SUMMARY/RECAP OF LORIMER WILSON 3-17-09 ANALYSES
Harry Dent, Jr.
Economy will be in a Depression by 2011
The worst of this next depression is likely to hit between mid-2010 and
mid-2013, especially around early 2011, but if the banking system continues to
implode a deep downturn or depression could begin sometime in 2009 instead of
2010.
Dow will Fall to 3,800 – 4,500 by 2012
Nasdaq will Fall Below 1,100, its 2002 low, by late 2010 or mid-2012 at the latest.
Economy will be in a Depression by 2011
- The worst of this next depression is likely to hit between mid-2010 and
mid-2013, especially around early 2011, but if the banking system continues to
implode a deep downturn or depression could begin sometime in 2009 instead of
2010.
Inflation will Increase until mid- 2010
and then turn to Deflation
Interest Rates will Increase
U.S. Dollar will Decline
Housing will Decline by 40 – 60% from
Today’s Levels
Greatest Economic and Banking Crisis
since the 1930s will Occur Between 2010 and 2012
Russell
Napier is the author of the book “Anatomy of the
Bear”, a professor at the
The S&P 500 will Decline to 400 by
2014 (the Dow 30 to 3800)
The S&P 500 will then undergo a major crash that will see U.S. equity
prices bottom at almost 50% below current levels (i.e. to 400 or less; the Dow
30 to 3800 or less) sometime around 2014 as Tobin’s “q” drops to 0.3 signaling
the end of the bear market, as it has done at the end of the four largest U.S.
market declines in 1921, 1932, 1949 and 1982.
U.S. Treasury Sales Could Collapse Leading to End of U.S. Dollar as Reserve
Currency
Robert R. Prechter Jr.
is author of a number of newsletters and books including “Elliott Wave
Principle” (1978) in which he predicted the super bull market of the 1980s; “At
the Crest of the Tidal Wave – A Forecast of the Great Bear Market” (1995) in
which he predicted a slow motion economic earthquake, brought about by a great
asset mania, that would register 11 on the financial Richter scale causing a
collapse of historic proportions; and “Conquer the Crash: You can Survive and
Prosper in a Deflationary Depression” (2002) in which he described the economic
cataclysm that we are just beginning to experience and advised how to position
one’s self financially during that period of time.
Depression is Imminent
The Dow Jones Industrial Average will go down to at least 1000, most
likely to below 777 which was the starting point of its mania back in August
1982, and quite likely drop below 400 at one or more times during the bear
market.
_______________
If you still need to be convinced that
extremely difficult times are ahead and that action must be taken please refer here for an article entitled
“They Called it Right (Plus Predictions for 2009)”. This article reviews the correct
predictions of 8 noted investors, analysts and academics for the year 2008 and
their outlook for 2009. The individuals are: Nouriel Roubini, Peter Schiff,
Meredith Whitney, David Tice, Jeremy Grantham, Robert Shiller, Bob
Rodriguez/Tom Atteberry and Mark Kiesel. Their forecasts are much more general
than those of Dent, Napier and Prechter but clearly indicate what is in store
for us in 2009 and beyond.
________
COMPLETE
ARTICLE BY LORIMER WILSON 3-17-09
Most investors don’t take seriously warnings about the future of
the economy and the financial marketplace, but those who did avoided the dreaded
“Cs” of finance: the Credit Crisis and Crash of ’08. What warnings are we
talking about you might ask? Well, it was the headlines of several years ago
screaming that a
‘Category 6 Fiscal Storm’, ‘Debt-Driven Meltdown’, ‘Systemic Banking Crisis’,
‘Financial Train Wreck’, ‘Wild Ride’, ‘God-Awful Fiscal Storm’, ‘Major
Upheaval’, ‘Rude Awakening’, ‘Great Disruption’, ‘Debt Bombshell’, ‘Major
Upheaval’, ‘Unwelcome Economic Spiral’, ‘Perfect Financial Storm’, ‘Serious
Collapse’, ‘Drastic Fall’, ‘Financial Disaster’, ‘Major Bear Market’ and/or an ‘Economic Earthquake’ was in store for the U.S. and, indeed, the
global economy in the very near future.
And the future is now!
Some Predictions do Come
True
These warnings and predictions were often
derided as just negative nonsense coming from alarmists, ‘party poopers’,
‘Chicken Littles’, ‘perma-bears’, ‘doom and gloomers’ and the like rather than
from the insightful economists and financial and market analysts who made them.
To their collective credit they were all substantially correct in their
prognoses of what we could expect to happen as exemplified by what has occurred
(and is still occurring) over the past 6 months. It has cost many investors
50+% of their stock market investments, 20 - 30% of the value of their home or
even the loss of their house itself. Perhaps we should have paid more attention
to what they said and as I compiled in the 6-part series back in 2006 regarding
the “Ominous Warnings and Dire
Predictions of World’s Financial Experts” followed up by a 4-part series
entitled “Warning! Fiscal Hurricane
Approaching! Is Your Portfolio Secure?”
Once again warnings and predictions are
being put forth about the next crisis to befall us and
this time round it behooves us to pay more attention and make sure that we are
better positioned to survive and prosper whatever comes our way. Below are
major market forecasts and investment advice based on drastically different
analytical styles (demographic, fundamental, technical and ‘socionomic’) from
forecasters who have ‘been there, done that’ successfully in the past and are
once again forecasting what their research indicates is in store for us over
the next decade. It should be ignored at our peril.
Harry
S. Dent Jr., the author of ‘The Roaring 2000s’, ‘The Roaring
2000’s Investor’, ‘The Next Great Bubble Boom’ and his latest book entitled
‘The Great Depression Ahead’ states that
“The most important cycle change for your
wealth, health, life, family, business, and investments is just ahead during the
first and last depression you are likely to experience in your lifetime.”
Dent makes it clear that his predictions,
while almost always contrary to most economists and expectations, have almost
always proved to be correct because his predictions are based on the same sound
and quantifiable logic insurance actuaries use with a high degree of accuracy
to predict, decades in advance, when people will die. Dent says he applies the
same science to predicting what things will happen in between birth and death –
such as when people enter the workforce, get married, spend, are most
productive, borrow, invest, retire, buy houses and so on. He believes that such
a study of demographics and other key cycles allows him to determine the future
based on the facts of the present and of demonstrated behavior so he can see
the pig, or the pigs, going through the python. With that understanding of the
basis for his forecasting he goes on to predict (and I paraphrase) that:
Dow
will Rebound to 10,000 – 13,200 within 6 Months
A likely massive stimulus plan will
bolster the economy somewhat into 2009 for a likely rebound in the Dow to
between 10,000 and 13,200. A projected bullish scenario puts the Dow between
12,000 and 13,200 between April and September 2009 if the Treasury rescue plan
takes hold with the markets anticipating a recovery. A projected bearish
scenario assumes that if the recovery is at best rocky, or at worst that we
were to move more into a depression in 2009 than a serious recession, that the
Dow would only get back to 10,000 to 11,000 and not last as long.
Oil
will Increase to $180 – $215+ by 2010 and then Decline to $40 - $60 by 2015
Oil prices will likely rise to a commodity
bubble peak of between $180 and $215, possibly even more, and if not that high
then, at an absolute minimum, retest its 2008 high of $147, between late 2009
and mid-2010 unless the economy implodes earlier in 2009. We should then see a
major crash in oil prices, beginning in 2010, back into the $40 - $60 range,
and possibly even lower, between 2012 and 2015 which will continue for years.
Commodities
will Peak between 2009 and mid-2010
Commodities in general, including gold and
other precious metals despite their crisis hedge qualities in the past, will
likely peak between mid- to late 2009 and mid-2010. It will probably be 2020 or
2023 before we see the next sustained commodity boom and bubble which should
last into 2039 – 2040.
Dow
will Fall to 3,800 – 4,500 by 2012
The next accelerated stock crash, led by
emerging markets, Asian stocks, financial stocks and tech stocks – and finally
by oil and commodity stocks - will likely occur between mid- to late 2009 and
late 2010, when most of the damage will occur, and continue off and on into
mid- to late 2012. The Dow will fall at least to 4,500 and more likely as low
as 3,800 by mid-2012, the 1994 low where the stock market bubble first began.
Nasdaq
will Fall Below 1,100, its 2002 low, by late 2010 or mid-2012 at the latest.
Market
will Rally from 2012 until 2017
A substantial bear market rally will
likely occur between around mid-2012 and early to mid-2017 and then a less
severe downturn will occur from around mid-2017 into early 2020 or as late as
early 2023.
Economy
will be in a Depression by 2011
The worst of this next depression is
likely to hit between mid-2010 and mid-2013, especially around early 2011, but
if the banking system continues to implode a deep downturn or depression could
begin sometime in 2009 instead of 2010.
Note: According to a recent research paper
on “Stock-Market Crashes and Depressions” by David Barro, a professor of
economics at Harvard, there is a 20% probability that a stock-market crash such
as what we are currently experiencing will result in a minor depression - where
the economic decline is between 10% and 25% - and a 28% possibility if it is
associated with a major war of the magnitude of World War 1 and World War ll.
Conversely, if a minor depression occurs first we can expect a market crash to
follow 69% of the time and 83% of the time if the depression is major i.e. the
economic decline is in excess of 25%. As such, should our current recession
escalate and culminate in a minor or major depression by 2011 it may well
follow that we will indeed experience another major stock market crash in 2012
as Dent forecasts.
Unemployment
could Increase to 12 – 15% by 2011
Unemployment could reach 12-15%, or
possibly higher at the peak of the depression.
Inflation
will Increase until mid- 2010 and then turn to Deflation
A rise in inflationary trends from
mid-2009 into late 2009 or early mid-2010 will then reverse to an ominous
deflationary trend in prices, as the economy slows and all assets deflate, as
they have done after every bubble boom in history. It is not that the
government will not try to inflate its way out of this next crisis by cutting
interest rates and undertaking public works projects, etc. but that the massive
write-off of real estate and business loans will outweigh those efforts and
contract the money supply.
Interest
Rates will Increase
The Federal Reserve will raise interest
rates aggressively from mid-2009 forwards due to rising inflationary pressures
which will contribute to the on-going crash of the stock market down to the
3,800 to 4,000 level.
U.S.
Dollar will Decline
The U.S. dollar, which declined in early
2008 in the face of a strong stock market and which strengthened considerably
during the Crash of ’08, is likely to decline again into 2010 – 2012 as the
stock market declines considerably further. The dollar will then strengthen
again before we see the second milder stage of the depression between mid-2017
and early 2020 or 2023.
Housing
will Decline by 40 – 60% from Today’s Levels
A more severe deflation cycle in housing
will begin between late 2009 and mid-2010 and will likely last until somewhere
between mid-2011 and 2013, and possibly as late as early 2015 in larger homes.
During that period the average American house price will fall at least a
further 40% and as much as a further 60% from today’s market prices.
Housing has remained essentially flat when
adjusted for inflation over the last century except during the extreme bubble
after 2000 and the deflation cycle of the early 1900s and 1930s. As such, the
current grossly overvalued house prices of today, coupled with expected rising
unemployment deflationary trends and the continued real estate slowdown due to
the aging of the massive baby-boom generation, will likely make such a decline
in house prices a reality.
Greatest
Economic and Banking Crisis since the 1930s will Occur Between 2010 and 2012
Dent concludes by saying
“If you thought 2008 was scary, 2010 to
2012 will be the greatest economic and banking crisis since the 1930s. You must
be prepared in advance to survive this most difficult season. Do not accept the
proposition that you cannot, or should not, take steps to guard against losses.
As an investor, it is your money, your future, and your responsibility to
protect yourself in the best way possible and there will be the greatest reward
for those who do prepare during this once-in-a-lifetime ‘great sale’ in
financial assets.”
How
Best to Invest and Prosper during the Tumultuous Times Ahead (according to
Dent)
1. Early to mid
2009:
a) Sell stocks, except commodity and
energy sectors
b) Allocate between commodities and
T-bills or money markets and /or safe currencies.
2. Late 2009 to
mid-2010:
a) Sell commodities and commodities and
energy stocks.
b) Allocate 100% to T-bills or money
markets and safe currencies.
3. Mid- to late
2010
a) Start to allocate to 30-year Treasury
bonds only after their yield begins to spike.
4. Late 2010 to
mid- 2011
a) Allocate to 20-year corporate bonds
when yields go to extremes.
b) More conservative investors should
focus on AAA corporate, more aggressive investors toward BAA.
c) All investors must recognize, however,
that even high-quality bonds will be in question as to their viability, given
that the downturn between mid-2009 and 2012 is anticipated to be more extreme
than anything we have seen since the early 1930s, mid-1970s, or early 1980s.
5. Mid-2011 to
mid-2012:
Allocate to long-term municipal bonds when
yields seem to be peaking (high-tax-bracket investors).
6. Mid- to late
2012:
a) Aggressive/growth investors: allocate
majority into Asian stocks and lesser into
b) Conservative investors: focus largely
on 10- to 30-year Treasuries and 20-year corporate AAA bonds, with minor allocations
in multinational, health-care, and Japanese stocks.
7. Late 2011 to
early 2015:
Look for selected opportunities in real
estate (small condos and starter homes early on; vacation and retirement homes
later; trade-up homes by 2015).
8. Mid- to late 2014:
Aggressive/growth investors: allocate more
to leading stock sectors such as
9. Early to
mid-2017:
a) Sell stocks in all sectors.
b) Convert largely back into long-term
bonds and, to a lesser degree, into T-bills or money markets.
Note: His book goes on to provide
additional advice on which assets to invest in up to 2036 which I have excluded
here as our interest and focus is much more short-term given our current
economic, fiscal and investment environment.
If you doubt the validity of Dent’s above
mentioned predictions and advice consider this: ‘The Great Depression Ahead’
was written in the fall of 2008 yet Dent projected on page 56 that a) many
banks would fail – that has already happened; b) or have to merge with others –
that has already happened; c) or have to be bailed out by the government – that
has already happened; d) the Fed would have to cut short-term interest rates to
near zero – that has already happened; e) the federal deficit would soar to in
excess of a trillion dollars – that is already a reality and f) the 30-year
Treasury bond would eventually fall to something like 2% in yields (3.77% as of
March 16th, 2009).
Dent has an extremely good track record of
telling us what we would rather not hear and acknowledge as most likely the
case so it behooves us to make the most of this important information. Dent
encourages everyone to apply for his free periodic e-mail updates to his basic
forecasts and investment strategies and to check out ‘Free
Downloads’ for further and more current information. I encourage
those readers who have found the above forecasts and investment advice to be
informative to buy his latest book for a greater understanding of the study of
demographics and other key cycles that allow him to determine the future so
precisely.
Russell
Napier is the author of the book “Anatomy of the Bear”, a professor
at the
The
S&P 550 will Reach an Interim Bottom by 1Q’09
The S&P 500 now trades at below fair
value based on Tobin’s “q” ratio (which compares the market value of companies
to the cost of their constituent parts) which has dropped below its long-term
average of 0.76 to 0.68 from a peak of 1.9 in 1999, and the cyclically adjusted
10-year price-to-earnings (CAPE) ratio and, as such, should bottom by the
end of the 1Q’09.
The
S&P 500 will Rally between 2009 and 2010
The S&P 500 will experience a
significant rally from the end of the 1Q’09 until mid-2010 to late 2010.
The
S&P 500 will Decline to 400 by 2014 (the Dow 30 to 3800)
The S&P 500 will then undergo a major
crash that will see U.S. equity prices bottom at almost 50% below current
levels (i.e. to 400 or less; the Dow 30 to 3800 or less) sometime around 2014
as Tobin’s “q” drops to 0.3 signaling the end of the bear market, as it has
done at the end of the four largest U.S. market declines in 1921, 1932, 1949
and 1982.
U.S.
Treasury Sales Could Collapse Leading to End of U.S. Dollar as Reserve Currency
The crisis of 2008 will force key large
global economies such as China, India and Russia to target domestic
consumption-driven growth to replace sales to the U.S. and Europe. When China,
in particular, succeeds in shifting to a consumer-driven growth model it will
clearly provide the key marginal demand for most global consumer goods and this
will further reduce the need for the current export-oriented growth countries
to manage their currencies relative to the U.S. dollar in pursuit of export
growth to the U.S. The fewer countries that pursue such a policy, the less
foreign support there will be for the U.S. federal debt market. This could well
be the cataclysmic event that forces U.S. equities to the massive under-valuations
seen at the previous major bottoms of 1921, 1932, 1949 and 1982 and the end of
the U.S. dollar as the de-facto reserve currency.
Deflation
Expected until 2015
The yield on treasury inflation-protected
securities (TIPS) shows (using the yield differential between Treasuries and
TIPS) that deflation is now expected and forecasts that the average prices in
the U.S. will decline every year between now and 2015. Such a deflationary
economic contraction would be a major shock to the business community and
earnings damage associated with such a contraction would probably be larger
than normal initiating a significant decline in the U.S. equities markets.
Continued
Deflation or Renewed Inflation are Possibilities
The supply of U.S. Federal debt will be
soaring just as foreign demand for that debt is waning and this combination
will produce an up-shift in the yield curve which, if it were not met by a
Federal Reserve reaction, would be highly deflationary
for the U.S. On the other hand, if the Fed were to decide to open its balance
sheet to buy Treasuries and keep interest rates low, then the consequences
would be an inflationary scare that would further
exacerbate capital outflow and the collapse of the dollar.
Sell
U.S. Treasuries Soon, Buy Equities in 2014
Bond investors are already being presented
with a once-in-a-lifetime opportunity to get their money out of U.S.
Treasuries. Equities will look truly terrible by 2014 but they will be so cheap
they will once again represent excellent long-term value as they did in 1921,
1932, 1949 and 1982. Should the world lose faith in U.S. Treasuries sooner and
suddenly then U.S. equities would decline the projected 50% very quickly
thereafter.
Foreign central banks’ faith in Treasuries
can be monitored by checking the value of marketable securities held
in custody for foreign official and international accounts. Any marked decline
would be a warning to investors in U.S. securities that the end game was in progress.
Note: What is truly remarkable about
Messrs. Dent’s and Napier’s predictions is that they approached their economic
and financial analyses from totally different perspectives - Dent using
demographic trend analyses and Napier using technical and fundamental economic
analyses - yet came to the same conclusions by and large. It really makes you
want to sit up and take notice as to what they have to say.
Robert
R. Prechter Jr. is author of a number of books including
“Elliott Wave Principle” (1978) in which he predicted the super bull market of
the 1980s; “At the Crest of the Tidal Wave – A Forecast of the Great Bear
Market” (1995) in which he predicted a slow motion economic earthquake, brought
about by a great asset mania, that would register 11 on the financial Richter
scale causing a collapse of historic proportions; and “Conquer the Crash: You
can Survive and Prosper in a Deflationary Depression” (2002) in which he
described the economic cataclysm that we are just beginning to experience and advised
how to position one’s self financially during that period of time. Prechter
also publishes two newsletters, the ‘Elliott Wave Theorist’ and the ‘Elliott
Wave Financial Forecast’ both of which are paid subscription based. The Elliott
Wave Theory takes a ‘socionomic’ approach to forecasting which contends that
markets are driven by psychology and, while it is relatively easy to understand
in concept, the interpretation and resultant application of the trends are
difficult to implement consistently.
The above being said, there are no
shortage of senior economists, analysts and financial industry executives who
sing the praises of his work. Such words as “ignore Bob’s books at your peril”;
“it could help you save your financial future”; “the closest thing to a crystal
ball we could look for…it is a road map that no investor should be without”;
“ignorance may not be bliss – it may mean bankruptcy. Ignore the message at
your risk”; “knowing long term risks and opportunities in financial markets
ahead of time is absolutely the key to consistent investment success”; “if you
want to preserve your wealth (or what little is left of it) I urge you to
follow Prechter’s advice. You will be grateful that you did”. There are more
words of praise to be had but I’m sure you get the idea of what astute
professionals think of Prechter’s work.
So what does Prechter have to say about
the current situation and how we should deploy our assets? He is not as exact
with free advice as Dent and Napier are but, as a result of his analyses, he
has the following to say about the economic and financial environment (and I
paraphrase):
A
Deflationary Crash and Depression is Imminent
Deflation requires a precondition: a major
societal buildup in the extension of credit and its flip side, the assumption
of debt. Credit expansion continues as long as there are those willing to lend
and borrow and there is the general ability of borrowers to pay interest and
principal. These components depend upon whether both creditors and debtors think that debtors will be able to pay, and the trend of
production, which makes it either easier or harder in actuality for debtors to
pay. So long as confidence and productivity increase, the supply of credit
tends to expand. The expansion of credit ends when the desire or ability to
sustain the trend can no longer be maintained. The supply of credit contracts
as confidence and productivity decrease.
The social mood trend changes from
optimism to pessimism when creditors, debtors, producers and consumers change
their respective primary orientation from expansion to conservation. As
creditors become more conservative, they slow their lending. As debtors and
potential debtors become more conservative, they borrow less or not at all. As
producers become more conservative, they reduce expansion plans. As consumers
become more conservative, they save more and spend less. These behaviors reduce
the ‘velocity’ of money, i.e. the speed with which it circulates to make
purchases, thus putting downside pressure on prices.
At some point, a rising debt level
requires so much energy to sustain – in terms of meeting interest payments….
chasing delinquent borrowers and writing off bad loans – that it slows overall
economic performance. When this burden becomes too great for the economy to
support the trend reverses causing reductions in lending, spending, and
production which, in turn, cause debtors to earn less money with which to pay
off their debts, so defaults rise.
Default and fear of default exacerbate the
new trend in psychology, which in turn causes creditors to reduce lending
further. A downward “spiral” begins, feeding on pessimism just as the previous
boom fed optimism. The resulting cascade of debt liquidation is a deflationary
crash. Debts are retired by paying them off, by “restructuring” or by default.
In the first case, no value is lost; in the second, some value; in the third,
all value. In desperately trying to raise cash to pay off loans, borrowers sell
all kinds of assets to market - including stocks, bonds, commodities and real
estate - causing their prices to plummet. (Sound familiar? It should because
such behavior is unfolding as you read this very article!) The process ends
only after the supply of credit falls to a level at which it is collateralized
acceptably to the surviving creditors.
Note: Where are we at this point in time?
Let’s take a look again at the various stages of decline to determine where we
are:
Stage one
The major banks of the world major are
concerned that any credit obligations that they were to enter into with other
banks would not be honored because of the unknown extent of toxic assets (such
as derivatives and sub-prime Mortgage Backed Securities) on their books – as
was/is the case on their own books.
This, in turn, has
caused them to go from an expansion mode to a conservation mode resulting in a
credit crisis such as we currently are experiencing.
Stage two
The major banks’ refusal to lend money to business
has caused, or is causing, business to go from an expansion mode to a
conservative mode which has, in turn, adversely affected
the trend of production.
This is evidenced by the 6.2% seasonally
adjusted annualized decline in GDP during the 4th
Qtr. of 2008 which was the worst decline since a 6.4% decrease in the 1st qtr of 1982. To make matters worse, economists don’t
expect any relief in the current quarter, which ends March 31st, projecting a further -4.8% annualized rate which would
be the first time since 1947 that the GDP has fallen by more than 4% for two
quarters in a row.
Stage three
a) The reduction in production by business
has, in turn, led to or is leading to, over-capacity
which has increased employee layoffs.
Indeed, unemployment soared to 8.1% in
February, the highest rate in over 25 years. The consensus of private
forecasters is for the unemployment rate to get close to 9% in 2010 with some
forecasters suggesting a 10% rate. The Federal Reserve, itself, doesn’t expect
the unemployment rate to fall below 7% until 2011.
b) The increase in unemployment has, in turn, reduced the affected consumers’ ability to buy
goods and services.
c) The consumers’ inability to buy goods
and services has, in turn, reduced company sales and
profits.
d) The reduction in company sales and
profits has, in turn, caused the price of their stock to
decline.
e) The lack of easy credit and/or loss of
employment has meant that home “owners” (i.e. mortgagees in some degree of
co-ownership with whichever financial institution holds their mortgage) have
not been able, in increasing numbers, to re-finance and/or afford to re-finance
their mortgages and, as such, have not been able to make their escalating
monthly mortgage payments which have, in turn, led to a
record high number of mortgage foreclosures.
Indeed, as of the end of 2008 12% of
Americans with a mortgage were at least 1 month late or in foreclosure which
was up from 8% a year earlier. Even worse, a stunning 48% of home “owners” who
have sub-prime, adjustable-rate mortgages are currently behind in their
payments or in foreclosure which, in turn, has resulted
in ever more distressed house sales by the mortgagors and other neighborhood
homeowners with, or without, a mortgage.
Stage four
The dire economic scene (fear of loss of
job, loss of money invested in the stock market, reduced resale value of their
house, etc.) has seen, in turn,
a) a major increase in savings (the
personal savings rate rose by 5.0% in January, the highest rate since 1995)
b) a reduction in spending (it dropped
0.2% in December)
c) a reduction in the sale of goods and
services
d) a decline in the price of such goods
and services (as evidenced by the U.S. GDP Price Index which declined by 0.1%
on a quarter-over-quarter annualized basis in the 4th
Qtr of 2008 - the 1st decline since 1954 – and
supporting the Fed’s obtuse view that “inflation pressures will remain subdued
in coming quarters.” That tells us that deflation is imminent.
Stage five
We are going to see a self-reinforcing
escalating vicious cycle of stage two, stage three and stage four over and over
again. The downward “spiral’ is in progress.
So there you have it! We are in the early
weeks of stage five. As such, it is fully understandable why the governments of
the world are throwing money at the credit problem so excessively in an attempt
to get the wheels of industry turning to stem the decline before it takes hold.
It is an extremely dire situation with no end in sight at the moment.
Gold
and Silver Beginning a Decline to Under $680 and $8.39 respectively
Gold and silver will fall into their final
dollar price lows at the bottom of the deflation…after which time these metals
should soar in price. Given the likely political inflationary forces following
the period of deflation the rebound could be much stronger than anticipated so
owning precious metals prior to the onset of the post-depression recovery is
desirable.
Should you buy gold and silver now? If you
are willing to accept the dollar value of the precious metals dropping another
30% ($680 gold represents a 26% decline from the early March 16, 2009 price of
approximately $923) or more before they rise substantially….but are willing,
nevertheless, to pay such a price for its current availability and for the
‘insurance’ of greater portfolio stability under an unexpected inflation
scenario, then the answer is yes.
The above being said, it is probably not
as good an idea to invest in gold stocks because in common stock bear markets
stocks of gold mining companies usually go down with the overall market trend
except in relatively rare 5 to 10- year periods of accelerating inflation. As
such, in this early stage of deflation gold mines will enjoy no false advantage
over any other companies. Their stocks will probably rally when the overall
stock market rallies. Owning gold shares is fine at the top of the Kondratieff
economic cycle when inflation is raging and political tensions are their most
severe.
DJIA
Should Fall Below 777
The Dow Jones Industrial Average will go
down to at least 1000, most likely to below 777 which was the starting point of
its mania back in August 1982, and quite likely drop below 400 at one or more
times during the bear market.
Note: To Prechter’s credit he acknowledges
that these aforementioned forecasts are considered to be impossible by
virtually everyone. He is of the opinion that the price swings will be dramatic
over the course of the decline – as evidenced by recent swings in the Dow 30
from 11,723 on Jan.14th, 2000 to 7286 on Oct.9th, 2002 (-37.8%); to 14,165 on Oct.9th,
2007 (+94.4%); to 6594 as of March 5th, 2009 (-53.4%) - providing phenomenal
investment returns to the successful long term in-and-out investor. Even short
term in-and-out investors can profit considerably from the current market
volatility as the market swings up and down (October ’08 low of 7774 to a
November ’08 high of 9654 (+24.2%), to a late November ‘08 low of 7449
(-22.8%), to a January ’09 high of 9088 (+22.0%): to an early March ’09 low of
6594 (-27.4%). Is another 20% to 25% increase about to occur in the very near
future (i.e. to approx. 8250) followed by an even lower low of 25% to 30% (i.e.
to 6000 or so)? Only time will tell but Prechter sees money to be made during
such times for those astute and fortunate investors who choose not to park
their money in some form of cash or just ‘buy and hold’ as so many
financial/investment advisors are so prone to recommend.
U.S.
Dollar Index to Continue to Rise
It is important to make a distinction
between the dollar’s domestic and international values. In a deflation, the
value of any currency – the U.S. dollar, in this case – rises domestically
while the USD’s international value, as represented by the U.S. Dollar Index,
can rise or fall relative to other currencies in a deflation. In a time of
financial crisis, however, the U.S. dollar is considered to be a safe-haven
currency. This time is no exception, particularly given that the Euro, a major
component of the USD Index, is going through extremely trying times itself. As
the deflationary depression proceeds over the next few years demand for U.S.
dollars should increase even further. In such a deflationary environment, where
a strong dollar still persists, you want to be in safe cash equivalents such as
U.S. T-bills.
Treasury
Bonds are in a Bear Market
The 10-year Treasury note yield has been
in a sharp decline since the early ‘80s when it reached 15.84% at the height of
inflation and is at a deflationary level of 2.89% as of March 13, 2009. The
gargantuan government bond issuance to fund the U.S. debt bubble, however, may
push yields, which move inversely to prices, steeply higher in the years ahead.
Prechter has been quoted as saying
“The reason that I remain willing to
express my unconventional view is that I believe that my ideas of finance and
macroeconomics are correct and the conventional ones are wrong. True, wave
analysts make mistakes, but they also make stunningly accurate long-term
forecasts.”
Updates to Prechter’s insights and
predictions on all asset classes can be found here.
I encourage those readers who have found his above forecasts and investment
advice to be informative to buy Prechter’s books for a more in-depth read and
understanding of the basis for his making such projections of future events
with such confidence.
What is so intriguing here is that Messrs.
Dent and Napier, using totally different analytical approaches, have come to
much the same conclusions as Prechter. Again, when analysts with different
approaches to a situation agree, more or less, with the outcome it is something
to take very seriously indeed. And such is the case here!
If you still need to be convinced that
extremely difficult times are ahead and that action must be taken please refer here for an article entitled
“They Called it Right (Plus Predictions for 2009)”. This article reviews the correct
predictions of 8 noted investors, analysts and academics for the year 2008 and
their outlook for 2009. The individuals are: Nouriel Roubini, Peter Schiff,
Meredith Whitney, David Tice, Jeremy Grantham, Robert Shiller, Bob
Rodriguez/Tom Atteberry and Mark Kiesel. Their forecasts are much more general
than those of Dent, Napier and Prechter but clearly indicate what is in store
for us in 2009 and beyond.
In summary, we are being forewarned yet again about yet another
economic and financial crisis coming down the pike. This time don’t get burned
as you most likely did during the Credit Crisis and Crash of ’08. Instead,
position what is left of your portfolio such that you will actually prosper
during this ongoing financial hurricane. Now that you know what is about to
happen, take action, now! To just hope that everything will turn out okay would
be downright foolish.