'd want to get into a discussion with your spouse, partner, financial planner or accountant on the right mix of assets. More cash, a lot fewer shares, some inflation protected bonds, a portfolio of premium stocks with cash and little debt, and of course, Gold Mining shares, Gold Coins, Gold Bullion, and gold jewelry...plus, perhaps, a little silver.

Your asset allocation is a highly individual subject, of course, and it's not something we can advise you on. We would simply suggest it should be a matter of conversation if you haven't already made these decisions. And locking away a portion of your wealth – in a panic room, somewhere safe – might just help see you through.