The most important thing to understand about our economy right now is this: Once in a lifetime we tend to get a period of debt deleveraging, as we saw in the Economic Winter Season of the 1930s.

Debt bubbles occur when there’s high economic growth and falling inflation. During times like that, central banks tend to add fuel to the fire by pushing short-term rates lower to further stimulate the economy and to stave off any recessions, even though they’d help the economy purge excess debt and inefficiencies.

But this time central banks did something on a whole other level. They massively bought their own sovereign bonds to push long-term yields down to near zero (adjusted for inflation). This means that money is essentially free at the no-risk level, which makes money much cheaper all the way up the risk curve for corporate and personal borrowing…

Everyone’s getting a free lunch.

And hence we’ve created the greatest debt bubble in modern history. It began in 1983 and has stretched into 2017, making it much greater than the debt bubble created from 1913 (when the Fed was formed) into 1929. We know what followed that…


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Debt bubbles not only create excessive growth, capacity, and inefficiencies, they also create financial asset bubbles in stocks, real estate, commodities, etc. In the end, they become self-defeating because of the excesses they create that make them unsustainable.

At some breaking point, those bubbles always burst and that creates deflation as money (debt) and wealth (financial asset values) are destroyed. Fifty percent or more of private debt can simply disappear. Stocks and commodities tend to go down 80% to 90% and real estate loses 30% to 60%. Layoffs accelerate creating lower income for spending. There’s simply less money in the system chasing the same goods. That is deflation.

The only financial assets that don’t suffer during a burst are the highest quality bonds, i.e., only those that aren’t at risk of defaulting. Junk bonds get crucified along with stocks.

At a time when almost all financial assets collapse in a short and violent manner (like late 1929 into late 1932), generally practiced asset allocation doesn’t work. So what are you supposed to do? Just go into cash and put it under your mattress?

No!

There are things you can do that not only help you protect yourself while getting into position to take advantage of the sale of a lifetime that inevitably follows a bubble burst.

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The first thing you can do is to invest in the upward momentum of the U.S. dollar index (versus its six major trading partners).

It’s not that we’ve managed our economy and currency responsibly. It’s simply that we’re the best house in a bad neighborhood of currencies. Besides, we’re the reserve currency.

Most people aren’t aware that the U.S. dollar has appreciated as much as 47% since the great recession started in January 2008! This chart shows that appreciation, but also a substantial correction from 104 down to 91 in 2017.

Now the dollar is rallying again toward 120-plus. This will accelerate when the economy collapses again and deflation sets in. That’s a 27%-plus gain in the next year or two.

The next thing you can do, although not quite yet, is to invest in long-term Treasury and corporate AAA bonds. These were the two major financial assets that roughly doubled in value during the devastating, deflationary decade of the 1930s.

The 10-Year Treasury Bond Channel shows we may be heading towards the top around 2.9% to 3.0% or so. That would be the time to load up on these bonds and hold them for what I see as a deflationary period from 2018 into around 2023.

If you bought a 30-year Treasury bond, your yield would likely be near 3.5%. That’s better than most large-cap stock dividends. And I see 10-year yields going as low as 0.5% to 1.0% while 30-year yields could go to 1.0% to 1.5%. That means substantial appreciation as well over the coming years.

So, you don’t have to just sit in cash. Buy the U.S. dollar (we’ll tell you when to pull the trigger). Buy long-term, high quality bonds several months from now, especially if yields continue to edge up (again, we’ll tell you when).

And find an investment strategy that can weather the storm – up and down. Adam’s Cycle 9 Alert is the best place to start.

Your assets will grow instead of crash, and then you will have the capacity to take advantage of the sale of a lifetime between early 2020 and late 2022 or so – like buying in late 1932 – except this time you will have to focus in the sectors that have demographics and urbanization behind them, as I highlight in my new book, Zero Hour.

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Harry S. Dent, Jr. received his MBA from Harvard Business School, where he was a Baker Scholar and was elected to the Century Club for leadership excellence. His newest book, ZERO HOUR, Turn the Greatest Political and Financial Upheaval in Modern History to Your Advantage released mid-November 2017. Today, he uses the research he developed from years of hands-on business experience to offer readers a positive, easy-to-understand view of the economic future by heading up Dent Research. Harry has written numerous books over the years. In his book The Great Boom Ahead, published in 1992, he stood virtually alone in accurately forecasting the unanticipated boom of the 1990s. That same year he authored two consecutive best sellers: The Roaring 2000s and The Roaring 2000s Investor (Simon and Schuster).

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