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Rick Rule continues:

“If we have $85 trillion in net present liabilities at the Federal government level, how is it going to make it better by taking it up to $87 trillion or $88 trillion?  I think you see this manifested in the market, Eric.  The transaction would seem to be that the Fed, in some way shape or form, adds short-term credit to the banking system, and then convinces the banks to buy government securities.

There are a whole bunch of strange manifestations of this....

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“One of those strange manifestations is that corporate balance sheets are in extraordinarily good shape.  Public corporations are reported to have $1.5 trillion in cash.  The problem is they are afraid to invest the money because they feel the Sword of Damocles is hanging over them from the outside level of public sector debt.

The idea that the Fed can pump liquidity through the banks to get the corporations to start spending again isn’t going to work.  The reason for this is because the very set of circumstances that the Fed exacerbates, by adding more debt, is keeping the corporations from understanding.  It’s the opposite of a virtuous circle.

So these are very, very scary times.  What they are able to do by adding this liquidity to the system is foment a series of small, but spectacular bubbles.  Of course the other thing they are doing is furthering this war on savers.  These are truly strange times.

The question KWN readers might be asking themselves is, what do I do about it?  Despite the fact that you get almost no return by holding cash, I think it’s important for your readers to continue to hold reasonably large amounts of cash. 

The reason for this is because one possible outcome of all of this is a spectacular collapse of confidence, circa 2008, and having cash gives you the means and the courage to act in the context of that psychotic break.  And I would also say that it wouldn’t surprise me to see a psychotic break in the markets.”

When asked what to expect in the back half of 2012, Rule responded, “This is going to be a choppy and strange time.  We will have periods of extraordinary volatility.  The reality is that volatility is just going to come.  Right now we have major markets in denial.

I would also add that the junior exploration market is in complete denial.  We have a whole bunch of issuers that desperately need cash, but we have a market that won’t give them cash.  Companies that need the cash are stubbornly not willing to take the cash on the terms that the market thinks is appropriate.

The logical outcome to this, if it plays itself to conclusion, would be a lot of issuers getting suspended or thrown off the board (exchange).  Again, very strange times.  Having said that, it’s precisely in times like these that people who pick and choose and establish appropriate positions that will make absolute fortunes in a four or five year time frame.

When the dam breaks, and investors are able to do investing at the levels that are suggested by these markets, there’s going to be a spectacular amount of money to be made.   But you are going to have to have the cash and courage to get through the time between now and then.

KWN readers should also understand that I continue to feel like investors should own bullion.  I believe and consider bullion to be ‘good’ cash.  Gold is both a medium of exchange, but also a store of wealth, this makes it uniquely suited to act as a cash substitute.

While it is possible that we could see gold struggle if we continue to see money flow out of the euro and into the US dollar, in the intermediate time period, gold holders will feel pretty good.”

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with John Embry, Egon von Greyerz, James Turk, Dr. Stephen Leeb, John Hathaway and legendary Art Cashin ($612 billion UBS) are available now.  Also, be sure to listen to last week’s line-up of other KWN interviews which include Gerald Celente, Don Coxe ($538 billion BMO) and Eric Sprott by CLICKING HERE.

Eric King

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