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Does the DOW deserve to be back to an all time high that in 1999 proved to be overvalued? I think not. Yes, corporate profits are higher and PE ratios aren’t quite as stratospheric as in 1999, however the fundamentals going forward looked much better in 1999 than they do today. I do not believe the DOW and S&P deserve to be where they are. However, monetary inflation is a strange thing. Where those excess, newly printed US dollars go does not always make sense – in the short term. Remember, this is a game of confidence! All fiat currencies are held up by the confidence in the holders of that currency that their paper money can be exchanged for something of real value. That confidence can evaporate overnight. Will it? The bloom is off the rose in housing. The monthly and year-over-year statistics are terrible and continue to get worse. So far spin has been that it is not good, but not horrible either. Tell that to the Chairman of Toll Brothers who is quoted as saying: The slowdown "is the first downturn in the forty years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors," "Instead, it seems to be the result of an oversupply of inventory and a decline in confidence". (emphasis mine) Or the CEO of Countrywide Financial, one of our largest sub-prime lenders who said, "I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen." By some estimations anywhere from 35% to 50% of the jobs created during the last 5 years have been in housing and housing related industries (i.e. mortgage finance). If that source of job growth is gone – and in fact adds to unemployment, where is the job growth going to come from? The overall economy is slowing down, tech does not look healthy enough to take up the slack and the consumer is finally showing signs of slowing their spending binge. What ammo does the Fed have to fight this? They have the bully pulpit – and they will be using it to the extreme over the next few weeks and months. They have to! They are not in a position yet to let the US dollar fall (election time, Amero not ready) and if they cut rates, that is exactly what would happen. So for now they will try to “talk” the markets in the direction they want them to go. Additionally, the Fed will have the added benefit of having year over year inflation numbers that will look quite good come October and November. This is due to the spike in energy last year as Rita and Katrina ravaged the gulf coast. Because of that spike, oil is actually significantly lower this year than last. Expect the “core rate” of inflation, which is so focused on by the main stream media, to be thrown out the window and the headline rate instead highlighted in October and November. I believe it is very possible that “the core rate” inflation (a bogus number to begin with) will continue to be reported in the +.02 to +.03 range in the upcoming months, while the headline rate will be flat to maybe even down. All this will be fodder for the powers that be to declare “inflation expectations have moderated” and to keep the markets trending as they currently are. What is described above is what I believe is the best case scenario. Here is what makes the next six months so critical… If any of the markets fail to respond to the Fed’s “Open Mouth Committee” leadings then the confidence game in the US dollar could be up. Here is how the next 6 months may unfold:
As you can see, I believe there is the real potential in the next six months for the stock markets to lead us into the end game, or for housing to continue to lead, only with increased momentum. Consider the following chart:
Source: John Mauldin, “Fingers of Instability – Thoughts from the Frontline” This essay does not even cover the geopolitical games that are in dangerous phases (Iran’s nuclear program, Iraq’s instability, Israel’s conflict with the Arab world) that could precipitate a move to the end game. What is certain however is that the end game – if it comes within the next 6 months or 6 years - will not be pretty. It will be a time of turmoil and volatility the likes of which we haven’t seen in decades. The powers that be are not yet ready for the Amero. The Security and Prosperity Partnership isn’t set to have real legs under it until 2010. The question dead ahead is - will the global markets cooperate? God’s blessing to you! Stay protected with God’s money. Doug (aka pa30twin) Detail to support this view can be found at www.proverbs22-3.net. 44 Trillion Abyss audio and articles courtesy of Financial Sense Online (www.financialsense.com). Chart Courtesy: Grandfather Economic Report, Kitco.com, Economagic.com, and StockCharts.com Detail to support this view can be found at www.proverbs22-3.net.
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