Monday, September 5, 2016

Timing A market Collapse Is No Easy Task

Timing a market collapse is no easy task, last year on Labor Day I wrote a version of the article below titled "The Turning Point May Be Soon Upon Us". This is relevant to the holiday in that it is about money which is the commodity most of us trade our labor for. Again, I offer it up with some minor updates. Why should you listen to someone who has been wrong on the economy for so long? I humbly reply, that while I'm bearish and have underestimated how long those in power could continue to keep the wheels on our wobbling economy, what is happening in my world of both commercial and residential real estate has some very frightening overtones. Many people work hard for their money and even harder to save a bit of it but they are often lulled into complacency when it comes to protecting it. One of the saddest things to witness is when someone who has worked very hard suddenly becomes penniless because an investment or economy turns south.

I'm reminded of the story about how many people describe going bankrupt, slowly at first, then quickly at the end. We should remember this market has far exceeded the upside expectations of many bulls while the economy has languished and in many respects failed to regain all the ground lost since 2007. As I have stated, timing a market top is difficult, the question I again put forth is, are we reaching the turning point? A turning point can signify a historic or watershed event that is looked back on and commented upon for years, market crashes, the great depression, major economic shifts can fall into this category. In the past, I have written about the unpredictability of predictions and how a random black swan crashing through your front window plays havoc with the idea of always and never.

Currently, America and much of the world has been washed along on the momentum created by a wave of freshly printed money and low-interest rates. Auto sales have flourished because of super low-interest rates, and housing has also been pushed along by artificially low-interest rates that distort what might be called the natural laws of economic order. The historically low-interest rate environment has also masked inflation by lowering payments on loan and debt. In a free market, the law of supply and demand is left to efficiently allocate capital and in doing so determine true market value. By corrupting this force those in power have temporarily masked reality and the serious structural problems within the economy. Washington has failed to make the reforms necessary to make America more competitive, problems have been ignored and allowed to fester.

Job creation has been the weakest seen during any recovery on record, to make matters worse many of the jobs that have been created are of poor quality. Far too common we see low pay, none or little in the way of benefits, and many of the jobs today are only part-time. This means consumers are not in a position to spend the economy forward and out of this mess. Massive numbers of Americans have been unemployed forever and a day or simply dropped out of the workforce giving the illusion that the unemployment rate while a bit high has returned to an acceptable level, it has not. The decay and harm being done and the toll this is taking can be seen on city streets throughout America as building and houses sit empty and underutilized. The cost of carrying and maintaining this underused resource is staggering.

In this environment the burden of caring for a large number of people that need financial help has shifted onto the government, the projections made years ago had not envisioned such numbers. Talk that the budget deficit is rapidly coming down misleads many Americans into thinking that things will be fine but make no doubt we are still spending far more than we take in. The ugly truth many people choose to ignore is that starting in 2017 entitlements will become the driving force and carry the deficit further into the nosebleed territory.  Any claim that the Obama administration has the budget deficit back under control is a total lie. We are mired in the midst of the greatest government debt bubble in the history of the world. Even future budgets based on the most optimistic projections are ugly. Lies and changing rules such as recalculating how the GDP is figured only takes us further down the rabbit hole.

Washington has failed us, our politicians are always returning from another break, something most Americans would call "a paid vacation".  Again they will confront many of the issues they have continually kicked down the road. Making sense of our massive deficit has become far more difficult in these hard times yet cutting spending remains unpopular with many Americans who want more from their government. Central banks have been printing money for years with mixed results and all indications are that sooner or later interest rates will be rising putting, even more, stress on a struggling economy. Figures show the rich have grown richer while the middle and lower class have been smacked in the chin. The "too big to fail" banks have become a symbol of what is wrong with America.

Again this year let us ice this cake of  "difficulties" with a mix of troubles brewing throughout the world. Last year it was the drumbeat of war in Syria, Iraq, Ukraine, and many other hot spots, this still exists. Currency games, the carry trade, and money rapidly flowing across borders coupled with computer trading that distorts markets. Today we can add to the list a very contentious American presidential election, China collapsing in debt, ISIS and an unstable Middle East, as well as a wave of refugees flowing across Europe fleeing death and destruction. Forget all the hocus-pocus from the media and clowns about what historically is the best and worst months for the market or how well the market does when a certain team or party wins this or that. This bull market has gotten long in the tooth and exceeded the average length they normally run, caution would be in order. It might not be a good time to go double or nothing.


  1. Bruce,

    I would like to know your opinion on this, as it may have a big impact on what happens going forward. John Mauldin has recently speculated whether the BOJ, with Japanese government debt near 0%, would buy the debt, and strike a deal with the treasury to convert that debt to, say, 1,000 year, zero coupon bonds at 0%, effectively "disappearing" the debt. He even noted that it may do such a thing in a coordinated fashion with other CBs. Seems to me with Europe, the US and China having major debt problems, perhaps some arrangement could be struck between several to simultaneously do this, in which case it could have a small effect on FX markets and not cause loss of faith in currency ON A RELATIVE BASIS. I realize this is pretty far fetched, but what is being done now is beyond what anyone thought possible 10 years ago, and desperate times lead to desperate measures. What do you think would happen if this were done? Global loss of faith and price inflation from fear velocity into real, tangible things, or an acceptance and renewed hope in the face of far less indebted governments? I am firmly in the sound money camp, but also realize that the CBs will do whatever possible with more extreme measures going forward to keep the plates spinning. Thanks

    1. Good question, we can only speculate how events might unfold because of the massive number of variables. Welcome to the world our leaders have designed or allowed to form. Whether by design or merely as a byproduct of globalization we have weaved a web of financial transactions that circle the globe. Over the last several years as money was printed by the central Banks it was not contained in the countries wherein was printed. This money flowed across borders influencing and distorting markets and prices across the world.

      Some people have been calling for a "world currency" for years. the saying "one should never let a good crisis go to waste" means that a meltdown with high levels of fear would present a perfect opportunity and catalyst to advance this agenda down the field. Remember many people with agendas have a lot to gain when a major shift in the currency markets takes place. I refer to one possible outcome in a post I wrote awhile back, it can be found at the link below.

  2. Very interesting comments from you both Bruce and doug. I would like to hear your views on how an inevitable end game will play out.
    I believe there is no way the US, Japan and many EU countries (PIIGS) can repay their debt.
    We are seeing the CBs of those countries buying back national debt (US Fed 25% of outstanding, BOJ 50% and ECB somewhere in the middle).
    Ultimately this debt can only be nationalised/cancelled, or perpetually postponed as described by doug above, as it cannot be resold to the market place without massive collapse in bond markets as yields explode.
    This will eventually result in massive (hyper) inflation as purchasing power of, and confidence in, paper currencies (USD, JPY and Euro) collapses.

    Relative failure by a group of currencies will not avoid a hyper inflationary effect against hard assets like land, art and metals.

    A SDR or world currency which is a fiat currency and not backed by hard assets might delay a reckoning by fooling some/all of the people for all/some of the time, but it too must eventually fail.

    Debt is merely forward consumption. Indebted countries have made promises to pay they can keep in nominal currency terms but not in purchasing power terms. (That is except for the PIIGS which do not even have the luxury of independently printing money) When creditors realise they will not be repaid their purchasing power, (ie: they have made a severe capital loss) interest rates and inflation will skyrocket, regardless of existing real or nominal GDP growth levels.

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