To listen to the Bears over the past few years, you would have thought
we would all be in bread lines and
soup kitchens by now. So far, all of the ranting about doom and gloom sounds more like the boy who cried wolf
than accurate forecasting. But I do believe that when IT happens, things are going to get much worse than
anyone can imagine. Even though the markets, at their lows in March of 2003 had lost over $6 trillion of
value; that was not IT.
What is IT? Why hasn't IT happened and When will it happen?
IT is a major financial melt down followed by an economic contraction.
IT is sudden and sharp downward
spiral that takes everything down with it. IT will be started by a catalyst, a spark that will get
everybody's attention. But IT is already built into the system, like a bunch of oily rags, all in a pile
just waiting for internal combustion or a match or a spark to ignite IT.
Some of the candidates for the catalyst include the following:
1) Crash of the Dollar
2) Stock Market Crash
3) Derivative meltdown at a major bank
4 ) Nuclear terrorist attack
5) Major terrorist attack on the US (Bio or Chemical)
6 ) Major Corporate Debt Default
7) Major Municipal or State Default
8) Foreign Dumping or perhaps simply a refusal to continue buying US Treasuries
These are the matches. By themselves, most can be easily weathered.
But when combined with the poor
underlying fundamentals of the economy and stock market, such as $800Billion Trade and $600 Billion
budget deficits, sitting on top a mountain of unfunded pension and medical liabilities; then IT can turn into
Below are some of the oily rags just waiting to ignite:
a) Massive amounts of derivatives ($90 + Trillion)
b) Over valuation of the Dollar
c) Overvalued stock market (19 times last 12 months earnings is overvaluation)
d) Massive build up of debt
e) Record Low % cash levels in mutual funds
f ) Massive build up of personal debt
g) Under funded pensions (Gov. & Private)
h) Housing bubble?
i) Deflation or Inflation
j) Municipal and State deficits
But one thing for sure, IT will not happen as every body expects.
Some are waiting to see the writing on
the wall, Most want to see the fire before they will believe there is danger. Things havenít really
changed that much over the past 3 years. Investor attitudes are much too complacent. They see nothing to
worry about. Yet Liabilities have been outpacing income for six years: Since Year 2000, income growth
has slowed while expenses have continued to accelerate.
So why hasnít IT happened yet? Thus far the Fed has succeeded in playing
Fire Chief and kept pouring
liquidity into the system. But the Fed CAN NOT keep the money and credit spigots wide open indefinitely:
After all, is that not the definition of inflation? All they are doing is delaying the inevitable, not
curing it. Adding liquidity is only making our future economic problems worse. Itís the same as adding tons
of kindling in time of drought. Excessive liquidity was the main cause of the 90ís Bubble in the first
place and for that matter, every other bubble throughout history. The Crash in 1987 came as a
shocker: But Fire Chief Greenspan and his liquidity hose were on the phone to the banks and brokers
offering unlimited credit to any institution that needed it. He saved a melt down with five minuets to
spare. The downturn in 1997 was again saved by Alan and his liquidity hose. In 1998, the Long Term Capital
Management debacle caught everyone flat-footed; once again along came the Fed to the rescue.. Then came Y2K
and the Fed just automatically turned on the printing presses to prevent any problems. All of these problems
had similar characteristics - they were sudden and solved by the Fed with increased liquidity.
Along comes 9/11 and Greenspan once again took out his liquidity hose and drove interest rates down to 1%.
But this time liquidity was not enough, it required two G.W. Income Tax cuts to halt the recession and get
the economy rolling again. Only this time the 1% interest rates fueled the biggest real estate boom in
history. This chart below, although not fully up to date, shows that the fabled liquidity that Wall Street crows about
doesn't exist. This chart is a comparison of M2 (liquid money) to the NYSE capitalization. (If the
Nasdaq's capitalization were included the chart would look even worse.) Liquidity bottomed out in the 1st
quarter of Year 2000. It is only slightly higher today, but not enough to make a case for a long
lasting bull run based on liquidity.
In fact, the Fedís solutions have once again driven stock prices to
levels of irrational exuberance,. Too
much liquidity has destroyed the allocation function of interest rates. Corporations and individuals have
taken on unmanageable debt loads. Excessive liquidity drove the housing bubble. Too much liquidity must
eventually weaken the Dollar forcing the FED to raise interest rates much higher. Adding more liquidity
wonít solve any of these problems; it just exacerbates them by delaying the inevitable, and quite possibly
will make matters worse. It is taking ever increasing amounts of money and credit just to hold on to where
When will IT happen? IT is beginning to happen all around us. The ďoily
ragsĒ are there for everybody to
see. Debt continues to pile up. The market is still over valued. The Dollar is just barely holding on. No,
these arenít things that have ďalways been going onĒ as some pyromaniacs on Wall Street would have you
believe. No, they havenít happened yet, but we are getting close. The potential for a stock market crash
is always there with a market so overextended. The amount of Derivatives outstanding are growing ever
larger, now totaling more than $95 trillion, according to the Comptroller of Currency. The total of
derivatives is 8 times bigger than the entire US GDP. How risky is that? What are the odds of any one
of the catalysts happening? I donít know it varies. I put the odds of a nuclear war very low, but rising.
I imagine the North Koreans or Iran might think differently. The odds of a derivative meltdown taking
down a major bank are much higher. Barings Bankís failure and Long Term Capitalís failure have shown
us that derivatives can cause a financial disaster over night. The top banks are playing with matches,
big matches, and there is almost no Federal regulation on derivatives. Warren Buffett referred to
derivatives as financial time bombs. The odds are that the catalyst will come from the credit markets.
Maybe one foreign bank will start to dump US bonds. Which would cause US long term interest rates
to spike up and the Dollar to crash Could this happen? Could this have a domino effect? Japan with its
40% savings rate, has been the biggest buyer of our bonds both public and private, now looks like itís
finally starting to come out of its 14 year recession: If it hasnít, it will, sooner rather than later, and then
they will need some if not most of their savings to invest in their own economy: Their stock market is deeply
undervalued when compared to ours. Not if but when will they start selling its massive holdings of Treasuries?
Any one of the above could lead to a market decline/crash. Long term
rates look like they may
start climbing again should inflation numbers force the FED to resume increasing rates.. And the stock
market is once again attempting to climb a wall of worry and break out to new all time highs. Could that
be the trigger; the Big Hook that I have been looking for, for almost two years? Yet each time the market
looked like it was ready to break out it sold off
If there is any doubt that the worldís investment community is suffering
from irrational exuberance,
just look at the German and French Stock Markets; in the face of 12% unemployment rates and less than 1%
growth rates to look forward to which they consider to be good, unemployment rates can only get worse and yet
their Markets were making new five year highs, all in the face of Paris burning from two solid week of
There is certainly enough smoke to know there are still problems with
stock and bond markets all over
the world. Anyone who is tired of hearing about all of the dire predictions from the bears should be doubly
careful since some of the most die hard Bears have finally tossed in the towel and turned bullish: When
the last Bear turns bullish or neutral, watch out below. Anyone that is waiting for IT to arrive before
they act is playing a dangerous game. Now is the time to act to protect your assets. If you wait for IT to
be obvious, it will be too late as you get trampled in the mad rush for the exits.
THE LAST REMAINING BULL MARKET
For those of you who do not know how to handle the coming bear markets
and insist on always being fully
invested rest easy. There is still one ongoing bull market that is still in its infancy and yet most bulls
are ready to throw in the towel, GOLD. My opinions are always forward looking usually projecting three to
six months out. So if you have heeded my past musings you have been selling you stocks and bonds into
rallies and you have cashed in your speculative real estate over the last year or so. At the same time you
should have established a program of scaling into Gold and Silver with your ever increasing cash reserves.
buying Gold and Silver Bullion and gold and silver stocks or what might be even better buying any one of
the well known Precious Metals Funds that are out there and stop worrying. Itís my estimation that You
will more than double your money at a minimum, somewhere over the next two to five years.
GOLD WHERE TO NOW?
For all those that have now been gripped by fear that Gold has by breaking
below 600/oz entered a new Bear
market of its own, STAY CALM. I have been warning you that when ever you have an Elliott wave Extension and
that extension occurs as part of a fifth wave blow off; which is exactly what happened; that extension is
always Doubly retraced pulling back to the beginning of the extension which according to my interpretation
of Elliott wave is $540.. Now if the bullish sentiment percentage drops to below 15% as Gold approaches $540
in my opinion it would then be time to back up the truck and load up with Gold and Gold stocks. Now $540
/oz is not some kind of written in stone magic number. My down side support and thus the area of accumulation
should be a $50 range bracketing $540 or $515 to $565. Which, is a typical Fibonacci, Elliott Wave 50
to 62% retrenchment of the 2001 to 2006 first Wave of the Bull Market So Start scaling into gold as we
approach that range. As far as silver is concerned, there is a strong probability that silver will out perform gold..
Personally I prefer Gold because apart from all the fundamentals it is the only real money and Iím willing
to pay a small premium for insurance; but take your pick. Real Profits occur to those who at crucial times have
the courage to stand alone.
GOOD LUCK and GOD BLESS
Aubie Baltin CFA, CTA. CFP. Phd.
Palm Beach Gardens, FL.