UNCOMMON COMMON SENSE
Why Hasn’t “IT” Happened Yet?
To listen to the Bears over the past few
years, you would have thought we would all be in breadlines 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 a lot 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 meltdown
followed by an economic contraction.” IT” is a sudden and sharp downward spiral
that takes everything 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 pile of oily rags just waiting for spontaneous combustion, 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 against the
6) Major corporate debt default (i.e. Ford or
GM)
7) Major Municipal or State default
8) Foreign dumping or perhaps simply a
refusal to continue buying US Treasuries
9) A rapid increase in inflation
10) A speculative blow-off that creates a
vacuum on the downside.
These are just some of the most obvious
matches. By themselves, most can be easily weathered. But when combined with
the poor underlying fundamentals of the economy and stock market, such as $800
billion trade and $500 billion budget deficits, sitting on top of a mountain of
unfunded pension and medical liabilities; then “IT” can turn into an inferno.
Below are some of the oily rags just
waiting to be ignited:
a) Massive amounts of derivatives ($100 +
trillion)
b) Over valuation of the dollar
c) Overvalued stock market (a P/E of 19
times last 12 month’s earnings is overvaluation)
d) Massive build up of debt
e) Record low percentage cash levels in
mutual funds
f) Massive build-up of personal debt
g) Under-funded pensions (Government &
Private)
h) Housing bubble
I ) Deflation or Inflation
j) Municipal and State deficits
And last but far from least is the $1.5
Trillion in Hedge Funds leveraged to as much as 25 times, a disaster just waiting
to happen? The $6 Billion loss by one fund in less than a week was just the
first shot across the bow.
But one thing is for sure, “IT” will not
happen when or how anybody 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 haven’t 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 hasn’t “IT” happened yet? Thus
far the Fed has succeeded in playing Fire Chief by pouring liquidity into
the system. But the Fed CANNOT 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. It’s the same as waking up with a hangover and trying to cure
it by taking a few more drinks.
Excessive liquidity was the main cause of the 90’s 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 meltdown with five minutes to spare.
The downturn in 1997 was again saved by Alan and his liquidity hose. In 1998,
the Long Term Capital Management debacle, a harbinger of things to come, 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 tribulations 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 it only served to fuel the biggest real estate BUBBLE in history. After
9/11 liquidity was not enough; it required two BUSH Income Tax cuts to halt the
recession and get the economy rolling again. He was able to do this because the
government was projecting trillions of dollars in surpluses but this time with
massive budget deficits looming far into the future, there will be no tax cut
to save the day.
The fabled
excess liquidity that Wall Street crows about doesn't really exist. In
fact, the Fed’s solutions have once again driven stock prices to levels of
irrational exuberance. Too much liquidity has destroyed the allocation of
scarce capital function of interest rates. The world is awash in money, BUT
Fiat Money is not capital! Corporations and individuals have taken on
unmanageable debt loads. Excessive liquidity has not only driven the housing
bubble, but is now driving the TAKE-OVER BUBBLE that has always coincided with
stock market blow-offs.
By definition: Too much liquidity must
eventually weaken the Dollar forcing the FED to raise interest rates to much
higher levels than anybody expects. As a matter of fact, all the talk now is
about when the FED will start lowering interest rates.
WHAT
HAS HAPPENED TO COMMON SENSE
Why is the Market racing to new all time
highs when every analyst is expecting a slow down beginning in the first half
of 2007? Looking across the divide is
supposed to happen at bottoms not at tops that have not arrived yet. Our
Economists and Anal-ists can’t accurately forecast even next month’s level of
interest rates, GDP growth or inflation rates and yet they are pretending to
accurately project the end of a Soft–Landing (recession) that hasn’t begun yet?
Who is kidding whom?
Adding more liquidity won’t solve any of
these problems it just exacerbates them by delaying the inevitable and most probably
will make matters worse: The Bigger the bubble, the Bigger the bust. It is now taking
ever increasing amounts of money and credit just to hang on to where we are. The
When will “IT” happen?
“IT” is already beginning
to happen all around us. The “oily rags” are there for everybody to see. Debt
continues to pile up. The market is becoming more and more over valued. The
most popular way to increase earnings is by buying back stock at the high; is
that the best use for company’s money and is that not a sure sign of a company
stagnating? Is shrinking the capital stock of a company a reason to increase
their P/E? Why is the Dollar is just
barely holding on in the face of new all time highs in the stock market? No, these aren’t things that have “always been
going on” as some pyromaniacs on Wall Street would have you believe. No, they
haven’t happened yet, but we are getting close.
The potential for a stock market crash is always there with the market so
overextended. The amount of derivatives outstanding is growing ever larger, now
totaling more than $100 trillion, according to the Comptroller of Currency. The
total amount of derivatives is 9 times larger than the entire US GDP. How risky
is that?
What are the odds of any one of the
catalysts happening? Since I don’t
have a crystal ball, I don’t know. I put the odds of a
nuclear war very low, but rising quickly. I imagine the North Koreans or
Anyone of the above mentioned perils 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. The stock market is once again climbing
a wall of worry as it breaks out to new all time high. Could the wall of worry
turning euphoric be the trigger? Has the Big Hook that I have been looking for,
for almost two years now in sight?
DON”T
WORRY BE HAPPY
IRRATIONAL EXUBERANCE: If
there is any doubt that the world’s investment community is suffering from
irrational exuberance, just look at the German and French Stock Markets. In the
face of 12% unemployment rates, less than 1% growth rates and Communist rioting
against economic reforms to look forward to, their economies can only stagnate
at best and yet their Markets are making new five year highs, all in the face
of
BULLS
MAKE MONEY, BEARS MAKE MONEY, PIGS, THEY ALWAYS GET SLAUGHTERED
There is certainly enough smoke to warn us
that there are problems brewing 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 who is waiting
for “IT” to arrive before they act is playing a very 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 will get trampled in the mad rush for the exits.
SO
WHAT’S THE NEXT MOVE
If you still have long positions in any
long term bonds or in any stocks around the world, start selling NOW. The top
could come anywhere between tomorrow and January. Warning, you are playing with
fire. The break, when it comes, will be fast and furious and everyone who then
tries to get out will be trampled by the rush to the exits: You really don’t
want to get caught up in that. Why chance it when one of the biggest bull
markets in history is just beginning to unfold.
GOLD
We have recently completed Wave II at $560,
an almost perfect Elliott Wave 36% (38% WOULD BE PERFECT) pull back from its Wave
I high of $730 reached in May, which was another almost perfect five wave $475
($730 - $255) point move. We are now in the early stages of the Third Wave of
Gold’s 21st Century Bull Market. For those of you who are unfamiliar
with Elliott Wave Theory, third waves are never the shortest of the three
impulse (up) waves and are usually connected to the first wave by a ratio of
either 1.38 X 1 or more commonly 1.62 X
1 giving us a target for Wave III of
$1215 OR $1330 {1.38 x $475 = $655 + $560 = $1215 or 1,62 X 475 = $770 + $560 or $1330). That would not mark the end of the bull
market: It would be just Wave III of five and that’s assuming that there is no
extension for Wave III. Then, after a Wave IV consolidation, we still have Wave
V to look forward to, but we will leave that analysis until after Wave III has
been completed. With that kind of scenario, why are any of you still in anything
besides precious metal stocks.
SILVER
As far as silver is concerned, its
fundamentals may be even stronger than gold’s but it’s not MONEY; so my
personal preference is gold even though it is quite possible that silver could
go up even more than gold. Also, I would not argue against some combination of
the two.
STOCK
SELECTION
Please note: I AM RETIRED and therefore I do NOT make
individual stock selections for anyone but myself, so please do not call or
email me for suggestions, I will not answer you. However, comments and opinions
are always welcome and answered. There are plenty of qualified people and
services advertising on this sight for you to choose from or you can’t go wrong
by investing in any of the established Precious Metals Mutual Funds or listed
ETF’s.
GOLD
VS OIL AND BASE METALS
Please
note:
You are about to witness what I have been
preaching to you for years; OIL and Gold are NOT, I repeat linked. GOLD is in its
own BULL MARKET and is independent from everything else except maybe Silver. As
the Stock Markets around the world begin to break down and the full force of
the bursting real estate bubble makes itself felt, the
November
22, 2006
HAPPY THANKSGIVING
GOOD LUCK and GOD BLESS
Aubie
Baltin CFA, CTA. CFP. PhD
561-840-9767