Credit bubble (consumer debt), Mortgage bubble (housing)
Stock market bubble, National debt bubble (to China and Japan), unfunded liabilities (Social Security and Medicare).
The Debt Ceiling has been raised 3 trillion in the last 4 years. Last year the fed downloaded 1 trillion in credit to the system. Isn’t this grossly out of balance? Isn’t there always a "Reversion to the Mean Average"? The economy has to eventually follow laws of physics and do a major correction. Not so?
Be sure to read "Speaking Truth or Crying Wolf list under "Sources" here. You’ll probably want to sell your house.
Washington’s unsustainable deficits
Warren Buffet says to imagine it like a farmer would. "In order to consume 4% more than they produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own."
Kids will get this message. The adults running Washington don’t. Our trade deficit is unsustainable. Like the farmers, we borrow $700 billion a year to live high-on-the-hog. Washington’s been cleverly hiding the game. Until the Dubai fiasco we didn’t know that Washington’s been fast selling America’s equity assets to foreigners.
Be sure to read Warren Buffet’s other stories in the same article referenced in "Sources." Unfortunately, our nation’s moral character just keeps sinking deeper, while government debt explodes, Wall Street bonuses soar and Corporate America can’t stop throwing money at greedy CEOs.
I trade stock index futures for a living. I’m not an economist or advisor or employed by a mutual fund or biased broker, and have to discern my own way to decisions. I do have investors though, and here is what I told them about the stock market.
My technical analysis points to a top in the making. Fundamentally there are economic and business pressures mounting from the yield curve, energy prices, inflation, debt and housing. And lastly our historical research into the four-year Presidential Election Cycle indicates stocks are ripe for a fall and a major midterm bottom.
Nine of the last fourteen bear market bottoms have come in the midterm year. Two occurred in post-election years, two in election years, and one in a pre-election year — 1987, the biggest one-day crash of all time.
The consumer accounts for two-thirds of the economy. U.S. household debt reached a record high $11.4 trillion. The increase in debt was the highest in 21 years. And U.S. households spent 13.75% of disposable income on servicing their debt — another record high. Credit card delinquencies are at their third-highest level ever. Also, the savings rate of the consumer fell to its lowest since the Depression in 1933.
Unfortunately, the consumer can no longer rely on escalating real estate prices to financially bail them out.
43% of first-time homebuyers across the country bought properties with no-money down mortgages. Plus, what about all those adjustable-rate deals? There have been 14 consecutive interest rate hikes.
These types of loans with rising rates place the consumers and the economy in an extremely vulnerable position. In actuality, the combination of those leveraged obligations and the increase in borrowing costs make the level of interest rates much higher than the quoted figure.
You may have noticed that the bond yield curve has inverted. In the past, whenever the curve has inverted, for whatever the reason and at whatever level of interest rates, a recession has followed within months. This means that Ben Bernanke and his band of merry central bankers will have to keep raising the federal funds rate as long as the curve remains inverted.
With economic growth slowing, crude still rising, and a choppy corporate profit outlook, perhaps the market appears to be getting a bit too volatile for those looking for a more steady return.
Caesar’s failure to heed Spurinna’s prophecy resulted in his assassination. Neglect this forecast that a major market top has already been posted (probably today on 3/21/06), and your portfolio may begin to suffer losses after the Ides of March.
Last Friday marked the sixth anniversary of the Nasdaq Composite’s all-time high of 5049. From its all-time high to its bear market low of 1108, hit on Oct. 10, 2002, the Nasdaq lost almost 80% of its value, as did investors who owned Nasdaq stocks, invested mostly in high-flying internet companies and software startups. The market lost $8 trillion in value, poof, up in smoke.
Last Friday the Nasdaq closed at 2262, still down over 55% after six years of waiting. In comparison, The Dow industrials (DJIA) have at its current level of around 11,070 retraced about 85% of the bear market decline from the January 2000 high of 11,750 to the October 2002 low of 7,197. The S&P 500 Index, last at 1,282, has retraced 65% of its fall from the Mar.24, 2000 high of 1,553 to the Oct. 10 2002 low of 769.
There was a lot of hoopla surrounding the Dow Jones Industrial Average (DJIA) closing above 11,000 on Monday; another venerable construct. It has been there before – 19 times, in fact.; investors have amnesia. Obviously investors are immunized to history’s lessons, thanks to the relentless brainwashing from Wall Street’s quarterly earnings obsession, and cable news frantic reporting of the markets all day.
Consequently, this psychological affliction is destined to unfold much as it did in 1929, in 1974, in 1987, in 2000 and now again in 2006. Or at the least, we need to be prepared for it to be so.
What’s more important is the fact that the Dow is still below its record close of 11,723. That was set on January 14, 2000 – six years ago. This is the longest stretch between peaks for the Dow since the 1973-82 period.
But this key indicator of the stock market (DJIA) actually stagnated for even longer than the nine years indicated by these dates. The Dow first closed above another round number — 1,000 — back in January, 1966. After several attempts during ensuing years, the Dow didn’t move above 1,000 once and for all until late 1982, in essence, going nowhere for almost 17 years.
And just in case you forgot, after the stock market crashed in 1929, it took fully 25 years for the Dow to regain its previous peak! The “Buy and Hold Strategy” touted on Wall Street really depends on when you buy. Currently, if you bought the Nasdaq internets in 1999, your portfolio was down over 80% at one point, and still hasn’t recovered half of its value after six years.
When all asset markets are as extended as they are now it does not take much for a vicious sell-off to get underway. The world’s on a hair-trigger. It will take very little to reach the tipping point and push markets and economies over the precipice
Buy precious metals, build a cash hoard, and sell stocks and real estate. Get ready, because you never know how bad it’s going to be.
Have a Great Year!