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Money stampeding out of the market

Saturday, October 18, 2008, 12:56 PM

While the myth is that the stock market is a discounting machine, the reality is that it is mostly a liquidity measuring device.

What I mean by this is that the gigantic machinery of Wall Street, which includes all the people working at brokerages, as well as all of the buildings and infrastructure involved in operating a market, are not cheap, and the money to operate all of that has to come from somewhere.

It is safe to say that just keeping the machinery well-oiled requires several billions of new money each month to keep it fed at a subsistence level (for the pin-stripe crowd, I mean).

Yes, we could look at stock's p/e ratios and scrutinize annual reports, but the sad truth is that if more money is leaving the market than entering it, prices will fall.

It's very simple:

  • More sellers than buyers = prices fall
  • More buyers than sellers = prices rise

So for all the fancy analysis of stocks and earning and such, the most important measure is how much money is entering vs. leaving the market.   It is in that sense that the stock market is, first and foremost, a liquidity measuring device.

First, I have been watching the mutual fund money flows pretty carefully, because the constant flow of "retail" money from ordinary citizens (much of this via automatic 401k contributions) is the lifeblood of the industry.

Up through August it has been, well, disappointing, with up months and down months, but adding up to a net outflow for the year of more than $67 billion.  This outflow is the primary reason there are so many articles in the mainstream media cajoling and sometimes berating people into "investing for the long haul" and "not making the unfortunate mistake of selling at the lows."

The reason, for such articles, I believe, has little to do with helping people make wise investment decisions and everything to do with helping out Wall Street by keeping retail money in the markets to provide essential nutrition to the money machine.  Otherwise we would expect to see the counterpoint to these articles advising people to sell when new highs are reached, but I can't recall ever reading any such article in a mainstream media source.

At any rate, as bad as the August data was, the early read on the September data is even worse.

Funds saw $104.4 bln outflows in September
BOSTON, Oct. 17, 2008 (Reuters) — Investors pulled out a record $104.4 billion from U.S. mutual funds in September as they were spooked by the credit crisis and turmoil in financial markets, research firm Lipper Inc said on Friday.

"We have never seen (monthly) outflow figures like this," said Jeff Tjornehoj, senior research analyst at Lipper. The data did not include flows of exchange-traded funds.

No wonder they trotted out Warren Buffet to calm the crowds - this is a disaster for the investment community.  Now, I have to point out that my two data points are a bit of "apples to oranges," because the first data applies to stock mutual funds only and the second to ALL mutual funds, of which stocks are only a part.   But the trend is worth noting.

And then there was this data that caught my eye:

Hedge funds' assets off $210 billion in third quarter
SAN FRANCISCO (MarketWatch) -- Hedge funds saw a record $210 billion drop in assets under management during the third quarter as investors redeemed an unprecedented amount of money from the industry after poor performance, according to a survey released Friday.

Net capital redemptions totaled $31 billion in the quarter, also a record, the firm added.
Withdrawals came during a period of dismal performance for the funds.

Funds of hedge funds, which invest in a range of outside managers, also saw assets under management fall by $78 billion as investors withdrew $13.3 billion in the third quarter, Hedge Fund Research said.

When a retail investor pulls money from a mutual fund, that is what we call "unleveraged money."  A dollar pulled out represents a dollar that was in the market (for the most part).  But hedge fund money?  That is a different beast.

Hedge fund money is typically leveraged up, so the $31 billion withdrawn means that more than that was withdrawn from the the asset investment markets.   How much more?  Hard to say, since hedge funds use such widely varying levels of leverage, ranging from 1.2x to more than 30x.

Bottom line:  Money is fleeing the markets, and this means we are not yet near a bottom.  I am expecting more downside over the coming months.

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33 Comments

DavidC's picture
DavidC
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Re: Money stampeding out of the market

Chris,

Reading this raises the question for me, is this not likely to lead to more downside over the next  coming years?

Whales cannot survive without plankton. If the retail investor pays down debt (or indeed, is not able to pay down debt), is potentially out of a job if things get really bad or is in a home that is in negative equity, the desire and ability to save may be academic for the next few years.

As a rsult, surely the money going into funds, of whatever type is going to become and remain curtailed? Unless the uber-wealthy take advantage of the situation and pile in?

Ray Hewitt's picture
Ray Hewitt
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Re: Money stampeding out of the market
And who was the weasel who shouted "FIRE" in the theater? Aw I won't keep you in suspense: Paulson.
Sequoia512's picture
Sequoia512
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Re: Money stampeding out of the market
Well with 18 million less people to keep the Ponzi scheme up over the next 15 years what do people expect.  Also its hard to keep putting money in when it takes everything you earn and more just to get by.  That is if you aren't recently unemployed and living off your 401K.
Fish Gone Bad's picture
Fish Gone Bad
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Do you want to see something REALLY scary
Read this article: http://marketoracle.co.uk/Article6695.html

When the US did not bail out Lehman, it broke the Fed Funds rate/3 month LIBOR connection. The US is no longer in control of its money.



The 17 years of Yen-carry trades are unwinding and there is nothing the US can do to stop it.

Our currency is based on debt. When a country no longer honors its debt, its money becomes worthless.

So now the 800 pound gorilla question. What are the nine banks doing with $250 billion soon-to-be-worthless dollars? My best guess is they are doing what Lehman did before it went belly up. They are buying stock on the open market trying to prop it up.

I really hope I am wrong.
DeeDee's picture
DeeDee
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Re: Money stampeding out of the market

Chris

I understand that you are working on Section 20: What Should I Do?....coming soon.

Rather than wait until you have the whole Section 20 completed is it possible you could break it up into smaller sections like you did in Section 17?  As things are changing very rapidly in the financial world I would like to have some of your suggestions sooner rather than later. Thx.

 

Woodman's picture
Woodman
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Re: Money stampeding out of the market

I'll be interested to read Section 20 too, but I understand there's still a lot up in the air.  For now, I'm cutting unnecessary expenses and I've reversed my traditional assumption that the market is always going to rise on average over the long term.  I'm one of those who pulled money out of the market (ahead of the recent drops) and I paid off a lot of debt - thereby saving a bunch of money 100% risk free.  That was the first and the last time I ever buy a car with financing! 

Yet just yesterday I got two emails pushing cheap credit, one from my mortgage broker offering ARMs and one from the car dealer offering 0% financing.  It hasn't sunk in yet we need to completely change our way of thinking.   

pir8don's picture
pir8don
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Chapter 20: The buck stops here

or Chapter 20: Get down on your knees and pray

or Chapter 20: Gold doesn't taste as good as I thought it would

or just make it multichoice like our future used to be.

Sorry Chris and Erik - no dissrespect intended. What can you say?

Oooops again

Don

capesurvivor's picture
capesurvivor
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Re: Chapter 20: The buck stops here

I don't blame Chris for puzzling over Ch. 20. From what I read, other savvy folks are split 50-50 over whether we are heading for deflation or inflation in the short term, though inflation in the long term seems apparent. But...how long is the long term? The U.S. has kept all of the plates spinning in the air for years, with the help of other countries. They can't bail now or their assets become worthless. Maybe they will slow their rate of buying but that still could be a long time. In the short term, those of us who have recently procrastinated buying gold thank our lucky stars...we would have been screwed. 

The long term path may be clear but the short term path holds opportunity cost dangers, as well as not having some fat deflated dollars to survive that period. 

IMHO.

 

SG

Downrange's picture
Downrange
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Re: Money stampeding out of the market

Just a note of appreciation for the site, the Crash Course, which is superb, and the blog entries.

It seems to me that all the destruction of credit/debt is short term deflationary, as it destroys fungible "money."  But, it also seems that the only recourse the central banks will have is to try to inflate through various avenues that equate to "printing."  So, deflation short term, reversing quickly to inflation.  Or, a total system collapse, as an alternate.

Again, thanks for the site!

Maenad's picture
Maenad
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Re: Money stampeding out of the market

I'm a newbie here but it seems to me that the bail outs happening both inside and outside the US are designed to buy time and perhaps to slow the inevitable collapse. I can see some good things coming out of all this so long as you're up for a bit of Fight Club philosophy...

xeroid's picture
xeroid
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Re: Chapter 20: The buck stops here

Plan strategies to profit from both inflation and deflation - there will be both, you will only experience either when you make a transaction.

Things that are 'must have' in your lifestyle and physically limited in supply will eventually inflate, 'nice to haves' will deflate.

Also, whatever the average inflation/deflation rate is you probably won't experience it, few people are actually average.

Depending on your age and circumstances you shouild be able to tell whether you are more vunerable to inflation or deflation.

Think ... carefully! At your age what is long term for you? What are your long term plans?

Do different - maybe radically different!

switters's picture
switters
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Re: Chapter 20: The buck stops here
[quote=xeroid]

Plan strategies to profit from both inflation and deflation - there will be both, you will only experience either when you make a transaction.

[/quote]

Good point.  I often chuckle when I see people say "I sure am glad I didn't buy gold and silver", because we're headed for deflation in the short-term.  In the same paragraph, they also state their belief that deflation will be followed by inflation eventually.

My question for those folks is, why are you glad you didn't buy gold and silver?  Were you planning on selling it at its low during deflation?  Obviously nobody who owns gold or silver is going to sell it during a deflationary collapse - unless they're in dire straits and they have to.  They're holding it as a store of value.

Are you certain that you'll be able to acquire some at that magic point in time - just when deflation is ending and inflation is about to take off?  If gold and silver are this difficult to find in our current market, do you think there will be an abundant supply when inflation kicks in?

 

leo0648's picture
leo0648
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Re: Chapter 20: The buck stops here
It is still hard to find gold or silver, even with the 'market' prices coming down.  I bought some gold on ebay, and thought I would buy more with the prices going down.  The prices have actually gone up on ebay.  Apmex.com is selling silver at about $13.50/ounce unless you buy a lot.
Davos's picture
Davos
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Re: Money stampeding out of the market
[email protected] I can get uncirculated coins and 24kt gold from my suppliers, holler if you want prices... they mark it up a little as do I - but it is there! We have a little jewelery business.
presentmoment's picture
presentmoment
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Re: Chapter 20: The buck stops here

Hi, Chris,

I've tried to understand the meaning of existence of 750 trillion to 1 Quadrillon of OTC derivatives in the financial systems without avail.   Can you please explain to us what the consequences of the collapse of these derivatives are in terms of lives of the ordinary people in this country within next 6 - 12 months?  It seems like the collapse of this ponzi scheme is playing out fast...

I really appreciate the clarity of your explanations in all of your materials.

Regards

 

JMCSwan's picture
JMCSwan
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Re: Chapter 20: The buck stops here

Presentmoment (Sun, 10/19/2008 - 16:23 #1)

Don't know what Chris's advice will be, but in my opinion if you want to get a good psychological, emotional idea of what to plan for -- what to expect when an economy collapses -- so you can at the very least be psychologically kind of prepared... you should read Dmitry Orlov's article, Surviving Peak Oil & Economic Collapse: Post-Soviet Lessons for a Post-American Century..

He has allot of excellent insights -- in my opinion.

There is a copy at www.fromthewilderness.com, in a three part series; all on one page at www.eco-energy.co.nr

JMCSwan

Zay294's picture
Zay294
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Re: Money stampeding out of the market
Chris should just continue the crash course indefinitely in installments. Nobody knows for sure what's going on or how to deal with it. I don't want to pressure Dr Martenson into thinking he has to have a definite answer. He's done a lot of working opening everyone's eyes and minds already. 
pir8don's picture
pir8don
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Re: Chapter 20: The buck stops here

Thanks JMCSwan - printing it as I write.

My own favourite is a bit briefer and can be found here

http://www.mnforsustain.org/oil_eating_fossil_fuels_pfeiffer_d.htm

Happy end of the world as we knew it

Don

___________________________________________________

"And those that create out of the haulicaust of their inheritance, anything more than a convenient self-made tomb, shall be known as survivors"

JMCSwan's picture
JMCSwan
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Re: Chapter 20: The buck stops here

pir8don,

Oh yes, Dale's Eating Fossil Fuels, is a DEFINITE MUST! I got a couple of copies up too. It is really important info for people to read.  

And as Chris says, it certainly is an exciting time to be alive, and if the adage of every crisis is an opportunity, then indeed 'humanity' (hmmm slight exagerration of ego, me thinks for us two-legged neanderthals) have before us an opportunity of immense proportions.... a multitude of options, not too mention emotions.

So, Don, I can only agree and hope we make the best of finding an empty seat on one of the very few Titanic life-rafts and if not; well we may as well live every day to the fullest...

Frankly I've had such an interesting life, you wouldn't believe me if I told you the stuff that happened in my life, so I don't particularly mind if I am one of those culled... only one thing that I didn't do, and that wasn't my decision... and perhaps the other individual shall change thier mind, and perhaps not... we shall see.

But same to you Don.... Can you say Thelma and Louise ? ;-)

JMCSwan

capesurvivor's picture
capesurvivor
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Re: Chapter 20: The buck stops here

Keep in mind there are folks who come to sites and blindly and blithely do what is suggested. Most people are seeking gurus. The Buddhists say "if you meet the Buddha on the road, kill him." Back in the 70's idiots sold all their belongings, bought the Nearings' "The Good Life", and bought farms with animals. Most wrote plaintive letters to the Nearings when their animals started to die and they were broke.

 I'm not worried about my preparations. I appreciate Chris's work and am attending his Rowe conference but I'm not going to spend spend $$$ on gold as it plummets.  

I've read all of the books now flashing by on the right side of the page. Orlov's book, "Reinventing Collapse", was the only one that kept me up at night. He lived through the Soviet collapse. I don't think gold is his first concern. My concern is 200 million weapons in the U.S., a military with citizens who will want to provide for their own families, and the breakdown of relatively civil society.

 

SG

capesurvivor's picture
capesurvivor
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Re: Chapter 20: The buck stops here

Hi Pir,

That link is dead; do you have another?

TIA.

 

SG

TechGuy's picture
TechGuy
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Re: Chapter 20: The buck stops here
[quote=swittersMy question for those folks is, why are you glad you didn't buy gold and silver?  Were you planning on selling it at its low during deflation?  Obviously nobody who owns gold or silver is going to sell it during a deflationary collapse - unless they're in dire straits and they have to.  They're holding it as a store of value.

Are you certain that you'll be able to acquire some at that magic point in time - just when deflation is ending and inflation is about to take off?  If gold and silver are this difficult to find in our current market, do you think there will be an abundant supply when inflation kicks in?[/quote]

Lots of people will be in dire straits forced to sell. In the deflationary cycle, people will lose their jobs, they'll be forced to sell thier PMs in order to put food on the table and pay the rent. I think there are lot of people that are buying gold that really can't afford to. They probably have a little savings and likely have debt. Some might even be buying PMs on Margin, hoping for that "Get rich quick" belief. Currently on TV I see at least three gold pawn Ads telling people how to sell gold coins and jewerly for fast cash.

 Consider the rise and fall of oil prices. Oil quickly ran up to $150 in 2007, and now its at a 14 month low, and still falling. If there is one commodity that has true value its Oil. Oil is essential to the global economy where as gold have very little economic value (it isn't needed to power our economy ie Machinary, Trucks, Electricity, etc). I have a hunch that we may see a collapse in PM prices within the next twelve months that matches the price collapse in Oil. FWIW: I don't have a crystal ball and its impossible to predict the future.

 Inflation risks are being suppressed for the near term as the global economy is nearly in an uncontrolled decent. For now Foriegn Central banks are more worried about their own economies and US currency devalution is probably at their bottom of thier list of worries. On a scale of 1 to 10, where 1 is deflation and 10 is inflation we are probably at a 2 or 3, and the direction is towards 1.

1. Asset prices are falling (Homes, Commerial Real Estate, Autos and Durable goods)

2. Commodity prices are falling (Oil, Copper, Aluminium, etc)

3. Unemployment is rising.

4. Interest rates on consumer and corporate loans are rising fast (Making loans unaffordable for most).

As long as the the four trends continue the price of PMs should fall. The only reason why PMs are rising is because of irrational investing (the same irrational thinking that resulting in this bubble in the first place).

 

 

gauntlett's picture
gauntlett
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Re: Chapter 20: The buck stops here

I agree that we are probably going to see a continued decline in commodity prices especially PMs.  However, given the increases in the monetary supply I forsee this trend reversing.  When the trend reverses, which isn't going to happen immediately because we are headed towards a major recession, with unemployment rising, and more likely interest rates as well, inflation will be severe.

The Money Supply graphs are frightening.  Once that money goes into the system I wouldn't be surprised if we start to see hyperinflation.   For all of our sakes I don't want that to happen.

As for investing in PMs I think there are two types of people who purchase them.  The first is the speculator, and the other the long term purchaser regardless of price. (I'm leaving out purchasers for industry and jewelry).  As much as I don't like to see the value in relation to fiat currency of my PMs decline my intent on owning them is for more of the oh shit situation.   Throughout time gold, and silver to a lesser degree have held up as a store of value.  They aren't going to be worthless as can a paper currency backed by nothing. Politicians and those involved in the government don't like PMs as they aren't easily created.  Having a currency backed by a scarce resource means that they have to control spending as they can't print money to pay for various expenditures.

So, why gold and silver?  What happens if the fiat currency fails?  All of a sudden you and I have a bunch of roman numerals in our bank accounts.  Sure we can go get paper currency, but it is better to use as heat.  If this happens chaos will ensue until another solution is created or we go back to a currency backed by PMs.  I doubt the latter case would occur as bureaucrats aren't going to want that option. 

My other concern is war with Iran, which is looking more and more likely.  In this scenario gold and oil will skyrocket.  Oil will also be much harder to obtain and the government will probably institute a rationing scheme instead of letting the price rise.   I'd rather pay $50.00 a gallon for gas then not be able to get it or to have to wait in line for days.  I presume many of you don't agree, but gas or no gas you pick!  Would I drive much NO... however, if I needed to go somewhere I could get the fuel I needed.   

Lastely, beyond Gold and Oil we all need food and water.  Don't forget food.

 

-T 

capesurvivor's picture
capesurvivor
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Re: Chapter 20: The buck stops here

Hi Gauntlet, 

I sure can't argue with your scenario or your thoughts about PMs. Despite my hesitation, I'm sure I will try to acquire some AU or AG coins (easier if local) for the long term but, as you note, food trumps metal. Do you have a good plan or source for your food storage? I've read much in this area over the years (since the survivalists of the 70's), am hampered by the fact that my wife thinks this thread is full of lunatics, LOL.

 I would cheerfully buy a carload of stuff but that will be difficult. I could probably acquire a few hundred Powerbars, LOL. The Mormon plan of wheat, etc., etc...just not in the cards. Moving to an agrarian setting...not in the cards. Wide scale life change...not in the cards. Personal survival stuff...somewhat doable though unless you think anarchy is coming to the streets( a fair possibility IMHO), maybe not the way to go.

Then there is the "Black Swan" theory that we don't know what we don't know and random or unknown events can significantly alter our social reality.

 

Deflation, then inflation, seems to be the consensus though the time frame is not.

 

SG

JMCSwan's picture
JMCSwan
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Re: Money stampeding out of the market (capesurvivor-link)

capesurvivor (Sun, 10/19/2008 - 21:25)

Here's a working link to Dale Allen Pfeiffers EATING FOSSIL FUELS... 

JMCSwan

raptor's picture
raptor
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Re: Money stampeding out of the market

As I read here and on many other places :

http://market-ticker.denninger.net/

itulip.com

There  seems to be a concesus that we are in "disinflation" phase ($ get scarce) and then at some magic point we will go to high or hyper inflation. I agree with this observation, but then the BIG questions is,

WHEN IT WILL TURN ?

I have those clues :

- Biggest resets on mortgage loans were Sep-Oct ! I think. This probably will have impact on the banks balance sheets within 3-6 months (deflationatory)

http://www.charlesarthur.com/blog/?p=1072

- the other big deflationatory push is comming from unwinding of the CDO, 70trillion just in 2007, right?

- ppl withdrawing money and buying assets (gold/silver/houses) or paying debt - this both inflaionary and deflationary.

- printing money 250 bil Fed + 1.8trillion ECB  *  ~10 (leverage ratio)  =~ 20 trillion at least (if they can lend it)

If you can provide more data.. from the above I think that deflationatory pressure is more powerfull for now.. but  the question remains when it will turn ?

I think it should happen when the two forces collide big time i.e. when there is a BIG push to print money, I mean bigger than it was now.. the current print of the Fed I think was decipated cause the other banks also printed money i.e. all the fiats lose value.

When this happen the confidence would be so low that somebody will start dumping $.And I think it will be very fast, much faster than current crisis, you know exponential ;)

 

With what I read I think this could happen in ~6-7 months period.

If this is not the case the next closer moment to me seems like 2012 :) Doomsday, you know what all the conspirators were saying. Seems pretty good candidate for me.

 

What do you think ?

WHEN IT WILL HAPPEN ?

 

 

 

 

 

 

 

presentmoment's picture
presentmoment
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Re: to JMCSwan: Chapter 20: The buck stops here

JMCSwan,

 I appreciate your link to Dmitry Orlov's article, Surviving Peak Oil & Economic Collapse: Post-Soviet Lessons for a Post-American Century.   As you mentioned, his article was very helpful to understand emotional and psychological effects this kind of sudden changes in a massive scale can bring about.  I hope we will be lucky enough to have a new set of leaders at the top who will inspire the best in people instead of inspiring the worst (fear, greed, hatred, anger, etc. etc.) in us.

 Thanks!

Presentmoment

pir8don's picture
pir8don
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Posts: 456
Re: Chapter 20: The buck stops here

Thanks again Swan.

Read the printed book. 

Still left with the same problem, can't live next to starving people for all sorts of reasons and the 1kwatt of solar panels on our roof are a bit obvious.

Thanks for your writing and I hope again for all our sakes

Don

-----------------------------------------------------------------

Anyone can trade for what the want but only fools trade for what they need

pinecarr's picture
pinecarr
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Re: Chapter 20: The buck stops here

Hi capesurvivor-

    One link you might check out for emergency food supplies (and other emergency supplies) is www.thereadystore.com .  They have freeze dried food with a long shelf life of up to 30 years.  It is like having insurance for any kind of an emergency situation when you may not be able to get food for a while.  They sell packages good for anywhere from a 72 hour supply  to 1 year's supply.  It is certainly not a long-term sustainable solution if the shtf, but it may be  a good  "buy you some time" kind if a thing, at least!

    -C

capesurvivor's picture
capesurvivor
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Re: Chapter 20: The buck stops here

For me, that is the critical problem, Pir. It is like rewarding the failed banks and punishing the good ones. Those of us who think about and prepare for the future can be, oddly enough, the most vulnerable.

 

Low profile.

 

SG

pinecarr's picture
pinecarr
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Re: Chapter 20: The buck stops here

Thanks for the link to the article, JMCSwan; interesting perspective!

C

capesurvivor's picture
capesurvivor
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Re: Chapter 20: The buck stops here-food

Thanks, pinecarr, 

Will check it out.

 

SG

pir8don's picture
pir8don
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Re: Chapter 20: The buck stops here

capesurvivor - the only and the most obvious answer is to grow food with your neighbours or at least help those that aren't yet to start. In doing so you might become connected and identify your safety together. Keep it in the hundreds at most though.

Don

________________________________________________

Peace of Earth

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