Ba-Boom!!!

[Deogol]

Stock market dropped again.

Bets are it will go under 11,000 by next week.


I am sitting here watching Jack Welch on hardball. I wish TV was more interactive - cuz I would like to press a button that would cause a machine with a big glove slap him in the head.

[Melonie]

the Euro and Yen rose another 2% in the past couple of days, prompting hawkish comments from the FED implying further interest rate hikes to come in an attempt to reverse the trend.

If you're a european/asian investor holding US dollar denominated stocks or bonds, that represents an additional 2% loss on top of the 2% decline in the DJIA in terms of your 'home' currency. Once enough foreigners figure out that even when the DJIA doesn't move that the US$ decline is costing them exchange rate losses, they'll really start selling off their US holdings. Once that happens, aaa-ooo-gah, dive dive !

How bad ? here's some worst case speculation ...



(snip)" the longest depression in history was the DARK AGES !!!" (snip)
~

[Deogol]

Goodies about buying €

[StuartL]

For what it's worth Melonie, any financial / investment adviser in Europe worth his salt has done a lot of this already anyway.

For my part, I only have two investors left with any US index, US$ holdings. They refuse to sell, hard as I try. I have a few clients in US$ investments via China or India funds, but thats it.

I got all my US sales completed at the end of last year. Of course, the clients don't really see that you are doing well or badly. If you didn't see a cliff, you don't know that you narrowly missed falling off it... I just have to be contented that I know where the cliff was and that they missed it.

[StuartL]

I love the article by Doug Casey. Very interesting. Deflation and inflation at the same time. That really could happen. The man is a genius.

Some interesting thoughts throughout. Mostly about being well prepared. It's good advice. When the shit hits the fan, only those who have really prepared will have a chance. And largely, interest rates are the key. And they keep on rising.

PS. re my post above. I didn't have to get my clients to sell lots of US holdings. I never really put them in to start with. But if every adviser had to ease his clients out of $50,000 or $100,000 of US holdings, sooner or later it adds up to a lot of downward pressure.

I guess in total, my clients had about $200,000 of assets between them all. Maybe a little less. As I mentioned earlier, I have helped them to sell 85%-90% of that. Mainly, i got them into UK and European commercial property funds = lower risk with more reliable returns and additional diversification to their portfolios. My clients don't really get the gold argument and view commodities as 'gambles', so commercial property it was!!

As advisers worldwide start doing that, it'll be a stampede. The exit will be crammed.

If you are reading these posts and have a portfolio of US$ denominated assets (bonds and stocks) and don't know what to do, start looking for asset class and currency diversification whilst you can.

[Melonie]

As advisers worldwide start doing that, it'll be a stampede. The exit will be crammed.

This is especially true today since an estimated 40% of the 'dollar value' of ALL US stocks and bonds are now owned by 'foreign investors' i.e. non-US residents/entities. The last time the feces hit the fan i.e. LTCM + S&L's + Asian Contagion in the late 80's, the percentage of 'foreign' ownership was closer to 20%. This fact alone guarantees that US stocks, bonds and the US dollar itself will come under twice as much downward pressure as last time.

Bets are it will go under 11,000 by next week.

The dow spent most of the day below 11,000 and closed at 11,002 today, thanks in large part to a sizeable Fed 'coupon pass' and frantic 'anonymous' buying of futures just prior to market close !

interest rates are the key. And they keep on rising.

Actually, M3 (= broadest measure of total US$'s in circulation) is the key ... which is precisely why the Fed stopped reporting it. IMHO interest rates are a byproduct of large increases in M3 (= US Fed's printing presses running in overdrive) driving down the US$ exchange rate, and not a force unto themselves.

However, as the Fed keeps raising short term interest rates to defend the US$ exchange rate, and as the bankers/investors drive up longer term interest rates to cover increased risk, the higher interest expense puts a damper on US economic activity for businesses and individuals alike. Higher interest expense means lower business profits, as well as less discretionary spending by individuals which means even lower business profits. Higher interest expense may also represent the 'kiss of death' to businesses and individuals who are already operating on the 'ragged edge'. But IMHO all of these possibilities are byproducts of the underlying problem i.e. the US gov't printing new paper dollars in an attempt to pay off (monetize) past debts.
~

[lunchbox]

I'm still waiting to see gold break 1000 by the 4th of July....

[StuartL]

Well, Melonie, I think you are right and wrong. M3 is vitally important - I won't be denying that. But, it will be the increased interest rates that crush the US consumer who has debt up to their eyeballs. M3 won't make them feel so bad for a long time, but as interest rates rise and repayments on variable mortgages, secured loans, personal loans and credit cards rise they will lose any monthly spare cash they had and then find themselves in deep trouble very quickly. To my mind, that is only about 1% (in interest rate rises away).

For what it's worth, I'm building a website right now about debt management and I'm hoping that as the game gets really serious it will be largely completed...

[Melonie]

I suppose that the inflation versus deflation argument lies at the bottom of this discussion as well ... whether or not the US gov't will be able to print enough new dollars to allow itself and US consumers to still make their monthly debt payments ( i.e. hyperinflation, where the US dollar is devalued by say half, where everybody's paycheck doubles, but monthly payments on old debts go up by much less than that percentage wise). On the flip side is deflation, where US consumers and individuals see their paychecks stay the same, but see their monthly payments on old debts increase significantly, leading to bankruptcies and old debts liquidated by default.

We'll probably get some element of both. The new 'wrinkle' with hyperinflation in the USA is that we now import damn near all basic commodities and manufactured goods from other countries, meaning that the 'advantage' that inflation once offered by making old debts easier to pay down will be immediately counterbalanced by massive price increases in these imported basic commodities and manufactured goods. Another new 'wrinkle' is the massive implied costs of gov't providing higher unemployment checks, welfare checks etc. if deflation gets started, businesses start going bankrupt and people find new job opportunities non-existant. On the inflation side, 'automatic' pay raises and tax increases that will go along with hyperinflation for people who are still working will render many ineligible for social welfare benefits if gov't does not change the tax brackets and benefit eligibility thresholds - which would actually leave the gov't's budget in much better condition - which is why the gov't is promoting inflation.

[Melonie]

DJIA closed at 10931 today, and has gone even lower in after-hours trading ... see, you didn't have to wait until next week for the DOW to crack 11000 ! If foreign owners of US stocks start heading for the exit en masse, you may be able to see 10000 by the end of next week. A possible indicator of foreign investors moving money out of the USA is the "decoupling' that has been occurring over the past month or so ...



On the inflation-deflation subject, the Fed is apparently putting the word out that they are NOT going to deviate from the monthly 1/4 point increases in the Fed Funds interest rate, signalling that US interest rates will continue to rise for a while yet. The Fed of course did not announce how many billions of dollars worth of new US dollar bills they printed last month ! And as the link / charts point out, the Fed is now discovering that when they take particular actions re interest rates / money supply that they aren't getting the expected end result anymore. This leads to the obvious conclusion that a new 'force' is now making itself felt in the US stock and bond markets - very probably foreign owners of some 40% of all US stocks and bonds who are not 'immune' to the US$'s exchange rate as US residents are.


" What did Bernanke say?
TODAY'S EDITORIAL (Washington Times)
June 7, 2006

Federal Reserve Chairman Ben Bernanke has long been a big fan of central-bank transparency. In his capacity as one of academia's most respected monetary theorists throughout much of the 1990s, it's probably fair to say that he obsessed over it.

While his predecessor, Alan Greenspan, had a once-well-deserved reputation for speaking in Delphic tones about monetary policy and the direction of short-term interest rates -- legend has it that he had to ask Andrea Mitchell three times to marry him because his first two proposals were too opaque -- the fact is that Mr. Greenspan's interest-rate pronouncements had become extraordinarily transparent throughout the final years of his tenure. As an institution, so too, had the Fed.

Mr. Bernanke, who was the most loquacious junior Fed governor in history (take our word for it, we've read his speeches), deserves a fair share of the credit for the leaps in Fed transparency that occurred during his earlier stint as a Fed governor from 2002 to 2005. To become more transparent today, the Fed would probably have to invite C-SPAN's cameras into its policy meetings.

So it is ironic that despite his best intentions to operate as transparently as possible, Mr. Bernanke, of all people, had the misfortune of having his views misinterpreted by the markets at the beginning of his term as chairman.

Our view is that the markets deluded themselves into believing that Mr. Bernanke, in his April 27 testimony before the Joint Economic Committee, had effectively guaranteed a pause in monetary-policy tightening following the Fed's May meeting.

This, mind you, despite the emphatic assertion in his prepared remarks that the Fed "will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives."

How much more unambiguous must he be to send the markets the message that an inflationary breakout will not be tolerated?

Apparently much more so, judging by the markets' reaction to his straightforward, unvarnished, night-follows-day remarks on Monday at the International Monetary Conference in Washington. Acting surprised by his comments, the markets tanked: The Dow Jones industrial average and the S&P 500 shed 1.8 percent of their value, while the Nasdaq composite dropped 2.2 percent.

What did Mr. Bernanke say that so ruffled the markets? "At annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months." From a man who has repeatedly told us that his core-inflation "comfort zone" was between 1 percent and 2 percent, his conclusion -- "These are unwelcome developments" -- should have surprised nobody.

Nothing Mr. Bernanke said was news. These worrisome data points became known on May 17, when the Labor Department released its consumer price index report for April. Clearly, the Fed has not finished its tightening cycle. The markets, however, remained mired in self-delusion."

~

[scarlett_vancouver]

I'm buying US stocks. Prices are low. And no, not with Canadian money.

[Deogol]

Buy carefully - even the blue chips (like GM) aren't blue chips anymore!

[scarlett_vancouver]

lol, I'm not buying GM!

I'm being as careful as I can... it's all done with crossed fingers, though.

[Melonie]

I agree with Deo ... there are some talking heads who are of the belief that the recent 700 point drop in the DJIA represents a buying opportunity, but there are many others who are of the belief that DJIA stocks were (and still are) significantly overpriced versus future earnings. In reality, given the US$:CDN$ exchange rate trend, you might actually be better off putting that money into a CDN$ denominated savings account !

[scarlett_vancouver]

Well, I'm pretty spread out; I do have Canadian stocks of course. But the TSX is so small, and our economy is pretty weird right now too- our dollar might be strong, but our strong companies are folding too.

The Canadian stock market is like 2% of the world market, while yours is 50-odd%. Keeping my money that is already USD (which is about 50% of my savings) on a market where I can stay more diversified makes sense to me. I'll make my money in USD, and when it eventually goes back up relative to ours (it will...eventually), THEN I'll consider exchanging it.

Basically, I see no reason to stay right out of the US market. If I was retiring in 10 years, maybe, but I have 40+ years left (I don't plan on or want to retire early).

[Melonie]

Keeping my money that is already USD (which is about 50% of my savings) on a market where I can stay more diversified makes sense to me. I'll make my money in USD, and when it eventually goes back up relative to ours (it will...eventually), THEN I'll consider exchanging it.

hopefully this will happen before you reach retirement age !