Critical Warning 6
With the U.S dollar running a race with time in order to avoid being subject to further humiliation of devaluation; with the Euro staring at a likely collapsible defeat from its peers; with the smirking bloated inflation mocking at the masses; the stock market resembling a directionless musical band with each stock artiste singing its own melody and the gold prices merrily following an unseen Pied Piper’s tune, Critical Warning Number 6
THE PRESENT WORLD ECONOMY – THY NAME IS UTTER CHAOS!
What can be done to steer clear of a fast approaching situation of impending doom? Can a portfolio be devised in such a way that it will pave way for financial resources, regardless of the sorry state of present affairs of stock uncertainty and economic downturn?
A host of problems seem to be crippling the United States. The U.S. government has tried in vain to reset the fractured limbs of its once-healthy economy with external splints in the form of trillions of dollars. Despite these valiant efforts, it has had little effect on the growth in jobs and profits. The rate of underemployment in the U.S. stubbornly refuses to move beyond15%. Although the total non-farm payroll employment rose by 163,000 in July, the number of unemployed persons of 12.8 million and the rate of unemployment at 8.3% remained unchanged. (Source: U.S. Bureau of Labor Statistics). The following graph depicts the position of unemployment in the U.S.
Critical Warning 6
In 2008, the U.S. Government took charge of the twin mortgage giants Fannie Mae and Freddie Mac and the home loans (to the tune of $5 trillion) that they backed, in an effort to revive the housing market which was ridden with innumerable foreclosures and declining home prices. In effect, presently, more than fifty percent of the outstanding residential mortgages in the U.S. are either owned or given guarantee by the U.S. government. In June, the figures for home mortgages in the U.S. which were either in the process of foreclosure or payment-evading were almost five million. Presently, there is decline in the rate of foreclosures and this has resulted in a slight scarcity of availability of properties at a few places in the U.S. As the mortgage rates have been drastically reduced, there has been a slight increase in the number of home buyers, but still, it is an uphill task for the housing market as far as sufficient recovery is concerned, because there still are a considerable number of people who have houses that are priced so meagerly that they cannot sell them; not even to clear their outstanding debts. The resale of homes is seeing a slightly declining trend while new home sales miserably sit below their lowest figures since 1963. No wonder then that the U.S. Housing Sector is extremely woeful; waiting in anticipation of nothing short of a miracle to bring it back on the right track and fast! All this has contributed to the ushering in of high -velocity winds that are heavily rocking the cradle of the wobbly U.S. economy.
The banking figures too are not very hopeful. The European debt crisis has affected the American banks by about $1 trillion. It looks like the first blow of recession will befall the American economy very soon. Many European countries have already doubled under countless other blows already.
This year, our budget deficit will touch $1.3 trillion. With an official national debt of $16 trillion and the permitted debt increased to $16.4 trillion, the official national debt may go well beyond $20.0 trillion, if one excludes off-balance-sheet items like old age security, Medicare and other government promises to its citizens. Unofficially, our national debt including unfunded liabilities and entitlement to the citizens may almost be about $100 trillion.
Politicians too, are not far behind. Since 2008, they have been burdening the government-spending by trillions of dollars; hoping in vain that the economic situation will improve. Thus there are losses and then there are more losses. The velocity of the wind now has reached such high levels that the boughs bearing the cradle of the U.S economy will eventually break; bringing down the stock market, the U.S. dollar, the housing market and pave way for a sure recession!
With the national debt pointing at 150% of the GDP, the stage looks all set to remind us of the situation following the World War II. Prior to that period, gold was the official global currency of central banks. But America consolidated its manufacturing sector, improved its industrial sector, increased its job sector and successfully replaced gold by the U.S. dollar as the official currency. America had then fortified itself as a Superpower!
Unlike after the World War II, the story today is very different. The leading manufacturing sectors are in Mexico, India and China. America has been maimed with a downgraded credit rating. About forty four million American people are utilizing the ‘Food Stamps’ that are given to low-income groups to help buy food under the Supplemental Nutrition Assistance Program (SNAP). Internet jobs are on the decline. This speaks about the pathetic plight of so many of the citizens. Due to the lowering of the interest rates in the year 2004, there was a lot of borrowing which was put in real estate investments. These low interest rates are the main culprits that have brought the infamous inflation to rule the U.S economy for an indefinite period of time. Also, with the decade having not yet concluded, gold prices have reached sky-rock prices. So now, hyper-inflation and high interest rates are inevitable; the very signs of a befalling recession, so very reminiscent of, but may be worse than the hard times of 2007-2008 and the Great Depression of 1929.
To refresh your minds, the Great Depression, true to its name, saw the eruption of the volcanic Wall Street and its lava flowed to every part of the world. Heavy destruction, in the form of extreme unemployment gripped the countries. Resultantly, poverty prevailed in many a home. Low profits’ churning was the ‘best’ income. No wonder then, that the U.S economy was staring at its worst ever fate and there was nothing hopeful that could propel individual growth of the people. The outcome was that of utter depression in the minds of the people, who perceived the future with cynicism and did little to offer support and help in the economy. Industrialization remained stagnant, with hardly any new industries venturing to cut their ‘inauguration cakes’. There was increase in consumer debt. The industries that were affected in a big way were the construction industry, the agricultural sector, the shipping industry, the mining industry, the automobile sector and the appliance industry. 1933 was the year that saw the condition deteriorating and with it, the stock prices dropped to one fifth of their peak values of 1929. That was not all. Factories and many businesses had to shut down. The banks showed depressing results and farm income dropped to half of what it was in 1929. Most were without jobs and the worsening situation continued till the year 1933. Later, speedy growth overcame barriers till the year 1937, after which, again the country was hit by unemployment issues.
But this was way back in time, when U.S. had the required resources to combat against hampering situations.
What is the current situation?
The U.S. has some money; but it is highly insufficient to see the nation cruise through the next recession. The Federal Reserve has been printing money since the last three years with a view to ease the fragile condition of the U.S. economy. In the absence of such a tactic having been exercised, in technical terms, the U.S. would be truly called BANKRUPT! With the interest rates reaching zero figures, there is no chance of the same being further lowered. Inflation has already reached massive proportions with the printing presses working overtime. In addition, the higher long-term interest rates will move, rendering a choking atmosphere to the already smothered economy.
The stock markets of the period 2008-2012 bear so much resemblance to that of 1929-1937:
1929 – 1937
2008 – 2012 (ongoing)
|The stock market crashed in 1929||The stock market crashed in 2008|
|1934 saw the start of a bear market rally and it continued till 1937||March 2009 is the beginning of the current bear market rally.|
|The Dow Jones Industrial Average gained 106% from level 90 to 185 after which it plummeted down and recovered in 1944||The Dow Jones Industrial Average has risen by about 100% since the year 2008.|
Critical Warning Number Six
If the present rally follows the same trend as of 1934-1937, the prices of stocks are expected to fall below their March 2009 lows in the coming months while the subsequent bear market is in progress. But it appears that the next leg of the bear market will be much worse than that after the Great Depression.
Since the past four years, the U.S. national debt has increased by about $5 trillion dollars, courtesy, the Obama administration. The increase in the size of the U.S balance sheet by the Federal Reserve has been $2 trillion. With the U.S. dollar getting devaluated ever since the year 2009; it is to be expected that the rate of its devaluation will hasten with the worsening of the U.S. economy. Presently, seventy percent of the world central banks hold the U.S. dollar as their official currency. It is still the preferred choice of currency as many investors are reluctant to deal in the Euro after the Eurozone crisis. But when the national debt mounts and starts overflowing beyond control; when the inflation crosses the hyper-inflated stage (thanks to the Fed’s money printing strategy), it will not surprise us unduly if foreigners begin shunning the U.S dollar and search for safer, more secure pastures, where they will not be haunted by the ghosts of sovereign debt issues and bloated inflations!
The prices of gold are on the rise, which sets the gold mining stocks apart as the most likely investor-favorites. Every year, gold bullion prices rise, suffer a few slumps (these weaknesses are mainly due to corrections in ongoing bull markets and this is when it is sensible to invest in gold), then recover to end the year with prices higher than with what they started at the start of the year. The past eleven years have observed this trend. When there is rise in inflation, when the value of the U.S. dollar drops, when there is exorbitant government spending and when the Federal Reserve’s printing presses work round the clock, the prices of gold typically move higher.
The European crisis has caused investors to steer clear of the Euro and it has weakened significantly against the U.S. dollar. Austerity measures have not been taken kindly by Europe, with Greece having technically ducked on its debt and now it is being difficult to bail it out. Italy is not far behind Greece. And although billions of euros have been thrust into the Spanish banks, it is still asking for a bailout. Germany needs to pull out of the Euro.
Since thirty years, short term interest rates are falling and may bottom out. Presently, the U.S. treasury is giving low yields of 1.5%; the lowest in sixty years. The scenario is predictable of the end of a long-term down-cycle in interest rates just around the corner.
The U.S. government may elevate interest rates now to drive away the inflation. This may prove to be the final straw for the staggering U.S. housing market.
Just imagine the trauma of the following precarious situation!
THE UTTER SIMULTANEOUS COLLAPSE
THE U.S. GOVERNMENT
THE U.S. ECONOMY
THE HOUSING SECTOR
THE STOCK MARKET
Following history, the direction of the bear market rally in stocks will change its direction and sink down to test its March 2009 lows. The Dow Jones will fall almost 52% from its position today. The trend is that during Phase I of the bear market, the prices of stocks plummet down sharply. In Phase II, the bear traps the investor and goads him and analysts to reinvest in stocks, by painting a picture of pseudo- optimism; that of the economy improving and being investment-friendly in stocks again. In phase III the stock prices finally fall down. Likewise, from October 2007 to 9 March, 2009, the Dow Jones fell from 14164 to 6440, by 54%. We are now in Phase II as mentioned above and the bear has already done its job. The Dow Jones has managed to cross 13000 (as on 8 August, 2012). Now the bear is getting old and long in the tooth. So if we follow the path of 1934-1937, it will not be long before Phase III will begin and the stock prices will go below their March 2009 lows!
And when that happens, it will again bring with it a blanket of gloom, a sense of desperation, a future of uncertainty.
IS THERE NO WAY OUT OF THIS DARK, GAPING HOLE?
Also Read: Critical Warning Number Six
"A Golden Opportunity for Precious Metals and Gold Investors"