investing for stable, steady growth part 3

This is an update on Part 2 that I published last week. Briefly, I forecast a decline in US stocks. Generally speaking, that is what happened.

Today, I will mention a couple of short-term possibilities and then comment on a longer-term forecast. As a reminder, here is a chart I published last week:

Here is an updated chart, showing a decline of about 2.5% (which could have easily produced a gain of at least 7.5% last week for astute investors).

djia3months

 

Here it is with the two trendlines shown last week plus a new line:

djia3months2

 

Again, several measures of momentum and of trend exhaustion (“sentiment”) already indicate that current market conditions are very similar to the long-term market tops in 2000 and 2007.  My “top” short-term forecast was that US stocks would break the pink trendline and collapse. That was NOT precisely what happened.

Instead, there was a brief “throw-over” (an exhaustion of buying momentum) late last week and then a relatively moderate decline so far. US stocks were very weak at the end of today (resulting in the investments that I bought yesterday at $26 to close today at 3 times that price, an overnight gain of 200%).

Even though there has been clear weakness since last week’s publication, I am not convinced that a final top is in. I will not get in to the detail of why, but basically my temporary moderation has to do with the fact that the decline so far has been moderate.

Prices could rebound next week and come back up to barely make a new high, testing the BROWN trendline, then plummeting. That would be an “ideal” signal to enter a long-term position to benefit immensely from a crashing of US stock prices.

If prices do collapse Monday or Tuesday of next week, then that will cancel my short-term caution and I would expect prices to promptly crash to near the green line, then bounce for up to a few weeks, then proceed down to below 7,000 (past the 2009 low) rather quickly.

Again,  current measures of opportunity and risk are very similar to 2007 and 2000, when buying momentum was decelerating and measures of investor  complacency were at historic extremes, which is once again the case. That is why I am repeating my warning (first published in early 2003) about the immense risk once again at extreme levels in the US stock market.

Note that I am speaking only of US stock markets so far. Now lets look at the US as well as Asia and Europe.

globalstocks

 

First, I am going to assume everyone can see that GENERALLY, these different lines have similar movements. They tend to reverse trend together. They also tend to vary somewhat.

In 2008, during the global stock market crash, they all plunged in tight conformity. Next, the rebound of 2009 was also rather uniform.

Then, in 2010, Asian and European stock markets formed a series of slightly higher peaks. In 2011, European stocks approached the prior highs of 2010 and then all 3 groups plunged together. European stocks are still below the 2011 high.

Asian stocks have made two slight new highs, but in recent weeks are plunging (while the US and Europe are relatively steady). So, while the US has made new highs since the 2007 peak, Europe and Asia have not.

As I have repeatedly said for the last 10 years, the global economy is the issue, not a single region or country. Global credit markets (trends of lending and borrowing) are at risk of collapsing. The return to aggressive, high-risk lending practices in the US has led to a “false” boom (a temporary rebound). The US economy does currently have “better credit” than much of Asia and Europe, but that is not the issue. That simply explains why the US has had a stronger rebound.

The fundamental issues since I started publishing in 2003 & 2004 remain. First is the global surge in fuel prices (global oil prices went up over 1200% from 1999 to 2008, which I first focused on in 2004, as I detailed the an emerging peak in global production of crude oil, which happened very predictably a few years later). Second is the worldwide retiring of the baby boomers (again, that baby boom is not just in the US, but in all countries involved in ww2, including China, Japan, Russia, most of the current European Union, and other places directly involved in WW2, like North Africa and the Middle East). Briefly, retirees tend to sell stocks rather than complacently dump money in to 401Ks and IRAs and mutual funds every paycheck. At a minimum, they tend to stop dumping money in, even if they do not sell stocks for more secure investments like government bonds.

So, there is no regional “political solution” for the global baby boom- no solution at all. We cannot simply pass a law to invent an extra billion 20 year-olds to start dumping money every month in to the global stock market. Likewise, we cannot simply pass a law to double the amount of oil being produced worldwide.

Since it’s peak in 1989, Japan has been closely watched by astute investors. People there may believe that the latest political leader will “save” Japan’s economy. However, the government cannot indefinitely prevent the retiring  of the baby boomers in Japan, nor change the fact that Japan produces virtually no fossil fuel and is the only large nation entirely dependent on imports.

In contrast,m the US is still a top producer of oil, along with Saudi Arabia, Russia, Canada, Mexico, Iraq, Iran, and Venezuela. Just like fuel-rich Alaska had a great decade and energy-hungry Arizona has had one of the worst decades in the US, the US will do MUCH better than places like Japan, Italy, or Greece if global fuel prices continue to be high.

When a gallon of gasoline passed $11 in Europe in 2008, that basically ended the current global economic boom. That risk is what I have been focusing on since 2004. (Rising fuel prices would eventually result in reduced spending on most everything else.)

Will there be a technological innovation that rekindles the global economy? Probably, but when? After global investors predictably over-react to the coming decline, eventually there could be a quiet technological innovation that eventually spreads around the globe and creates a renewed wave of lending and borrowing.

However, as long as the masses are increasingly shy of huge government deficits, they will be more and more skeptical about lending money to insolvent governments like Greece. Soon, the masses will even be cynical about lending to banks and other large corporations who have entered in to massive liabilities, such as the insurance industry as well as any corporations that have gambled by borrowing huge sums to speculate in commercial real estate.

In other words, global economic production may increase, but trends of lending and borrowing are the real issue behind prices like stock prices. Since most people are unaware of the simple dynamics of how credit bubbles effect prices by artificially reducing demand for cash (currency), they are shocked when credit bubble stop inflating and begin deflating, which multiplies the purchasing power of currency, such as happened in the 1930s in most of the world and in Japan since 1989.

Given the effectiveness of recent marketing campaigns to pump speculation in real estate on borrowed money, in “safe” mutual funds, in “too good to be true” annuity contracts, and in other high-risk investments, the size of the deflating will be historic. The size will be in proportion to the size of the inflated expectations of “endless” access to easy credit and 1% down real estate lending and so on. Patterns of hysterical attention to credit reports will vanish and people will start to value their actual cash MUCH more. Why? Because when “no one” has any excess cash to lend, then no one cares about credit reports.

Deposits and down payments and cash will “speak louder than promises.” After a wave of bankruptcies and contract re-negotiations and disputes, the global credit bubble will more or less disappear. The immense wave of baby boomers will retire and face reduced (fixed) incomes, reducing their credit-worthiness.  Tax rates globally may also spike, causing another spike in demand for cash.

Again, people generally ignore the fact that the ONLY fundamental source of demand for government currencies is taxation and other claims of liabilities imposed by force on the masses. If governments worldwide face insolvency due to ridiculous socialist promises to support the retiring baby boomers, then raising tax rates (and increasing the ferocity of the collection activities by the court’s law enforcement personnel) is another predictable outcome.

Because of the baby boom creating a huge surge of young people entering the workforce, there used to be 50 employees to each retiree. Now, with modern life expectancy increasing, countries like Japan are facing  rates of 5 employees to each retiree (or even less). Many governments are aggressively seeking to monopolize health care, especially for elders, just as governments are facing huge incentives to redirect material wealth from the productive working age masses to subsidizing non-productive members in their retirements.

The global economic boom of the baby boom generation is coming to an end. If technology and political creativity can soften the decline and keep it short, so be it. However, with the twin issues of global fossil fuel production peaking (crude oil, natural gas, coal, etc) and the retiring of the baby boom, my long-term forecast remains absolutely the same as it has since 2003.

Most people do not see this predictable transition as an opportunity. That indicates to me how unaware they are of what investing methods are enormously profitable during a deflation of credit markets. Because of the historic discounting by the masses of the methods that will be the most lucrative in coming years, there may have never been such a concentrated opportunity to benefit once the global masses stop discounting certain investments and begin to pour in to those opportunities as they pour out of ultra high-risk strategies like speculating on real estate with borrowed money.

 

 

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2 Responses to “investing for stable, steady growth part 3”

  1. truth60 Says:

    You seem to think all retirees will do is sit on their butts and knit. There are quite a few who will continue to contribute to the economy in various ways. I, myself am in the process of starting an e-business, and there are many retired veterans in my groups who are lanching second careers, for example. Perhaps this trend might be taken into consideration? I don’t know how it could be recorded, however, since most of them very wisely chose to work on a non-tavable basis.Some, of course, haven’t realized any profits as yet, or will suffer the normal risks when starting up a new business. Still, I think it is a trend that should not be overlooked.

    • jrfibonacci Says:

      First, thanks for your reply. Second, I agree with you in regard to some retirees continuing productive economic activity, whether “recorded” or not, and I will say more about that below. Third, I consider your tone to border on antagonistic, which I would presume to be based on terror, and sometimes terror is entirely appropriate. However, unless your commentary is respectful, you will not be part of “my” conversation.

      Now, on to the topic you raised, your comment about recorded activity and unrecorded activity is accurate, but not the point I was making. I was explicitly talking about investment markets- such as stocks, mortgages, annuities and other financial instruments that are written on paper.

      Certainly, retirees can plant gardens, but that will reduce overall consumption (demand) at grocery stores, reduce sales tax revenues of those stores, and contribute to a decline in various kinds of prices as they stop buying so much and start producing for private use. Your “exception” actually completely supports my main point.

      Yes, retirees in Europe could invade South Africa and take over all the diamond stockpiles there, but, again, that is not a transaction, even though it is economic activity to invade somewhere and confiscate stuff and then demand war reparations and so on. I was referencing financial transactions in particular, not all economic activity, not gardening, not piracy or imperialism or colonialism, but just free market exchanges (with the obvious exception that I referenced coerced taxation revenues).

      I find it notable that for the last 10 years, many people will witness a small tidbit of my body of research, then offer some dismissive attack on some trivial element like that I did not talk “enough” about recent advances in “early detection of cancer” or something. I consider it normal, but not a sign of maturity. The reality is that the 90s worldwide was quite different in many ways than the last 13 years worldwide.

      If that is deemed relevant or not by any particular person, that evaluation is a matter of their VALUES (priorities). If people are rude and antagonistic or respectful and inquisitive, that is also evidence of their values.

      One of the MANY forecasts that socionomists like myself have been long referencing is the emerging shift in values away from mutual respect toward antagonism (at least in the West). The last several Presidential elections in the US, I noticed decreasing goodwill and increasing antagonism among the PUBLIC. My experience is that people call each other “idiots” on facebook much more frequently lately than years ago.

      Condemnations of corruption are growing. Some say that there is more corruption, but there is more ATTENTION to corruption for sure, whatever the amount of corruption before.

      There is a decreasing sense of “Europe is heading in the right direction” by citizens of the EU (as measured in many polls and surveys). Same in Asia and America and so on.

      These are all evidence of the most basic principles of socionomics. Of course, the main stream are blind to these principles and antagonistic toward any attention to personal responsibility.

      As “social mood” deteriorates, there may be increasing campaigns of blame and rebellion. “Blame the dolphins!” “Just say no to the influence of lobbyists!” That sounds like another panic of terrified denial to me. The influence of lobbyists is not new. Dolphins are not new either. But hysterias of blame and antagonism, according to socionomists, form predictable trends.

      Sometimes, the antagonistic will drag each other down. That is when the meek “inherit the earth,” like simply by humility and gratitude and partnership and maturity. Hysterias of antagonism are very different from the systematic strategies and tactics of imperialist propaganda and conquest.

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