The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
The market-index "circuit breakers", which automatically suspend trading for a brief cooling-off period, were in place in 1989 and appear to have been somewhat effective in minimizing the stock market crash during the collapse of the Asian currencies. Though I can't prove it, I suspect the damage was contained because the trading suspension gave the "plunge protection team" (which was established at the time of the 1987 Crash) time to move in and support stock prices by buying stock index futures.
Toward the end of the 1990s I again warned of an incipient stock-market crash, simply due to the worst overvaluations seen in many generations (really, since the South Seas and Mississippi bubbles circa 1720). One could argue that the NASDAQ crashed in the spring of 2000, but the popular averages traversed a more ordinary bear-market pattern, culminating in a (temporary, I believe) bottom in the summer of 2002.
So, I had to ask myself, why did the high probability (in my opinion) of an early-21st-century crash lead only to a quasi-crash in the NASDAQ? One can point to the extremely aggressive monetary easing and forcing-down of short-term interest rates by the Federal Reserve, but I think a more likely answer is that the "plunge protection team" was working overtime with stock-index futures to let the hot air out of the stock-market bubble more slowly.
So, if (as I think) today's stock market is no longer free, but a creature of government manipulation, it's time to get out of the stock-market-crash-predicting business. Certainly the Federal Reserve and its "plunge protection team" have the means to ameliorate a crash (if it's not a part of a bigger failure), and they definitely have the incentive, as a large chunk of baby-boomers' (and others') retirement funds are tied up in stocks and there's a political push on to sell the stock market as the rescuer of an impossible-to-keep Social Security promise.
However, that does not mean that the financial world is crash-proof. The greatest risk is a systemic risk in the general form of a failure of the monetary system, most likely presenting itself as a crisis of confidence in some highly-leveraged asset market. The most likely of these is the global derivatives market, which is essentially unregulated, highly-margined (100x and higher leverage), and of gigantic size. I have seen estimates for the total value of the financial derivatives markets of $100 trillion or more, well in excess of world annual GDP and of any underlying real assets supposedly backing the derivatives. The second most likely is the global housing market, which is also highly leveraged (with no-down-payment house purchases), though very regionalized by country and within countries (Great Britain, Australia, and the East and West coasts of the U.S., in particular).
The level of systemic risk is, of course, directly tied to the underall health and stability of the economic structure. Consider the present system: The Fed (keeper of the world's reserve currency) pressures stock and house prices higher in the U.S., giving people the illusion of being wealthier than they really are. Consumers then spend their asset values (exactly how one becomes wealthier by depleting assets through borrowed money I've never been able to figure out, but that's probably why I had trouble with economics in college). They spend it on stuff made by low-cost labor overseas, particularly in China, which keeps the value of its currency artificially depressed so U.S. demand for its goods will be high. The earnings these foreigners accumulate are "recycled" into U.S. debt, which thereby depresses interest rates and helps keep U.S. asset values elevated.... and the party goes on.
Whatever you can say about this state of affairs, one thing is for sure: It isn't stable. Eventually some thing has to give, something more than the 20+ percent drop of the dollar against foreign currencies that's been seen so far.
The Fed, the Treasury and the other "managers" of our economy hope that whatever gives way will give way slowly. I say, there are no guarantees it will happen that way. The longer the present arrangement continues without correction and a gradual return to normalcy, the more likely it is to abruptly rupture.
All that has to happen is for a shift to occur with sufficient alacrity for investors to perceive the "managers" have lost control of the situation. Then the failure, whatever it is, will snowball out of control.
This did not happen with the Japanese - their bubble degraded in a mostly orderly way. But then, the Japanese do not (mis)manage the world's reserve currency, and they are prodigious savers, not prodigious debtors. Once the unstable situation in the U.S. begins to unravel, it's more likely to look like Brazil or Argentina, rather than Japan.
So, say goodbye to "crash alert". Welcome to
"systemic failure alert". Currently I rate the odds
about 15% that we will have a major systemic failure
triggering a worldwide depression, and about 85%
that we'll go the way of the Japanese (muddle
through). We'll just have to see what transpires as
the 2006 recession draws closer.
The picture over about the last month is one of a deflationary spiral, seemingly only solvable with "helicopter money". Yet, this is no solution; it's a cure that is worse than the illness... a conundrum, if you will. If you are in the stock market in any way shape or form, you are not investing, you are speculating. Sell 'em all. The indices are weak having traced a head and shoulders reversal pattern. Shorts are working. Longs are failing. Sell 'em all. Sell 'em all. Sell 'em all!! - Martin Goldberg
US stocks are in the Kondratieff winter bear market. Not that you'd know it. Most investors and investment advisors have been persuaded by the recovery in stock prices following the initial bear market low in October 2002. However, in my opinion the recovery has been engineered by the panic response of the Federal Reserve to the initial stock market sell-off. If you don't think 12 rate cuts since April 2001 from 6% to just 3/4% by November 2002, combined with the added cash infusion of trillions of dollars, isn't panic, I don't know what is. Anyway all that it has done has added massively to the credit bubble, which is most apparent in real estate and to a lesser extent, the recovery in stock prices. Alan Greenspan has apparently been forced to reverse his low interest rate policy to induce foreigners to continue lending money to the USA. Rising interest rates are not good for stocks or the economy. They weren't, after the Federal Reserve raised rates from 4.5% to 6% between August 1999 and May 2000, nor were they when rates were raised from 3.5% to 6% between 1928 and 1929. How soon we forget. - Ian Gordon
Key Question: Are we in a bear market? ....Bear markets typically unfold in a hostile monetary climate with rapidly deteriorating breadth. We have neither of these conditions present right now. While the Fed has raised short-term interest rates near 3%, they still remain close to 40-year lows. And over in the bond market, yields are 1/2% LOWER than they were at this time last year. So the monetary climate is not yet hostile. - Jim Stack
GM's recent significant tremors are a warning quake that belies the enormity and fragility of the nature of total obligated US and world debt. Is this the antecedent shaker prior to a great tectonic disruption that might soon occur? The fundamental stressors and imbalances suggest the answer. Preeminent debt default by a venerable smokestack company with a debt load comparable to the total national debt of Canada has the very possible potential to produce a rapidly accelerating, cascading, and potentially devastating positive feedback effect that will expose and turn inside out the awful and considerable interlocking leverage that characterizes and riddles the world's fractional banking-derivative debt system. - G. Lammert
We have long believed that the economic recovery was artificially spurred by massively stimulative monetary and fiscal policy that, for a while, overcame the severe structural imbalances left over from the prior boom. In recent months, however, the stimulation has faded, and in its place we have the negative effects of sharply higher energy prices and a significant move toward a far more restrictive monetary policy. As a result the U.S. and global economies are now being exposed as a house of cards. - Charlie Minter
Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.... I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars. I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change. - Paul A. Volcker
If the U.S. credit expansion does no more than stay on its fourth quarter of 2004 trajectory, it will generate new credit to the tune of $US 3.425 TRILLION over the current year. By the end of 2005, the total will be close to 29.25% of the US GDP. That is a TOTALLY out of control situation. At the present level of expansion, total US credit markets will stand at around $US 40 TRILLION in less than nine months. That total will then be around 350% of the TOTAL US economy. Historically, this is a debt load which breaks ANY civil economy.... If the U.S. federal government even slows down their rate of deficit spending, the U.S. economy dives into an economic recession. If the Federal Reserve slows down its credit expansion, the U.S. economy dives into a steep economic recession. Both institutions are fully aware of this, so they will NOT slow down. This being the case, it is simply a matter of time before the world slows down or even stops its funding of U.S. external deficits. The result will be a U.S. economic recession and a plunging U.S. dollar. - Bill Buckler
The conventional "wisdom" praises Americans for their profligacy while condemning foreigners for their thrift (ironic because without foreign savings, Americans could not borrow).... What would have been the reaction had American consumers acted responsibly for a change and had denied themselves some current gratification for the sake of the future? What if they acted like adults, rather than undisciplined children, and paid down debt? What if they had decided to put some money aside for their kids, a financial emergency, or retirement? What if personal spending actually declined? Such an inevitable first step down the road to financial responsibility would have been greeted by Wall Street and the media as a disaster; evidence that the "heroic" consumer had finally run out of gas. This is because the entire house of cards that is the U.S. economy, and the overvalued stock and housing markets it supports, rests on the continuation of reckless borrowing and consumption which must inevitably come to an end. Given the fact that sooner or later the American consumer will "run out of gas," wouldn't it make sense for him to refill his tanks before they run dry? Ironically, the longer consumers borrow and spend, the more severe the long-term damage they inflict on the U.S. economy, and the greater the inevitable declines in the very asset prices their irresponsible behavior temporarily props up. - Peter Schiff
Lacking in support from labor income generation, America's high-consumption economy has turned to asset markets as never before to sustain both spending and saving. And yet asset markets and the wealth creation they foster have long been balanced on the head of the pin of extraordinarily low real interest rates. The Fed is the architect of this New Economy, and most other central banks -- especially those in Japan and China -- have gone along for the ride. Lacking in domestic demand, Asia's externally led economies know full well what's at stake if the asset-dependent American consumer ever caves. And so they recycle their massive build up of foreign exchange reserves into dollar-denominated assets, thereby subsidizing US rates, propping up asset markets, and keeping the magic alive for the overextended American consumer. Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards.... It didn't have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can't live without excess US consumption. - Stephen Roach
American investors are getting worn down. Major stocks are topping out and falling. Mutual funds are losing money. Executives get rich...lawyers and stockbrokers still make money...but the little guys' retirement portfolios wither. So, the money and enthusiasm leaves the stock market...and moves to houses. Soon, stock prices will fall. And the real estate market, too, is bound to come to a complete halt early or late. A generation ago, people owned houses because they provided financial and physical safety. They were loath to mortgage them, if they could avoid it, because the mortgage made the house less secure. In hard times, they might lose the house - and have no money and nowhere to live. Who among the dead could have imagined how things would change! - Bill Bonner
Weakness in financial stocks indicates that money is getting tighter and that the ability of finance companies to extend loans at negative real interest rates may be coming to an end. Obviously a slowdown in loan growth to the real estate sector would have negative implications for the housing market and the homebuilders whose stocks have risen by almost ten times since 2000.... Moreover, weakness in both financial and retailing shares suggests an imminent slowdown in US consumption. Why? Over the last twelve months, about 25% of consumption growth in the US was driven by households, which drew down their home equity lines of credit by an unprecedented US$ 110 billion. Please note that.... the 37% increase in revolving home-equity loans over the last twelve months has exceeded growth in wage-based income by a factor of six. So, if the housing market begins to weaken as a result of financial companies' diminished ability to extend loans, an important pillar of consumption growth - increasing revolving home equity loans - will be absent and weigh on the consumer's ability to keep up his lavish spending habits. - Marc Faber
Housing Daytraders (Flippers) are showing up in my local (small Oregon town) market along with all the national "hot markets". This sure reminds me of a time not so long ago in US equity markets. Remember when the music stopped playing in March of 2000, and liquidity dried up and prices evaporated? The same thing I do believe will happen in the housing market. Just when will the music (and hammers) stop, that is the billion dollar question. In this regard, Uncle Al, everyone's Fed pal, has been the prime mover of the housing boom with his ultra-easy money policy in the wake of the 2001 recession and 9/11 shock. Now, we are very late in the Housing/Real Estate party, and I would contend the drunks are running wild. My mother always said, "nothing good ever happens after midnite", and she is right as usual. I think with the housing party, we are around 2 am already. - Matt Davio
In the end the boom-bust cycle (as brought on by central banking) cannot be repealed. When the bust hits, Fannie Mae's extremely leveraged balance sheet will collapse like a house of cards - forty-year mortgages be damned. - Eric Englund
We are rapidly ending up in the situation where shelter is provided if you are willing to shoulder an excessive debt burden. THIS IS SIMPLY WRONG. Credit is not helping us to buy a house, it is making the house far less affordable; what is perceived as a solution is the problem. It is the availability of too much easy credit that is driving a speculative mania that will enslave you and ultimately cost you your job.... The solution is simple: After the 1929 crash they identified excessive margin or credit as the fuel of the speculative excess, they limited the margin. That is exactly what they must do now in the housing market; they must limit the fuel which is driving the fire. My major concern is that house price speculation and inflation has already become the economy, the consumer is 70% of GDP, if you take away the fuel what else is left? - Ceri Shepherd
Without a shadow of doubt, real-estate appraisal is the most corrupt "profession" I have ever seen. - Bob Burnitt [Texas appraiser]
Experience plus my research into real estate has taught me that a house isn't really much of an investment, contrary to what everybody will tell you. It doesn't pay me a penny in rent or interest or income of any kind. I can't spend it without going into more debt. With investments, you're supposed to earn interest, not pay it! And if I sell my house, I have a choice to make: either use the proceeds for more real estate, or pay a big capital gains tax. My only return is the benefit of living in it. - Dan Ferris
Like the biting winds of nature that sculpt rock and carve stone, inflation and taxes will grind the greatest piles of fortune to dust over time. The road to extinction may be of indeterminable length, but the final destination of that road is not in doubt. The same can be said of all our paper currencies, be they yen or pounds, pesos or ringgit. All of them are on the same slide. - Chris Mayer
Bernanke will be perfect for the job as economic advisor to President Bush, as Bush is intent on spending us into the poorhouse. And creating more money and credit and spending it like there is no tomorrow is Bernanke's prescription for everything, which is all they teach in the universities anymore, and which also that proves, beyond a doubt, that we Americans are the biggest bunch of idiots that ever walked on the face of the earth, because it takes a huge group of real morons to not only think that the problems caused by too much creation of money and credit, and the amassing of un-payable levels of debt, is MORE money and credit and debt, but they actually teach this preposterous idiocy in our universities! - Richard Daughty
Bangalore is India's Silicon Valley. A 21st-century creation of outsourcing, Bangalore is a new R&D home for Hewlett-Packard, GE, Google, Cisco, Intel, Sun Microsystems, Motorola and Microsoft. The New Scientist reports: "The concentration of high-tech companies in the city is unparalleled almost anywhere in the world. At last count, Bangalore had more than 150,000 software engineers." Meanwhile, American software engineers go begging for employment, with several hundred thousand unemployed. I know engineers in their 30s with excellent experience who have been out of work since their jobs were outsourced four or five years ago. One is moving to Thailand to take a job in an outsourcing operation at $875 a month. A country that permits its manufacturing and its technical and scientific professions to wither away is a country on a path to the Third World. The mark of a Third World country is a labor force employed in domestic services. - Paul Craig Roberts
Now, ....some of you may think there's what they call a Social Security trust: The government collects the
money for you, we hold it for you, and when you retire, we pay it to you. But that's not how it works. You pay
your payroll tax; we pay for the people who have retired, and if there's any money left over, we spend it on
government. That's how it works. And what's left is an empty IOU, a piece of paper. - George W. Bush
Who knows, maybe soon the rates the Fed sets will
actually be higher than the rate of inflation!
Seriously, with a recession (suggested by the rate
near-inversion) drawing close, stocks will be
pressured lower.... but not right away. After the
May/June secondary top, I expect a choppy summer,
with the next major leg of the bear market getting
under way in the fall, bottoming in mid-2006.
A. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $17,325.21
Increase: $ 6,626.21 [+61.93%]
COMMENT on "PIG": There is no change from the last issue.
TIAA/CREF 403(b) retirement plan; I switch between indexed stock/bond/money funds:
(No transactions since June 30, 2004 due to my retired status. Update soon, I hope!)
Values, 30Apr2005: stock, 184.15; equity-index, 74.69; MM, 22.18; bond, 75.26; inflation-indexed bond, 45.97; real estate, 216.78; TIAA current yield in
SRA, about 5.2%. Current money-market yield is 2.58%.
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993:
3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%; 1999: 5.12%;
2000: 9.99%; 2001: 1.11%
Gain, January 1 through March 31, 2002: 0.97% (3.86% annual rate of return)
Total gain since January 1, 1988 (14.25 years): 223.43%
Compound annual rate of return: 8.59%
Gain shown excludes the impact of additional monthly cash contributions.
(Please note that I have not had the time to calculate my rate of return beyond March 2002, and
may not get the time until 2005)
Buying CREF stock on January 1, 1988 and holding it gained 422.38%, for a compound annual rate of
return of 11.46%.
COMMENT on NYSE "Timer's Trend": We are currently on a SELL signal of March 16, 2005.
COMMENT on NASDAQ "Timer's Trend": We're currently on a SELL signal given February 17, 2005.
NEXT ISSUE - will appear near the end of May.