Great Depression 2.0: You've Got Nothing

What was a recession is now starting to look like a full blown depression. Bank of America BAC is being sued by AIG AIG for $10 billion. This is both ironic, hilarious and depressing, as AIG nearly caused the financial crisis in 2008, and could lead to starting another with this lawsuit. Shares of BofA are under $7 as of the time of this writing, and it looks like it could go even lower. We feared having the government default, luckily it did not happen, although confidence was badly shaken over the debt debate. We feared having a downgrade of U.S. debt, and unfortunately we got it Friday night. S&P downgraded the U.S. debt from AAA to AA+, and it is not likely to get the AAA rating back anytime soon, perhaps ever. It's almost as if Friday, August 5, 2011, was the official start of the end of the U.S. empire. A troubling day in the history of this country. Earlier in the summer, David Rosenberg, chief economist at Gluskin Sheff & Associates, said there is a 99% chance we are headed for another recession by 2012. Many laughed him off, some thought it was likely, and few thought it would happen so soon. As we have seen the impact of the S&P downgrade across the global financial markets, there continues to be one trade only that is working: go long U.S. government debt. With the U.S.'s ability to print money, there will never be a default on U.S. debt, so long as Washington does not screw it up. We can inflate our way to paying debt, even if it means crushing the value of the U.S. dollar to do so. Even if the Federal Reserve does announce a QE3 this week, or at least hint at it, it is doing nothing but pushing off the inevitable. The same thing happened in 2009 and 2010, and will continue to happen until the system is allowed to purge itself. It is going to hurt, and unemployment could go to levels no one can imagine. Austerity hurts and it needs to happen. As such, earnings will likely not be as robust as many thought they would be in the second half of 2011, and 2012. As such, we have seen the Dow fall 1,600 points in roughly two weeks. Oil has firmly entered bear market territory, and gold is soaring to over $1,700 an ounce. What looked like a bleak possibility only a few short months ago is becoming a terrible reality. We probably will see some kind of recession or depression like scenario in the next few years if governments around the world can not figure out how to get rid of excess in the system and make structural changes that need to be made. No one wants to see people at soup kitchens, or on the unemployment line, but it looks like that may be an inevitable outcome if it does not get better soon. Great Depression 2.0. You've got "nothing." ACTION ITEMS:

Bullish:
TTraders who believe that the U.S. economy will rebound sooner rather than later might want to consider the following trades:

• If we get a rebound in economic numbers, we could see stocks rally sharply. Pay attention to names like IBM IBM, Caterpillar CAT and other major global economic players.

• Also consider looking at the banks. If Citigroup C, J.P. Morgan JPM, etc. start to rally, we could be in for a humongous rally.

Bearish:
Traders who believe that the world is going to experience a global depression may consider alternate positions:

• Go long arms, canned food, bottled water and other disaster-type scenario necessities. Also consider going long gold, which you can do by buying SPDR Gold Trust ETF GLD.
  
  

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