Stocks closed in the red once again today as concerns around the global economy continue to hold the world's markets hostage. There was no real news today folks. In the past, these type of days usually resulted in moves to the upside. Not today! I hate to say it but...Perhaps investor's are losing interest?
This is one of the big worries that I have had as we attempt to work our way out of this mess. It was actually discussed on CNBC today. The streets biggest fear is investors will simply get tired of losing money and begin to lose interest in the stock market. WIthout buyers, Its hard to take the markets higher!
Its happened before:
My Take:
Take a look at the DOW from 1969-1982. Can you say flatline? This chart reminds me of looking at a heart monitor of someone who just died from a massive heart attack. This scenario is definitely on the table folks. My best case scenario thesis for the next decade(2010-2020) is a do over of the '70's.
Like the '70's, I predict we are going to get hit with a major inflation problem as we head into the early years of the next decade. Its almost impossible to avoid because we have simply created too much money in order to fund these bailouts. This will all come home to roost a few years from now. Inflation will soar and we will need to raise interest rates in order to quell it.
This will be the final nail in the housing coffin. Housing should already be on its knees by then as the asset deflation destroys home prices over the next year or two. The final leg of the housing crash will be the higher lending rates via skyrocketing inflation. I am guessing this hits around 2011-2012.
Hopefully by this time, our banks will have been reformed and will have the balance sheets to handle this final leg down in housing. Let me be clear here folks, I am HOPEFULL we will have reformed our banks by then. This is still very much up in the air. I am not sure we have the ability(money) to actually fix the mess that the fraudsters on Wall St have put us in. Like I said, the 1970's scenario is my best case!
Can we handle this next bout of inflation?
Folks, this is one of the things that keeps me up late at night. In the 1970's, we were able to handle the huge inflation spikes because wages rose dramatically. One of the key drivers of wage inflation was the unions rise to power. I can remember the stories of steelworkers in Pittsburgh in the 1970's that made $70,000 a year including overtime. That's a hell of a wage even today!
Unfortunately, this go around we have no such driver to increase wages. The unions are a shell of what they used to be. Take a look at GM's current manhandling of the UAW which at its peak was one of the most powerful unions in the country. This tells you all you need to know.
As a result, our next tango with inflation is going to be extremely painful. Go back to early last year when oil was at $4 a gallon if you are wondering what its going to feel like. We will be facing soaring prices in an era in which our wages will be decreasing(that is if you even have a job!). There will be no wage increases this go around because the corporations in this country will be crippled from the devastating effects of the debt bubble collapse.
This is why everyone must focus on saving and digging out of debt. Don't get suckered into these low interest rate bailout home loans unless you have no other choice. This is a lose lose situation folks! If you refi into one of these loans you better plan on living there for 30 years! These low interest rates cannot be sustained once inflation grabs us by the throat.
Bottom Line:
Its time that we all accept this collapse and realize that prosperity isn't coming back anytime soon. The complete devastation that we have seen in the stock market will take a decade or more to fix. More than half of the wealth that was created during the bubble has now been wiped out. The leverage that enabled us to create these unprecedented riches has also been completely wiped out.
The money is gone and its not coming back. The DOW will not be back to 14000 for a generation or more. Just look at the NASDAQ 10 years post bubble burst. We are 80% down from the highs.
Its time to start preparing for the future versus hanging on to the past. Our lifestyles will never be the same, and we need to start realizing that the stock market may flat line for years and years. When inflation hits, fixed income will be the place to be. This is why its time to get frugal and conservative!
I am not ready to invest for the inflation trade just yet because we are currently being swallowed up by a deflationary black hole of the likes that I have never seen before. The risk of a 20-30 year Japan style deflationary collapse is still very much on the table. This is my worst case scenario other than Financial Armegeddon where the financial system collapses.
I am sure I sound ultra bearish tonight folks but I call them like I see em. The market is acting absolutely horrible. The low volume tells me that many investors have given up and refuse to invest in this cesspool that's filled with fraud and government intervention.
I recently had a long fascinating conversation with a 50 year Wall St veteran in my family. He described the 1970's on Wall St. About half way through the decade, he explained that the equity brokers all jumped over to fixed income from the stock market because the equity market was dead as a doornail. Bonds was where all of the action was because they was outperforming equities. I can see a similar scenario setting up right now.
I mean why wouldn't investors be starting to bail? Can you blame them? Anyone that bought the S&P in the late '90's has now lost 50% of their money TWICE within a 10 year period. If that doesn't destroy confidence in an investment vehicle then I don't know what will.
If the corruption on Wall St isn't fixed, Investor's may never come back.
7 comments:
interestingly, im seeing quite alot of Baby Boomer age people getting out and about: gambling, eating out, etc. I think thats stock market money being spent on lifestyle. have to say; wise decision! why put money in something out of your control? in fact, just today, i got a notice from merrill lynch saying a trade selling all my shares (at a 75% ;oss) was done. problem is: i didnt initiate the trade! so i call him and bla blah. I was thinking of doing it anyway, so i said "whatever gimme my check NOW! and i got the chack an hour later... because im simply fed up. the truth is, you can say "im gonna sue!" but for what? BAC, MER are practically bankrupt! they are more dangerous than ever now, they have nothing to lose. seriously, what can you do if they outright ROB you? All i can say is, if you have money with one of these criminal enterprises: BEWARE!
Great Post Jeff.
Just this past weekend I was thinking of which markets will present the best opportunity to jump in on.
I'm speculating, but do think (on the assumption it will be revolutionized) Energy markets will be a great place to trade (along with fixed income).
JD
I have the same worries. Part of me just wants to clear out all of my accounts and bury it in my backyard..lol
I know this of course isn't realistic so I just here in treasuries and hope they don't explode.
I have been tapping the ATM quite often and building up a stash. I hope its worth something if TSHTF!
I am glad you tapped out of Merrill. Screw those bastards.
Joey
My thought exactly....I was going to get into the inflation trade on that post but I figured I had babbled long enough.
My first thought is TIPS. That will be a large core holding. Energy is also a great call. Oil, metals, miners.
IF fixed income starts paying 7-8% why risk anything in equities?
I will spec trade for fun, but I will be mainly fixed income if we get up to those yields in 3-5 years from now.
U remember my spiel last summer about the 70s being a 9-to-11 year structural transformation of our economy, complete with 2 energy shortages and bouts of 2-digit inflation, unemployment, i-rates, etc.
What Obama, Ben & Timmy are trying to do is re-set the clock to...2003. That’s easy (LOL...it aint gonna happen tho) compared to the bigger trick they've concocted to conjure afterwards: to harmonize the re-inflating of inter-locked credit markets in the US, EuroZone, Japan, China, UK, and the Oil Oligarchs. They believe they can unite and blow blow blow in harmony so as to neither blow a too big bubble quick to burst nor too small a credit bubble that wont meet local demand and local political realities. They seek the global Goldilocks Credit Bubble involving central banks, sovereign wealth funds, and private banks. That’s a fantasy that really ‘blows’.
Gillian Tett @ London Telegraph blew a hole in this fantasy in April 2008, no pun intended.
No big inter-locked credit markets = no return to GDP’s 70% driven by debt-fueled consumer spending = no USA exiting the ‘L’-shaped recession, even after de-leveraging finishes, until 20xx.
This means no booms in broad stock markets like S&P 500 and Wilshire5000.
U'll have to hunt-n-peck for individual winners.
I’m doing more exploring into this along with the deaths of the 3 models: 1) the GDP consumer spending model, 2) Service Economy and Jobs that used debt to close the household budget model, 3) FIRE generating 30% of all US corporate earnings in 2006.
The US is 50% bigger as it enters this brutal economic restructuring in 2007, than it was in 1973 when it entered its last one. Wow.
Today we’re a flabby, ponderous, slow-footed, 300+ million-person politically-divided nation. In 1973 we were only 208 million, svelte, better muscle tone and quicker on our feet, but admittedly sickly with a flu. Today we're an ocean liner 50% bigger than the last one that crashed the iceberg.
Demo data like this is why I reject Charts. That kind of TA ignores changes in the under-lying 'economic & demographic physics' between data points at different times in history.
Avl
Great points
We are pretty much a bunch of bloated pigs over hear.
I
totally agree with you. There is no reflation here. Reform and transformation is needed.
We need to get back to manufacturing and innovating. DEBT DEBT DEBT is not the answer.
Great points.
I have been doing a lot of research on P/E values at bear market bottoms. According to what I discovered we aren't even close.
I may do this one tomorrow.
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