Seventy years ago on this day, Japanese armed forces attacked the US naval base at Pearl Harbor, effectively marking the beginning of the United States' direct involvement in World War II.  While we take today to remember this historic and tragic event, I would now submit to you that our country will soon face another Pearl harbor-style event, but this time of the financial sort.

Put another way, we are up against the ever-increasing possibility that our country will suffer a crippling blow financially, with an impact not unlike the Pearl Harbor events of 1941.  The biggest difference may lie in the fact that our country recovered from the Pearl Harbor attack and emerged stronger, something I do not expect will happen now given the dire state of our nation's finances.

A quick summary/reminder of what we're up against:

1) A national debt that now exceeds $15 trillion.  We are paying approximately 3-4% interest on this every year, equating to interest payments of no less than $450 billion.  Servicing this debt will increasingly weigh upon our economy, and force future generations to work harder for less as we struggle to pay the interest alone, nevermind the actual principal.

2) Routine budget deficits totaling over $1 trillion a year, adding to the aforementioned debt.  Our government has promised us way more than they can deliver, and this is evidenced by the fact that every year our budget contains more spending than what we are taking in as a nation.  This is called "living beyond our means."  It's destructive, adds to the national debt, and must stop immediately.  Cessation of deficit spending means we will get less from our government for the same price for a while, but we need to accept that privation and stop selfishly pushing it onto our children and grandchildren.

3) Potential for further credit downgrades, increasing the cost of our borrowing needs.  S&P recently knocked the US credit rating down a notch, resulting in market turmoil, but curiously had no effect on our cost of borrowing.  That won't last forever -- as future downgrades are made, which we know they will be given our government's inaction on this crisis, it will eventually catch up to us and the interest we pay on our debt will go up. This means more of our country's wealth will be needed to make those interest payments, rather than being used for more productive means.

4) Economic productivity that hinges on consumer spending, to the tune of over 70%.  This is unsustainable, simply put.  When almost three-quarters of a nations' economic production is tied to consumers spending their income or going deeper into debt, a day of reckoning lies ahead.  We need to get back to producing exportable goods (read: manufacturing) and making the country more business-friendly, as opposed to forcing those businesses to move their operations overseas.  The obvious question here is, what happens when Americans are so strapped they can't spend anymore?  You guessed it -- the economy goes in the tank.

5) Dwindling job market that practically guarantees lower productivity from a GDP standpoint, declining tax receipts, and a lower standard of living for the American people.  The persistent 8-9% unemployment (and 16+% underemployment) rate says it all -- jobs have left the country and they aren't coming back anytime soon.  This reality has a severe ripple effect, since unemployed people pay less (or no) taxes, spend less money, add less (or nothing) to the nation's economic productivity, which leads to economic slowdown, which leads to more job losses, and so on...you get the picture.

If you listened to my November 27 podcast, you'll recall me saying that our political leadership will not address this financial crisis until it becomes a full-blown catastrophe, as they will then have the political cover to get away with any law or policy they wish to see instituted.  The September 11, 2001 attacks provide the best evidence of this impotent style of leadership, as Congress only passed the PATRIOT Act (albeit a draconian, liberty-killing law in and of itself) AFTER the Twin Towers and Pentagon had been struck, and Flight 93 had been downed -- not before.

Thus, you as an individual investor have to factor into your financial planning the fact that the government will allow this situation to reach catastrophic proportions before acting.  Creating some degree of defensiveness against everything from high inflation, dollar weakness/collapse, and a plummeting stock market would be a minimum level of prudence for today's investor.

Another month, another one of the PIIGS makes headlines for its impending financial meltdown.  (PIIGS stands for: Portugal, Italy, Ireland, Greece, Spain.)  This time it’s Italy, bumping Greece out of the news for the meantime.  The problem is, Italy’s situation is far more dire when viewed through the lens of the global economy.  The fact that Italy is Europe’s third largest economy alone would account for that fact, without even factoring in the growing strain all of these recent bailouts have placed on the EU.

Let’s back up for a second and see how we got here.

In general, the entire PIIGS crisis can be summed up with the following statement: the countries in question borrowed more money than they were making.  In slightly more technical terms, they borrowed too much relative to their Gross Domestic Product (GDP), to the extent that they are now unable (or having serious difficulty) meeting their fiscal obligations.

How did Italy get into this mess, specifically?  This article, titled “Italy’s Debt Crisis: Doomed by Corruption, Bloated Bureaucracy and Poor Productivity,” is a good primer on the basic reasons, and I’ll attempt to sum them up here:

1) First and foremost, perhaps as the general and foundational reason behind Italy’s woes, is the fact that it’s overspent by 1.9 trillion euro, or 120% of GDP.  

2) Corruption is widespread, with Italy’s Mafia accounting for nearly 16% of GDP.  (Obviously, this economic output isn’t necessarily optimized to aid the country’s growth.)  Tax evasion isn’t just limited to the criminals, as ordinary citizens have seemingly embraced it as a national pastime.

3) Bloated bureaucracy is an enormous cost unto itself.  Italy’s politicians earn 140,000 euro a year on average, and are driven around in executive cars (Audis, Maseratis, etc.) that cost the country 2 billion euro a year.

4) Italy’s education system is extremely poor, with only one of the world’s top 200 universities located in Italy (University of Bologna).  To underscore this, Italy’s unemployment rate for youth between the ages of 15 and 24 is a staggering 30%.

As you can see, many of Italy’s problems are systemic, and have gradually led the country into a worsening position financially.  The irresponsible government spending is really only the tip of the iceberg.

So where do things stand as of today?  Italy’s borrowing costs have rapidly increased over the last several weeks, hovering around 7% as of the writing of this article.  These government bond yields are a good yardstick for determining how unstable things have become, and it’s interesting to note that the other three EU nations that required bailouts (Greece, Portugal, Ireland) had also reached the pivotal 7% mark when they received emergency assistance.  These higher yields reflect investors' declining confidence that Italy can and will repay the debt.  Thus, they are seeking a higher premium for taking the risk of buying these bonds.

The outlook for Italian citizens is grim.  This past weekend, austerity measures were proposed that would result in a familiar combination of remedies -- spending cuts and tax increases – with the goal of balancing the budget by 2014.  Expect Italians to vehemently protest these measures.

External to Italy, I expect things to worsen significantly as we head into 2012.  The previous bailouts of EU nations have cost billions, and ultimately have done little to stem this contagion.  How much more money will the EU have to conjure up (read: print) in order to save Italy?  Not to mention the possibility of Spain and other countries requiring similar assistance in the near term.  

I cannot understate the severity of the aftershocks the collapse of Italy would cause for both the global economy and the US in particular.

Let’s walk through a possible vignette on how things could get ugly quickly if Italy goes down (keep in mind, this is a highly simplified example, and only one of many possibilities that could arise):  Italian bonds are bought and held by a wide variety of institutions around the world.  Let’s assume a host of Italian banks hold these bonds, and are informed by the Italian government that many of them will either only be paid back to a partial extent, or perhaps not paid back at all.  Several of these Italian banks would then presumably go insolvent, especially if they have high exposure to the bonds.  The same goes for other EU banks holding those bonds, as well as EU banks that had other types of holdings with the Italian banks that are suddenly failing.  Several of these EU banks would then go under, as well.  Here in the US, banks holding Italian debt, and/or invested in any way in the Italian and/or EU banks that are going insolvent, would also be subjected to potential insolvency.  As the EU collectively attempted to inject monetary assistance into the system, the very stress that cost would create would likely exacerbate the matter and trigger even more bank failures, insolvencies, and related bankruptcies. 

In other words, an enormous chain reaction would be set off.  If you think of the global economy as a massive series of interconnected/interdependent nodes, then you can begin to envision how the failure of several of those nodes begins to propagate negative consequences across the entire network.

This scenario would not be pretty for your investment portfolio.  Recent market perturbations and EU/PIIGS anxiety have already spooked the average investor, and this is just a taste of what’s to come.  Now is the time to review your portfolio and determine how much exposure you have to the kinds of systemic risks I’ve discussed here.  Gauge how high your risk tolerance is and then make defensive adjustments as necessary.  If you have extra cash, you might also consider betting that a collapse will occur, and invest in options or other high leverage instruments.  

Last week's jobs report, while not astoundingly good, was generally regarded as a good sign, as over 100,000 jobs were added in September.  The unemployment rate was listed as holding steady at 9.1%.  The purpose of this post is to clarify that unemployment figure.

The 9.1% refers to the number of people who actively sought/applied for a job in the given month, but did not secure one.  Thus, we can say that of every 10 Americans who can work, approximately one of them is looking for work and unable to find it.  That's bad enough, and one of the highest unemployment rates in recent memory.

But I don't think it's the most important figure being measured.  That one equates to 16.5% -- or the number of people out of work, including those who had sought work and/or have now given up, and are not counted as an "active" job seeker.  (This higher figure is also referred to as the "underemployment" rate.)  So with this number, we can say that if we brought 100 Americans into a room, about 16 of them would be out of the work force and/or not bothering any longer to get back into it.

That's a frighteningly high number.

Not surprisingly, the government doesn't advertise this number.  Obviously, they're incentivized to report the lower number, but it's done a disservice to the rest of us trying to grasp the scope of this problem and left most Americans unaware of how bad things have really gotten.

The next time the government releases these metrics (November 4), make sure to check the underemployment rate and not just the unemployment rate.

As our economy continues to struggle, with both parties in our political structure pointing the finger back and forth, I thought it might be helpful to dredge up an old article I wrote back during the 2008 Presidential campaign season (located on my previous blog, "Austrian School"), titled "Your Presidential Candidate Doesn't Matter (Subtitle: You'll Be Worse off Economically in 2016 No Matter Who Gets Elected)."

Now, I hate to jump the gun by five years, but I'm starting to feel like I was more right than I even imagined in the first place.  I suspect that if you had read this article of mine when it was first published, at the very least you were a bit skeptical...but now here we are, worse off than we were then, and all signs pointing downward.

While I encourage you to read the whole article, I did want to share and comment on a couple of excerpts here.  To begin:

To quickly summarize: when inflationary policies are instituted, and money is created out of nothing, that money flows to entities that can utilize it before its price-raising effects seep into the larger economy. These entities (investment banks, corporations, the wealthy) can invest it or capitalize it in a fashion that is advantageous to them, such as by investing in real estate, stocks, derivative investments (options, collateralized debt obligations), or anything else for that matter. Then when the added money trickles down to the consumer (read: you and I), we are left with one thing: higher prices. Less purchasing power. Smaller paychecks. Whatever you want to call it, it's not good.

I like this paragraph because it captures, in essence, this prescription we've received of more government borrowing/money printing/spending (through Quantitative Easing I [February 2009], Quantitative Easing II [November 2010], and Operation Twist [September 2011]), which so many of us take for the beginnings of an economic recovery.  Unfortunately, it is actually the poison that will eventually do us in.  It LOOKS good -- "Great! The government is actually doing something, they're helping us out."  It SOUNDS good -- "This government spending will create more construction/infrastructure/etc jobs."  It FEELS good -- "We've GOT to do something, we can't just do nothing."

But it is NOT good, and it will turn out very badly as time goes by.  Briefly said, it will ultimately achieve only the following:

1) Add to the national debt, burdening us with increasing interest payments over time in order to service that debt.
2) Contribute to devaluation of the currency, weakening the value of each dollar, lowering our purchasing power, and leading to a lower standard of living.
3) Crowd out more jobs than it creates; for every job created by the government, the fact that it had to borrow/spend to create it destroys 1+X jobs (we'll never know what the X is).

I also wanted to highlight this excerpt, the closing paragraph of the August 2008 article:

Allow me to proclaim with even more emphasis the following: no matter who becomes President - Barack Obama or John McCain - your economic situation will be worse after the presumptive two terms that individual will serve. By worse, I mean some combination of the following conditions: less home equity, devalued investments in stocks and bonds, lower purchasing power, less available savings, more reliance on credit to buy the essentials, you name it. It won't be pleasant.

Gloom and doom.  Yeah, I know everyone is tired of it, but it's way past the time to face facts.  The government does not have a shred of a clue how to fix the economy, aside from their misguided appropriation of our wealth and the subsequent redistribution of it.  And we see where that has gotten us today.

Actually, it's got to be somewhat unnerving for those who have put so much faith in the government's ability to aid an economic recovery, to see the ineffectiveness of these policies.  I honestly don't know how anyone could actually believe at this point that the government has a viable approach for fixing the problem.  Every policy has failed, and indeed has worsened the conditions under which we're subjected to economically (rising inflation, higher national debt, etc.).

I hate to say it, but at this point in looking ahead to the 2012 election, it really matters not who ends up President.  There is no political will nor ability to compromise on the big issues and problems to suggest that the economy will once again prosper and thrive.  The election season and campaigns will roll on with theatrical flourish, and you and I will continue to witness a declining standard of living.

Followers of this website know that along with Nassim Taleb, Peter Schiff is the other market and investing guru that I follow closely and have a deep respect for -- and so you wouldn’t be too surprised how happy I was to hear that he was given an opportunity to testify before Congress on the current economic conditions.  The testimony occurred back on September 13, and you can watch part 1 and part 2 of his testimony on YouTube.

Basically, Schiff sticks right to the same message that he’s been touting for years, and that he used as a platform for his unsuccessful Senate run in 2010.  The major points you’ll hear in the testimony:

-- The government is a net destroyer of jobs.  For every job we see created in the tangible sense, we have no way of estimating how many jobs were destroyed or stopped from being created due to the burden of higher government spending, debt, taxes, regulation and overall intrusion into the economy.

-- Stimulating the economy with more borrowed or printed money does not make for an economic recovery; rather, it lays the foundation for greater economic pain down the road, by acting as a “sedative” that delays the necessary corrective forces in the market, thus exacerbating them when they finally run their course.

-- Speaking as a businessman (Schiff owns and runs Euro Pacific Capital), he emphasizes the fact that he has been discouraged from hiring new workers due to the high-tax, high-regulation environment our economy is subjected to.  Schiff goes so far as to point out that he has now resorted to opening new offices/branches overseas (he mentions Singapore and the Caribbean) in order to escape the tax and regulatory burden here in the States.  Effectively, these are jobs the government has driven out of the country through various misguided laws and policies.

Of course, these are just a few high points from the testimony.  If you enjoy following Schiff, or want to hear an alternative argument as to how to truly stimulate the economy as opposed to the ones consistently put forth by the government, then I recommend you take a look at the video clips contained in this post.

“Printing money doesn’t deliver a triple-A rating.” -- David Beers, S&P Head of Sovereign Ratings

So the inevitable finally occurred this weekend -- Standard & Poor’s (S&P), one of the the three major credit rating agencies, downgraded the United States’ AAA rating to AA+.  Since the decision was announced, there’s been much wailing and gnashing of teeth at the audacity of S&P for insinuating the US should no longer hold the highest rating possible.  “How dare they” has pretty much been the refrain the last couple of days.

I say, what took them so long?  I mean, let’s face it -- the long term fiscal outlook for the US is awful, simply put.  Consider the following:

-- There’s virtually zero chance the US will ever pay back a single dime on the principal it owes on the national debt.  If I told you I had a couple of credit cards, I max them out all the time, and I never do anything but make the minimum interest payments every month and never pay into the balance, how eager would you be to lend money to me?  Probably not so much.

-- The US has $14 trillion of debt today, but this doesn’t take into account the trillions more coming due at the end of this decade and beyond for all the entitlement programs (Medicare, Medicaid, Social Security).  (I’ve read everything from approximately $50 trillion to over $200 trillion as the total cost of these programs.)  If the Congress and President can barely agree on how to cut $2 trillion (as part of the debt ceiling deal), then what are the chances they can deal with these enormous long term debt obligations?

-- The US economy is headed in the wrong direction, and perhaps permanently so.  The option of growing our way out of the debt problem, by being more productive and increasing the nation’s Gross Domestic Product (GDP), is looking more and more like a pipe dream.  Job growth is stagnant, with nearly one out of every two unemployed persons out of work for six months or more, and the eventual need to raise taxes will stifle job growth even more as businesses retrench.  Since our “productivity” relies heavily on consumer spending, a slowing economy and more limited borrowing ability (as a result of the credit downgrade) will further hamper any rise in GDP.  As GDP remains level and debts rise, our overall debt-to-GDP ratio will soar, a key aspect of the S&P decision.

To back up for a second, it’s important to understand what S&P is actually rating.  The grade they assign indicates the likelihood that the entity issuing the debt will pay back the obligation. At the same time, the rating tells the debt purchaser how much risk it is assuming in the transaction.  So the rating is intended to synopsize the long-term debt outlook for the entity being rated.  As the rating declines, debt purchasers can demand higher yields (interest rates) on the debt in order to compensate for the higher risk associated with the debt issuer, thus making it costlier for the issuer to borrow money.

What does this all mean to us as individuals in the US economy?  Well, as the US government’s borrowing costs rise, banks will raise their interest rates commensurately to keep up with the trend.  When banks raise their rates, this will affect everything from mortgages, to school loans, credit cards, personal loans, car loans and so forth.  You will eventually pay more interest to borrow money compared to today.

The credit downgrade signifies a sad day in our country’s history.  Once a great economic power, we’re now left in a position where our debt instruments are no longer considered the safest available.  We held that status for 94 years (since 1917), and never held a rating below AAA -- until now.   Some will have the urge to blame this development on the President, or his predecessor, or this Congress -- but the bottom line is the problem has been fomented over numerous decades.  Only now are we seeing a symbolic representation of this decay in our fiscal position as a nation.

Unfortunately, it probably won’t stop here.  With our long term debt outlook deteriorating year over year, S&P has indicated more downgrades may be coming.  With our debt-to-GDP ratio  projected to hit 101% ten years from now, such a development would warrant another downgrade, this time to AA status.

The best advice I could give right now is to liquidate as much debt as possible, as quickly as possible (assuming you have any).  While the downgrade’s effects could take years, you won’t be able to time when those effects hit, so you need to be protected well in advance.  In addition, as always, review your portfolios for exposure to assets that would most likely be weakened by the downgrade, such as the US dollar and US Treasury bonds, and hedge or short (bet against) these positions appropriately.  Again, the effects won’t come overnight, so you have to decide when the timing works best for you and your particular situation.

What are your thoughts on the downgrade?  Please leave a comment below or contact me directly.

I think we might be witnessing the last vestiges of the Keynesian economic model dissipating before our very eyes.  The supposed economic recovery that has been touted for the last several months is faltering in all-too-rapid fashion, and even the government's cheerleaders are sobering up to the notion that there might never have been a recovery to begin with.  The last few weeks have seen one disappointing economic report after another, and Friday’s job report drove the point home with uncomfortable emphasis.

It’s a momentous occasion, so it’s worth saying again: I think we’re witnessing the beginning of the end for the Keynesian economic theory.

John Maynard Keynes, an esteemed economist in the first half of the 20th century, maintained that government involvement in the economy was a healthy thing, and that money supply expansion during economic downturns was a viable option for reversing such downtrends.

Austrian School theorists have always maintained that Keynes had it all wrong -- money supply expansion was dangerous in terms of its propensity for causing inflation, and government involvement would invariably lead to market distortions and myriad unintended consequences for the whole of the economy.

For decades now, there hasn't been much in the way of hard and fast evidence with which to prosecute the Keynesian model.  However, the 2008 financial crisis, and the response to it since then, has placed Keynesian theory front and center, where it may now be subjected to the most rigorous scrutiny to date.

You see, the Keynesian response to the crisis -- the swift and unprecedented expansion of the money supply, on a scale never before attempted -- has seemingly produced little effect on our overall economic health.  Trillions of new dollars pumped into circulation (quantitative easing, or QE) have provided only the smallest of bounces to the economy, contrary to the belief that we'd be placed on a firmer path to recovery after QE1 (early 2009) and QE2 (late 2010).

Of course, expect defenders of this approach to simply claim that the efforts weren’t on a large enough scale.  “Had we just circulated a few trillion more dollars into the economy, everything would be fine now.”  This is the only remaining defense for the QE/Keynesian proponents.  To them I’d ask, how big is big enough?  Instead of $3 trillion, should we have printed 30 trillion?  Or maybe 300 trillion?  Why stop there?  If printing money is the road to prosperity, why did we go so small in the first place?  Print a few quadrillion dollars, and we’ll all be rich.

In other words, a little common sense goes a long way when debating with a Keynesian.  But I’m digressing...

The real point here is the recovery is ephemeral, and we need to recognize this fact and begin adjusting to that reality.  I expect a cocktail of gradually-worsening economic data to continue surfacing, and will be looking for the subsequent effect on the stock market.  In a nutshell, the declining manufacturing numbers, worsening employment situation, anemic housing market, high gas prices, decreasing consumer confidence and consumption metrics, and steadily rising inflation will create a significant drag on the economy.  I anticipate the Federal Reserve will also do their part to help lay the foundation for another financial crisis, as they toy with the idea of QE3 and leave interest rates at rock bottom levels for who knows how long.

As always, check your portfolios.  The market is down 5% in just the last few weeks, so whether it’s the beginning of a bear market or only a hiccup, either way it’s good practice to review your holdings.

Strictly from a dollars and cents standpoint, that’s a true statement.  A decade ago, it would have been an outlandish assertion.  But the problem is, over this past decade, the debt load college students are left with after graduation has risen a staggering 47%.  Talk about starting with two strikes against you.

I read about that figure in this article discussing whether it was really worth it for some Americans to go to college anymore.  The article references another article from earlier in the year, citing a study that found college students hardly learn anything anyway.  So one must ask: do we really need people entering the workforce already $23,000 in debt and not having anything to show for it?  (Of course, in my opinion, we should be teaching people how to think and not what to think, but I realize that’s a bridge too far.)

Of course there’s the argument that the unemployment rate for college-educated individuals is lower than those who do not have a college degree, but I tend to think there are other factors influencing that reality as well.  Nonetheless, consider the following:

Individual A graduates college, entering the workforce with a salary of $35,000 a year, and $23,000 of debt.  His debt load is nearly two-thirds of his salary.

Individual B doesn’t graduate college, entering the workforce with a salary of $25,000 a year, and no debt load.

Is Individual A predisposed toward a higher standard of living than Individual B?   Not necessarily.  Such could end up being the case, but it’s not guaranteed.  This is exacerbated by the fact that the labor market these days isn’t even producing as many jobs as it used to that require specialized skill sets, so college graduates are being forced to accept lower-paying jobs anyway. 

As far as why the price of college has rocketed by 47%, my personal opinion is that most of it is due to inflation.  We’ve expanded the money supply an awful lot over the last decade, what with fighting two wars, bailing out every bank in sight, and pumping liquidity into the economy to combat the recent recession.  As I’ve mentioned before on this site, the goods and services that people cannot do without respond the earliest to inflation.  So to the list of items like food, gas and lodging, I’d add education because the perception in our country is you can’t succeed or get ahead without one.  So people will pay anything for it, and colleges know this -- so they jack up tuitions, year in and year out, knowing it will be paid either way.  They know this because the student will simply borrow more to cover that tuition.

Ultimately, I find it pretty sad that we even have to debate the issue of whether it’s worth attending college.  As a “superpower” and “the richest country in the world,” you’d think higher education would be a bit more accessible.   An educated populace is a sign of a prosperous, economically healthy country, and we are clearly backsliding in that area.  This is not to mention the constant travails we read and hear about regarding our public school system, which I won’t begin to touch on here.  

The bottom line is, if we’ve reached the point where higher education is too expensive for a growing number of individuals, then we’re regressing as a country.  We won’t be able to produce the kinds of workers who will lead us into a brighter economic future.  We simply won’t be able to compete with countries that are educating a higher percentage of their workforce.

It was a year ago today that we experienced what has come to be known as the “flash crash.”  On May 6, 2010, the Dow Jones Industrial Average plummeted nearly 1,000 points in a matter of 10 minutes or so.  The event was harrowing and left market participants, experts, and various pundits searching for answers: how could the impossible have occurred?

If you recall, accusations flew over the weeks after the crash.  Most pointed to electronic trading mechanisms that went haywire and simultaneously sold off billions of dollars worth of positions, thus fleetingly tanking the market.  Some said it was rigged by large institutions in order to see what would happen and thus prepare better for a repeat scenario.  Still others actually pointed to a single hedge fund, Universa (advised from a distance by The Black Swan author Nassim Taleb), as the reason for the crash, when it bought a sudden and massive position in deep out of the money options.  The hypothesis was that such a bearish position caused a psychological backlash in the market and induced a selling panic.  (Never mind that this accusation coincided with repeated critique on Taleb’s part of the US government’s and Federal Reserve’s economic and monetary policies.)

After all that hypothesizing, what did we learn about the causes?  Nothing.  Scarily, we are no smarter today about it than we were a year ago.

So today, we watch as the market continues to climb upward, in spite of a host of economic realities that suggest the market should be heading the other direction.  Consider the following:

-- The unemployment rate moves higher, even as jobs are added, because the job creation cannot keep up with the demand for work.  There simply aren’t enough jobs for all the people who want to work.

-- The European debt situation (the “PIIGS” crisis) festers, with little in the way of long term solutions firmly in place.  

-- The US credit rating is poised for a downgrade by S&P within the next couple of years.  A loss in confidence by our creditors will mean higher interest rates, shrinking loan access, and a sharp decline in our standard of living. 

-- Charts depicting housing prices in the US clearly show a double dip forming, with waves of resetting mortgages coming due in the next three years.

-- Talk persists about changing the reserve currency from US dollars to something more viable, a nightmarish scenario that would send the value of the dollar plummeting and cause almost certain hyperinflation and destruction of our currency.

So the point of this post is to simply remind the reader that, no matter how outlandish or unbelievable any of the above items sound, anything is possible, as was demonstrated to us a year ago today.  No one would ever have thought the May 6, 2010 flash crash could have happened -- a scenario like that would have been labeled “impossible,” right before it actually happened.  And the conditions for a more virulent flash crash, or even a more protracted and sustained crash, are ripening.  There has never been a better time to scrutinize your portfolio, review your risk exposure, and make any necessary adjustments now before it’s too late.  I urge you to take the time to do this in the coming weeks.